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(“Alcoa” 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 consents to the Commission’s +jurisdiction over the Respondent and the subject matter of these proceedings, and 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 Foreign Corrupt Practices Act of +1977 (the “FCPA”) [15 U.S.C. § 78dd] by Respondent Alcoa Inc. (“Alcoa”) concerning alumina +sales to Aluminium Bahrain B.S.C. (“Alba”), an aluminum manufacturer owned primarily by the +Kingdom of Bahrain. +2. Between 1989 and 2009, Alcoa of Australia (“AofA”) and Alcoa World Alumina +LLC (“AWA”) (collectively, the “AWAC Subsidiaries”) retained a consultant to act as their +middleman in connection with sales of alumina to Alba and knew or consciously disregarded the +fact that the relationship with the consultant was designed to generate funds that facilitated +corrupt payments to Bahraini officials. The consultant was paid a commission on sales where he +acted as an agent and received a markup on sales where he acted as a purported distributor. On +sales where the consultant acted as a purported distributor, no legitimate services were provided +to justify the role of the consultant as a distributor. The consultant used these funds to enrich +himself and pay bribes to senior government officials of Bahrain. +3. The commission payments to the consultant and the alumina sales to the +consultant made pursuant to the distribution agreements were improperly recorded in Alcoa’s +books and records as legitimate commissions or sales to a distributor and did not accurately +reflect the transactions. The false entries were initially recorded by the AWAC Subsidiaries +which were then consolidated into Alcoa’s books and records. During the relevant period, Alcoa +also lacked sufficient internal controls to prevent and detect the improper payments. +Respondent + +4. Alcoa is a corporation organized under the laws of the Commonwealth of +Pennsylvania. Until 2006, Alcoa’s principal place of business was in Pittsburgh, Pennsylvania, +in the Western District of Pennsylvania. In 2006, Alcoa moved its principal place of business to +New York, New York. Alcoa issues and maintains a class of publicly traded securities registered +pursuant to Section 12(b) of the Securities Exchange Act of 1934, which are traded on the New +York Stock Exchange. +5. Alcoa is a global provider of primary aluminum and fabricated aluminum. Alcoa +is also a global provider of smelter grade alumina, the raw material that is supplied to smelters to + +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 +produce aluminum. Alcoa refines alumina from bauxite it extracts from its global mining +operations. Alcoa operates worldwide through subsidiaries and affiliated entities in North +America, Asia, Australia, Europe, South America, Africa and the Caribbean. +Other Relevant Entities and Persons +6. Alcoa World Alumina and Chemicals (“AWAC”) is an unincorporated global +bauxite mining and alumina refining enterprise formed in 1995 between Alcoa and Alumina +Limited (“Alumina”), the majority and minority owners of AWAC, respectively. AWAC +operates through a number of affiliated enterprise companies, including AofA and AWA, with +each enterprise company being owned by Alcoa and Alumina in proportion to their respective +ownership interests in the AWAC enterprise. In matters of strategy and policy, the AWAC +enterprise companies receive direction and counsel from a “Strategic Council” that is chaired by +Alcoa. Alcoa controls the Strategic Council and as such the operations and personnel of AWAC +report to Alcoa personnel in New York. +7. Alcoa of Australia Limited (“AofA”) is the AWAC enterprise company that +owns and operates AWAC’s bauxite mining and alumina refining assets in Australia. AofA’s +principal place of business was located in Melbourne, in the state of Victoria, Australia, until +1996, and is now located in Perth, in the state of Western Australia. AofA owns and operates +mines in Western Australia that extract bauxite, which AofA then processes into smelter grade +alumina in refineries it owns and operates. AofA sells the smelter grade alumina to aluminum +smelters it owns in the state of Victoria as well as to customers and alumina traders around the +world. AofA maintains bank accounts in the United States. AofA’s books, records, and +accounts are consolidated into Alcoa’s books and records and reported by Alcoa in its financial +statements. +8. Alcoa World Alumina LLC (“AWA”) is a Limited Liability Company formed +under Delaware law, which maintains its principal place of business in Pittsburgh, Pennsylvania, +in the Western District of Pennsylvania. AWA owns and operates (either directly or indirectly) +bauxite mining and alumina refining assets in North America, Europe, South America, and the +Caribbean. AWA is an AWAC enterprise company. Beginning in or around 2000, executives at +AWA’s offices in Pittsburgh and Knoxville, Tennessee, assumed primary responsibility for all of +AWAC’s relationships with global alumina customers, including Alba. AWA personnel +responsible for these functions reported to Alcoa personnel in New York. +9. Consultant A is an international middleman who resides in London and is a +citizen of Canada, Jordan, and the United Kingdom. Consultant A had close contacts with +certain members of Bahrain’s Royal Family, some of whom were senior officials in the +Government of Bahrain. Consultant A met with Alcoa executives to discuss matters relating to +the relationship with Alba. Consultant A operates through many shell companies, including +Alumet Ltd (“Alumet”) and AA Alumina and Chemicals Ltd (“AAAC”). +10. Aluminium Bahrain B.S.C. (“Alba”) is an aluminum smelter operating in +Bahrain. At the relevant times, the state holding company of the Kingdom of Bahrain, the +Mumtalakat, which was controlled by the Bahrain Ministry of Finance, held 77 percent of the + 4 +shares of Alba. The Saudi Basic Industries Corporation (“SABIC”), which is majority-owned +and controlled by the government of the Kingdom of Saudi Arabia, held a twenty percent +minority stake in Alba, and three percent of Alba’s shares were held by a German investment +group. The majority of profits earned by Alba belonged to the Mumtalakat, though part of the +profit was permitted to be used by Alba for its operations. The Bahrain Ministry of Finance had +to approve any change in Alba’s capital structure and had to be consulted on any major capital +projects or contracts material to Alba’s operations. Members of the Royal Family of Bahrain and +representatives of the government sat on the Board of Directors of Alba, controlled its Board, +and had primary authority in selecting its chief executive officer and chief financial officer. +Facts +11. Alcoa’s global bauxite and alumina refining business (the “Alumina Segment”) is +part of the Global Primary Products group, one of Alcoa’s three business lines. The Alumina +Segment operationally consists of multiple subsidiaries. During the relevant time period, the +Alumina Segment reported to the global head of the Global Primary Products group, who was an +executive of Alcoa and reported directly to Alcoa’s CEO. +12. Alcoa exercised control over the Alumina Segment, including the AWAC +Subsidiaries. Alcoa appointed the majority of seats on the AWAC Strategic Council, and the +head of Global Primary Products served as its chair. Alcoa and AofA transferred personnel +between them, including alumina sales staff; Alcoa set the business and financial goals for +AWAC and coordinated the legal, audit, and compliance functions of AWAC; and the AWAC +Subsidiaries’ employees managing the Alba alumina business reported functionally to the global +head of the Alumina Segment. Alba was a significant alumina customer for Alcoa’s Alumina +Segment and during the relevant period, members of Alcoa senior management met both with +Alba officials and Consultant A to discuss matters related to the Alba relationship, including a +proposed joint venture between Alcoa and Alba. During this time, Alcoa was aware that +Consultant A was an agent and distributor with respect to AofA’s sales of alumina to Alba and +that terms of related contracts were reviewed and approved by senior managers of Alcoa’s +Alumina Segment in the United States. +13. From at least 1989 to 2009, AofA supplied alumina to Alba through a series of +multi-year contracts. During this period, Alba was one of Alcoa’s largest alumina customers +purchasing a total of nearly 19 million metric tons beginning with an annual volume of 300,000 +metric tons increasing to 1.6 million metric tons. +14. Beginning in approximately 1989, AofA retained Consultant A to assist in long- +term contract negotiations with Alba and Bahraini government officials, including the +negotiation and execution of a new long-term alumina supply agreement in 1990 (the “1990 +Supply Agreement.”) +15. By 1996, Consultant A was playing a significant role in the relationship between +the AWAC Subsidiaries and Alba. Around this time, Alba complained to the AWAC +Subsidiaries that it was paying an above-market price for alumina. AofA learned that Alba was +seeking to increase its alumina supply requirements from 600,000 metric tons a year up to + 5 +970,000 metric tons a year, and that other major global suppliers of alumina were seeking to +capture these additional requirements. The AWAC Subsidiaries’ sales team decided that, to +“comply with business norms in the Middle East[,]” the AWAC Subsidiaries would propose +supplying some of Alba’s alumina through Alumet, which was one of Consultant A’s shell +companies, which would pay the “required commission.” An AofA manager proposed using +Consultant A as the intermediary because Consultant A was “well versed in the normal ways of +Middle East business” and “will keep the various stakeholders in the Alba smelter happy….” +16. Despite the red flags inherent in this arrangement, AofA’s in-house counsel +approved the arrangement without conducting any due diligence or otherwise determining +whether there was a legitimate business purpose for the use of a third party intermediary. +17. The AWAC Subsidiaries’ sales managers traveled to London in August 1996 to +meet with Consultant A to discuss this proposal to route some of AofA’s alumina through +Consultant A’s company for resale to Alba. Upon their return to Australia, an AWA manager +told other members of the AWAC Subsidiaries sales team that: +It feels like we subsidise the Sheiks and end up with a 5 year outcome that is about +$10-15/t lower than the average of the rest of our business. +18. In September 1996, the AWAC Subsidiaries’ sales managers traveled to London +to meet with Alba and Consultant A and agreed to an addendum to the 1990 Supply Agreement +(“1996 Addendum”). Under the 1990 Agreement, AofA was supplying 600,000 metric tons per +year to Alba under a formula pricing structure (as opposed to a “market”-based price). Under +the 1996 Addendum, AofA agreed to supply Alba with an additional 285,000 metric tons per +year through one of Consultant A’s shell companies using a “market”-based price that resulted in +pricing that was, at times, actually below market and allowed Consultant A to mark up his sales +of alumina to Alba. +19. Employees at AWA and AofA either knew or were willfully blind to the high +probability that Consultant A would use his commissions and markup to pay bribes. For +example, in an internal document memorializing the negotiations surrounding the 1996 +Addendum, a member of AofA’s alumina sales staff wrote: +The methodology of business in the Middle East is a complex web of interactions +that are necessarily difficult to understand to disguise the payment of commissions. +We have in the past maintained a position of paying our agent a 1% commission on +the basis of the agent work that he has done for us. We have also, however, been +asked by Alba to supply some cargoes through other intermediaries, including our +agent, on various occasions and we can only assume at the purpose this +serves….Given that we want to supply the full tonnage going into the future we +need to fix on the best methodology for us given the commission requirements and +the contract structure. +20. The sales staff was concerned that the monies paid to Consultant A come from +Consultant A’s markup on sales to Alba, rather than through increased commission payments. + 6 +An AWA manager was concerned that the monies paid to Consultant A not come at AofA’s +expense and that the sales to Consultant A “protect our position.” +21. In 2001, with the coming expiration of the 1990 Supply Agreement and 1996 +Addendum, AWA approached Alba to extend and expand the alumina supply relationship. Alba +agreed to extend the existing supply relationship (“2001 Extension”). Following the 2001 +Extension, AofA stopped selling alumina directly to Alba; all AofA alumina destined for Alba +was instead routed through AAAC, which was one of Consultant A’s shell companies. +22. In 2004, AofA entered into another distribution agreement with Consultant A that +involved the sale of up to 1.6 million metric tons of alumina to Alba every year through AAAC, +which was a shell company of Consultant A. This arrangement lasted until approximately +December 31, 2009. +23. The 2001 Extension and 2004 purported distributorship agreements facilitated the +corrupt payments by allowing Consultant A to impose an inflated markup on his purported sales +of alumina to Alba and used the markup from those sales to enrich himself and pay bribes to +senior government officials of Bahrain. +24. From 2002 to 2004, AWA caused Consultant A and AAAC, one of his shell +companies to receive in excess of $79 million in markups on alumina sales to Alba. Consultant +A also received a commission under the terms of the 2001 Extension. The 2001 Extension +provided for a commission of 0.125 percent of all payments made by Consultant A to AofA for +alumina. From 2002 to 2004, AofA paid Consultant A “commissions” of $493,509. +25. In 2002, Alcoa was attempting to negotiate a joint venture with Alba, in which +Alcoa would supply Alba with alumina from the AWAC system’s refineries, and, in exchange, +Alba would supply Alcoa with aluminum. Alcoa retained Consultant A to act as a consultant +and to privately lobby a Bahraini government official on behalf of Alcoa, and Alcoa entered a +consulting agreement with Consultant A pursuant to which Consultant A would receive an $8 +million “success fee” based on limited specified negotiation “advice and assistance to Alcoa” if +the joint venture were successful. +26. As part of the negotiations, Alcoa proposed a joint venture structure that +contemplated supplying alumina to Alba through a distributor. On or about March 26, 2003, an +in-house attorney in Alcoa’s legal department raised questions about the deal, and requested an +explanation for the role of the distributor. On or about March 27, 2003, AWA sales executive +responded that “[t]he Distributorship rol[e] is something the Bahrain Government wants” and +that Alcoa “shouldn’t get too involved with how the Distributor and the Government interact. +We are currently selling the alumina we supply to Alba through a Distributor.” +27. On September 15, 2003, Alcoa and Alba agreed to a Memorandum of +Understanding (“MOU”) outlining an equity investment by Alcoa in Alba and providing for +alumina to be sold to the Government of Bahrain, as majority shareholder of Alba, “directly or +through an associated company of Alcoa satisfactory to GoB [Government of Bahrain] and +Alcoa.” The MOU was approved by the same Bahraini government official on behalf of Alba + 7 +that Consultant A had been hired to lobby. Subsequently, the joint venture negotiations fell +through, and Consultant A was never paid the $8 million success fee. +28. By the summer of 2004, AofA was supplying approximately one million metric +tons of alumina annually to Alba, but Consultant A’s companies were invoicing Alba for the +shipments. Unlike a true distributorship, Consultant A’s companies never took possession of the +alumina, assisted with the shipping arrangements, or otherwise performed any legitimate services +for either the AWAC Subsidiaries or Alba. The only function the shell companies provided was +to invoice Alba for the shipments at a significant markup. +29. Alba’s obligations under pre-existing supply arrangements with AofA were set to +expire at the end of 2004. In the summer of 2004, AWA sought to secure a new long term +alumina supply agreement with Alba. On or around August 5, 2004, Alcoa management was +advised by a former senior Alcoa executive who had a relationship with Consultant A that if they +attempted to negotiate a direct contractual relationship between AofA and Alba, rather than +negotiate a supply arrangement through Consultant A and one of his companies, some or all of +Alba’s business could be lost to another alumina supplier. +30. On or about August 19, 2004, AWA management met with Consultant A at +Consultant A’s London Office to discuss using Consultant A’s companies “as Alcoa’s exclusive +distributor in the region.” On or about August 22, 2004, an AWA executive negotiating with +Consultant A sent an email documenting with more specificity certain items that were discussed +at the meeting. Among them, the executive noted that “[w]e agreed to supply [Consultant A] +with pricing indications for supply to [AAAC, one of Consultant A’s shell companies] by 8/24 so +he can have these for his meeting with [a Bahraini official]. We mentioned pricing close to +14%.” The email also noted that “[a Bahraini official] is holding on to publishing [Alba’s] +alumina tender [to the market] until he has further discussions with [Consultant A] on 8/29.” +The pricing terms per metric ton of alumina that the AWA executive quoted to Consultant A at +the meeting in London were less than the pricing terms for Alba that an AWA sales executive +had quoted to a Bahraini official approximately one month earlier. +31. On or around September 29, 2004, AWA facilitated Consultant A’s tendering a +bid to supply Alba up to 1.6 million metric tons of alumina for ten years commencing in 2005. +On or about October 8, 2004, the in-house attorney responsible for supporting the alumina +business suggested terminating the consulting agreement that Alcoa had entered with Consultant +A in connection with the proposed joint venture, as “the terms of [Consultant A’s] current +engagement created a lot of anxiety in the organization.” However, an AWA executive decided +that the consultancy agreement should not be terminated until AofA had secured a new long-term +alumina supply agreement with Alba. +32. On or about November 1, 2004, a Bahraini official caused Alba to accept +Consultant A’s tender offer for a ten-year supply of alumina. On or about December 31, 2004, +AofA entered a sham ten-year distributorship agreement with AAAC, one of Consultant A’s +shell companies to purportedly supply annually up to 1.78 million metric tons of alumina for sale +to Alba from 2005 to 2014 (the “2005 Alba Supply Agreement”). It was actually AofA that +would continue shipping the alumina directly from its refineries in Western Australia to Alba. + 8 +33. On or about March 4, 2005, a representative of Consultant A sent another +Bahraini government official a final, unexecuted contract for the purported supply agreement +between Consultant A and Alba. On or about June 8, 2005, the final agreement negotiated +between Consultant A and Alba was signed by that government official on behalf of Alba. The +agreement’s effective date was January 1, 2005, and its term was through December 31, 2014. +The agreement provided that Consultant A would supply Alba with 1.508 million metric tons of +alumina in 2005 and 1.6 million metric tons of alumina thereafter for each remaining contract +year. Alba was required to bear the cost of shipping and insurance. +34. For sales of alumina to Alba, Consultant A did not receive payment until after +Consultant A was bound to pay AofA. Given the discrepancy in the timing of payment, +Consultant A sought a line of credit from Alcoa to cover the cost of alumina shipments to Alba +until Alba remitted payment to Consultant A. Alcoa’s policies and procedures required its +customers to submit financial statements for an extension of credit. Consultant A, however, +refused to provide financial statements to Alcoa’s credit department. Nevertheless, in or around +December 2004, senior management of AWA invoked an override procedure that resulted in an +Alcoa executive approving a $23 million line of credit to Consultant A’s companies. +35. Thereafter, in each of contract years 2005 through 2009, Alcoa continued to grant +overrides to extend increasing credit lines to Consultant A’s purported distributorships. By +2007, Alcoa was extending a credit line of $58 million. During this period, Alcoa granted +Consultant A credit lines that were significantly greater than those granted by Alcoa to any other +third party. By facilitating the extension of credit to Consultant A, AWA enabled the purported +distributorship scheme by allowing Consultant A to defer paying AofA for the multi-million +dollar shipments of alumina to Alba until Consultant A received payment from Alba. +36. From 2005 through 2009, AWA caused Consultant A to receive in excess of $188 +million on the markup of alumina sales to Alba. This money was transferred from the initial +accounts in which payment from Alba was received through various bank accounts controlled by +Consultant A, including accounts in the name of shell companies. +37. The AWAC Subsidiaries knew or consciously disregarded the fact that Consultant +A was inserted into the Alba sales supply chain to generate funds to pay bribes to Bahraini +officials. Ultimately, these funds facilitated at least $110 million in corrupt payments to Bahraini +officials. The vast majority of those funds were generated from the markup between the price +Consultant A sold to Alba and the price that AofA sold to Consultant A. Those funds were also +generated from the commissions that AofA paid to Consultant A. +38. The recipients of the corrupt payments included a senior Bahraini official, +members of the board of directors of Alba, and senior management of Alba. Examples of the +corrupt payments include: + In August 2003, Consultant A’s shell companies made 2 payments totaling $7 million to +accounts for the benefit of a Bahraini government official who Consultant A had been +retained to lobby. Two weeks later, Alcoa and Alba signed an agreement in principle to +have Alcoa participate in Alba’s plant expansion. + 9 + In October 2004, Consultant A’s shell company paid $1 million to an account for the +benefit of that same government official. Shortly thereafter, Alba agreed in principle to +Alcoa’s offer for the 2005 Alba Supply Agreement. + In or around the time of the execution of the final 2005 Alba Supply Agreement, +Consultant A-controlled companies paid another Bahraini government official and/or his +beneficiaries $41 million in three payments. + +Legal Standards and Violations +C. 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 of omission the person knew or +should have known would contribute to such violation. + +FCPA Violations +D. Under Section 30A(a) of the Exchange Act it is unlawful for any issuer, officer, +director, employee, or agent of such issuer or any stockholder thereof acting on behalf of the +issuer, 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, promise to give, or authorization of the giving of anything of value to any +foreign official or any person, while knowing that all or a portion of such money or thing of +value will be offered, given, or promised, directly or indirectly, to any foreign official for the +purposes of (i) influencing any act or decision of such foreign official in his official capacity, (ii) +inducing such foreign official to do or omit to do any act in violation of the lawful duty of such +official, or (iii) securing any improper advantage in order to assist such issuer in obtaining or +retaining business for or with, or directing business to, any person. [15 U.S.C. § 78dd-1]. +E. Additionally, under Section 30A(g) of the Exchange Act it is unlawful for any +issuer organized under the laws of the United States, or a State, territory, possession, or +commonwealth of the United States or for any United States person that is an officer, director, +employee, or agent of such issuer or a stockholder thereof acting on behalf of such issuer, to +corruptly do any act outside the United States in furtherance of an offer, payment, promise to +pay, or authorization of the payment of any money, or offer, gift, promise to give, or +authorization of the giving of anything of value to any of the persons or entities set forth in +paragraphs (i), (ii), and (iii) of subsection (a) of this section for the purposes set forth therein, +irrespective of whether such issuer or such officer, director, employee, agent, or stockholder +makes use of the mails or any means or instrumentality of interstate commerce in furtherance of +such offer, gift, payment, promise, or authorization. + 10 +F. This Order contains no findings that an officer, director or employee of Alcoa +knowingly engaged in the bribe scheme. As described above, Alcoa violated Section 30A of the +Exchange Act by reason of its agents, including subsidiaries AWA and AofA, indirectly paying +bribes to foreign officials in Bahrain in order to obtain or retain business. AWA, AofA, and their +employees all acted as “agents” of Alcoa during the relevant time, and were acting within the +scope of their authority when participating in the bribe scheme. As described above, Alcoa +exercised control over the Alumina Segment, including the AWAC Subsidiaries. Alcoa +appointed the majority of seats on the AWAC Strategic Council, and the head of the Global +Primary Products group served as its chair. Alcoa and AofA transferred personnel between +them, including alumina sales staff; Alcoa set the business and financial goals for AWAC and +coordinated the legal, audit, and compliance functions of AWAC; and the AWAC Subsidiaries’ +employees managing the Alba alumina business reported functionally to the global head of the +Alumina Segment. Alba was a significant alumina customer for Alcoa’s Alumina Segment and +during the relevant period, members of Alcoa senior management met both with Alba officials +and Consultant A to discuss matters related to the Alba relationship, including a proposed joint +venture between Alcoa and Alba. During this time, Alcoa was aware that Consultant A was an +agent and distributor with respect to AofA’s sales of alumina to Alba and that terms of related +contracts were reviewed and approved by senior managers of Alcoa’s Alumina Segment in the +United States. +G. Under Section 13(b)(2)(A) of the Exchange Act issuers are required 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)]. +H. Under Section 13(b)(2)(B) of the Exchange Act issuers are required to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +(i) transactions are executed in accordance with management’s general or specific authorization; +(ii) transactions are recorded as necessary (I) to permit 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)]. +I. As described above, Alcoa violated Section 13(b)(2)(A) of the Exchange Act by +improperly recording the payments, to Consultant A, as agent commissions when the true +purpose of these payments was to make corrupt payments to Bahraini officials. Alcoa violated +Section 13(b)(2)(A) when Alcoa recorded the sales to Consultant A as a distributor. The false +entries were initially recorded by the AWAC Subsidiaries which were then consolidated and +reported by Alcoa in its consolidated financial statements. Alcoa 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. + + 11 +Alcoa’s Remedial Efforts +J. Alcoa made an initial voluntary disclosure of certain of these issues to the +Commission and Department of Justice in February 2008, and thereafter Alcoa’s Board of +Directors appointed a Special Committee of the Board of Directors to oversee an internal +investigation by independent counsel. Alcoa’s counsel regularly reported on the results of the +investigation and fully cooperated with the staff of the Commission. +K. Alcoa also undertook extensive remedial actions including: a comprehensive +compliance review of anti-corruption policies and procedures, including its relationship with +intermediaries; enhancing its internal controls and compliance functions; developing and +implementing enhanced FCPA compliance procedures, including the development and +implementation of policies and procedures such as the due diligence and contracting procedure +for intermediaries; and conducting comprehensive anti-corruption training throughout the +organization. + +Criminal Plea Agreement + +Respondent’s subsidiary AWA has agreed, with the United States Department of Justice, +Criminal Division, Fraud Section, to plead guilty for criminal conduct relating to certain of the +findings in the Order. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Alcoa’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Alcoa cease and desist +from committing or causing any violations and any future violations of Sections 30A, 13(b)(2)(A) +and 13(b)(2)(B) of the Exchange Act; + +B. Respondent shall pay disgorgement of $175,000,000. A portion of Respondent’s +disgorgement obligation in the amount of $14,000,000 shall be deemed satisfied by Respondent’s +payment of $14,000,000 in forfeiture as part of Respondent’s resolution with the United States +Department of Justice (“DOJ”) filed in the Western District of Pennsylvania. In the event that +Respondent’s resolution with DOJ requires a forfeiture payment less than $14,000,000, the +Respondent acknowledges that its disgorgement obligation will be credited up to the amount of the +payment required by Respondent’s resolution with DOJ, with the remaining balance due and +payable to the Securities and Exchange Commission within 14 days of payment pursuant to +Respondent’s resolution with DOJ. In light of the impact of the disgorgement payment upon +Respondent’s financial condition and its potential to substantially jeopardize Alcoa’s ability to +fund its sustaining and improving capital expenditures, its ability to invest in research and +development, its ability to fund its pension obligations, and its ability to maintain necessary cash + 12 +reserves to fund its operations and meet its liabilities, Respondent shall pay the disgorgement in +five equal payments based upon the following schedule: + +Amount Date Due +$32,200,000 January 9, 2014 +$32,200,000 January 9, 2015 +$32,200,000 January 9, 2016 +$32,200,000 January 9, 2017 +$32,200,000 January 9, 2018 + +If timely payment of disgorgement is not made within 14 days of when due, 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 identif ying +Alcoa 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 Charles Cain, Deputy Unit Chief, +FCPA Unit , Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + + + By the Commission. + + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3527.txt b/raw/aaer/2014/AAER-3527.txt new file mode 100644 index 0000000000000000000000000000000000000000..920e6b10548681095afb8b6a107ab4f1cc774e87 --- /dev/null +++ b/raw/aaer/2014/AAER-3527.txt @@ -0,0 +1,1390 @@ + + + + + + + + + + + + + + + + SEC.gov | Diamond Foods, Inc. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/515051","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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Diamond Foods, Inc. , Civil Action No. 3:14-cv-00122 (N.D. Cal.); Securities and Exchange Commission v. Steven Neil Civil Action No. 3:14-cv-00122 (N.D. Cal.) + + headline --> + + + The Securities and Exchange Commission ("Commission") today filed separate actions against Diamond Foods, Inc. ("Diamond"), a San Francisco-based snack food company, and its former chief executive officer (CEO) Michael Mendes, and its former chief financial officer (CFO) Steven Neil for their roles in an accounting scheme to falsify walnut costs in order to boost earnings and meet estimates by stock analysts. + + According to the Commission's complaints against former CFO Steven Neil and Diamond, which were filed in federal court in San Francisco, Neil directed the effort to fraudulently underreport money paid to walnut growers by delaying the recording of payments into later fiscal periods. In internal e-mails, Neil referred to these commodity costs as a "lever" to manage earnings in Diamond's financial statements. By manipulating walnut costs, Diamond correspondingly reported higher net income and inflated earnings to exceed analysts' estimates for fiscal quarters in 2010 and 2011. After Diamond restated its financial results in November 2012 to reflect the true costs of acquiring walnuts, the company's stock price slid to just $17 per share from a high of $90 per share in 2011. + + Diamond Foods agreed to pay $5 million to settle the SEC's charges. Former CEO Michael Mendes, who allegedly should have known that Diamond's reported walnut cost was incorrect at the time he certified the company's financial statements, also agreed to settle charges against him. The SEC's litigation continues against Neil. + + According to the Commission's complaints filed against Neil and Diamond, one of the company's significant lines of business involves buying walnuts from its growers and selling the walnuts to retailers. With sharp increases in walnut prices in 2010, Diamond encountered a situation where it needed to pay more to its growers in order to maintain longstanding relationships with them. Yet Diamond could not increase the amounts paid to growers for walnuts, which was its largest commodity cost, without also decreasing the net income that Diamond reports to the investing public. And Neil was facing pressure to meet or exceed the earnings estimates of Wall Street stock analysts. + + The Commission alleges that while faced with competing demands, Neil orchestrated a scheme to have it both ways. He devised two special payments to please Diamond's walnut growers and bring the total yearly amounts paid to growers closer to market prices, but improperly excluded portions of those payments from year-end financial statements. Instead of correctly recording the costs on Diamond's books, Neil instructed his finance team to consider the payments as advances on crops that had not yet been delivered. By disguising the reality that the payments were related to prior crop deliveries, Diamond was able to manipulate walnut costs in its accounting to hit quarterly targets for earnings per share (EPS) and exceed estimates by analysts. For instance, after adjusting the walnut cost in order to meet an EPS target for the second quarter of 2010, Diamond went on to tout its record of "Twelve Consecutive Quarters of Outperformance" in its reported EPS results during investor presentations. + + The Commission further alleges that Neil misled Diamond's independent auditors by giving false and incomplete information to justify the unusual accounting treatment for the payments. Neil personally benefited from the fraud by receiving cash bonuses and other compensation based on Diamond's reported EPS in fiscal years 2010 and 2011. + + In a separate settled administrative proceeding filed today against former CEO Michael Mendes, the Commission found that Mendes should have known that Diamond's reported walnut cost was incorrect because of information he received at the time, and that he omitted facts in certain representations to Diamond's outside auditors about the special walnut payments. Mendes agreed to pay a $125,000 penalty to settle the charges without admitting or denying the allegations. Mendes already has returned or forfeited more than $4 million in bonuses and other benefits he received during the time of the company's fraudulent financial reporting. + + The Commission's complaint against Diamond alleges that Diamond violated Section 17(a) of the Securities Act of 1933 ("Securities Act"), and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 ("Exchange Act") and Exchange Act Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13. Without admitting or denying the allegations, Diamond has consented to the entry of a permanent injunction against future violations of the relevant federal securities laws, and the imposition of a $5 million penalty. + + The Commission's complaint against CFO Neil alleges that Neil violated Section 17(a) of the Securities Act, and Sections 10(b) and 13(b)(5) of the Exchange Act and Exchange Act Rules 10b-5, 13a-14, 13b2-1, and 13b2-2, and Section 304 of the Sarbanes-Oxley Act of 2002, and aided and abetted Diamond's violations of 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. The complaint against Neil seeks a permanent injunction, civil penalties, an officer and director bar, disgorgement plus prejudgment interest, and relief pursuant to the Sarbanes-Oxley Act of 2002. + + The cease and desist order against CEO Mendes alleges that he directly violated Sections 17(a)(2) and (a)(3) of the Securities Act, Exchange Act Rules 13a-14, 13b2-1, and 13b2-2, and caused Diamond's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. Without admitting or denying the factual findings, Mendes has consented to the entry of a cease and desist order against committing violations of Sections 17(a)(2) and (a)(3) of the Securities Act, Exchange Act Rules 13a-14, 13b2-1, and 13b2-2, and causing Diamond's violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13, and the imposition of a $125,000 penalty. The Commission's order against Mendes noted that he already has returned to Diamond or has forfeited over $4 million in bonuses and other benefits he received during the time of the company's fraudulent financial reporting. + + The Commission took into account Diamond's cooperation with the SEC's investigation and its remedial efforts once the fraud came to light. The penalties collected from Diamond and Mendes may be distributed to harmed investors if SEC staff determines that a distribution is feasible. + + + + + SEC Complaint + + SEC Complaint + + + SEC Order + +   + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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Christopher Hohol and Brian Poshak , Civil Action No. 2:14-CV-00041 (RTR) (E.D. Wis.) (filed January 14, 2014) + + SEC Charges Former Senior Executives of Public Company Subsidiary with Falsifying Financial Records and Circumventing Internal Controls + + + The Securities and Exchange Commission announced that on January 14, 2014, the Commission filed a civil injunctive action in federal district court Milwaukee, Wisconsin, charging Christopher Hohol ("Hohol") and Brian Poshak ("Poshak"), formerly the senior vice president for operations and the  controller, respectively, of Veolia Special Services ("Special Services"), a fourth-tier United States subsidiary of Veolia Environnement S.A. ("Veolia"), a multinational utilities and environmental services company, with falsifying books, records, and accounts and circumventing internal controls in order to overstate Special Services' earnings before taxes ("EBT") over a period of at least three years.  + + The Commission's complaint alleges that beginning no later than January 2008 and continuing through February 2011, Hohol, who was the most senior executive at Special Services, and Poshak, among other things, made and caused others to make false accounting entries in Special Services' general ledger, including entries for fictitious revenue accruals, and entries that improperly reclassified expenses as inventory and improperly reclassified expenses (such as rental equipment, including industrial tools and diving gear) as prepaid assets, in order to artificially increase Special Services' monthly EBT to meet internal financial performance projections and create the false appearance that Special Services consistently was profitable.  The complaint further alleges that both Hohol and Poshak signed monthly certifications falsely verifying the accuracy of Special Services' financial information and efficacy of Special Services' internal controls.  The complaint also alleges that Poshak forged invoices and other documents to support the false accounting entries and to conceal the scheme.  According to the complaint, as a result of Hohol's and Poshak's misconduct, Special Services overstated its EBT by a total of approximately $64 million.  The complaint also alleges that, as a result of their misconduct, Hohol and Poshak received $136,000 and $28,000, respectively, in ill-gotten bonus payments that were triggered by the inflated financial performance of Special Services.  The complaint further alleges that the false financial information provided by Special Services was reported up through several intermediate subsidiaries and, ultimately, was consolidated into the parent company's publicly disclosed financial statements, which were filed with and furnished to the Commission.  + + The complaint charges Hohol and Poshak with violating Section 13(b)(5) of the Securities Exchange Act of 1934 ("Exchange Act") and Rule 13b2-1 thereunder, and aiding and abetting Veolia's violations of Section 13(b)(2)(A) of the Exchange Act.   + + Without admitting or denying the allegations in the complaint, Hohol and Poshak have consented to the entry of final judgments that permanently enjoin them from violating Exchange Act Section 13(b)(5) and Rule 13b2-1 thereunder, and aiding and abetting violations of Exchange Act Section 13(b)(2)(A).  Hohol also has agreed to disgorge $106,000, and Poshak has agreed to disgorge $28,000, together with prejudgment interest in the amount of $3,500.  The settlements, which are subject to court approval, take into account Hohol's and Poshak's current financial condition. + + + + + 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-3529.pdf b/raw/aaer/2014/AAER-3529.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b496a8336e333f5bc55c6b0e0bcedba066e7a891 Binary files /dev/null and b/raw/aaer/2014/AAER-3529.pdf differ diff --git a/raw/aaer/2014/AAER-3529.txt b/raw/aaer/2014/AAER-3529.txt new file mode 100644 index 0000000000000000000000000000000000000000..e78e2d85e911db5593b00ee3a90346345b502e49 --- /dev/null +++ b/raw/aaer/2014/AAER-3529.txt @@ -0,0 +1,434 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9513 / January 17, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71348 / January 17, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3529 / January 17, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15680 + + + + + +In the Matter of + +EUGENE M. EGEBERG III, 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 RULES +102(e)(1)(ii) AND (iii) OF THE +COMMISSION’S RULES OF PRACTICE +AND NOTICE OF HEARING + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section +8A of the Securities Act of 1933 (“Securities Act”), Sections 4C1 and 21C of the Securities + +1 Section 4C provides, in relevant part, that: + +“The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . (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 Rules 102(e)(1)(ii) and (iii) of the Commission’s +Rules of Practice2 against Respondent Eugene M. Egeberg III, CPA (“Egeberg” or “Respondent”). +II. + After an investigation, the Division of Enforcement alleges that: + +A. RESPONDENT +1. Eugene M. Egeberg III, CPA (“Respondent” or “Egeberg”), a resident of +Hampstead, Maryland, operates a self-named sole-proprietorship accounting firm in Baltimore, +Maryland. Egeberg is a Maryland-licensed CPA and was previously registered with the Public +Company Accounting Oversight Board (“PCAOB”) before his voluntary request for withdrawal +was accepted by the Board in November 2012. +B. RELATED ISSUERS + +2. Fox Petroleum, Inc. (“Fox Petroleum”) is a Nevada corporation located in New +York, New York with a class of securities registered with the Commission pursuant to Exchange +Act Section 12(g). Egeberg audited Fox Petroleum’s financial statements for its fiscal years ended +February 28, 2010, February 28, 2011, and February 28, 2012. + +3. RPM Advantage, Inc. (“RPM Advantage”) is a Nevada corporation located in +Houston, Texas. RPM Advantage’s stock was previously registered with the Commission pursuant +to Exchange Act Section 12(g). On November 8, 2011, and again on January 30, 2012, RPM +Advantage had its registration revoked by the Commission pursuant to Exchange Act Section +12(j). Egeberg audited RPM Advantage’s financial statements for its fiscal years ended December +31, 2006 through December 31, 2010. +C. FACTS +Failure to Conduct Audits with Due Professional Care and Skepticism, and Failure +to Obtain Competent and Sufficient Evidential Matter. +4. AU3 §230.01, Due Professional Care in the Performance of Work, requires that an +auditor exercise due professional care in the planning and performance of an audit, and in +preparation of the audit report. Due professional care requires an auditor to exercise professional +skepticism throughout the audit process. AU § 230.07-08. Similarly, AU § 326, Evidential +Matter, required that the auditor obtain sufficient competent audit evidence to support the opinion + +2 Rule 102(e)(1)(ii) & (iii) provide, in pertinent part, that: (ii) “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;” and (iii) “to have willfully violated, . . . any provision of the Federal +securities laws or the rules and regulations thereunder.” +3 References in this order are to the PCAOB standards in effect at the time of the relevant conduct. + 3 +expressed in the auditor’s report, for fiscal years beginning before December 15, 2010. AU § +315.09, Communications Between Predecessor and Successor Auditors, requires a successor +auditor to make specific and reasonable inquiries of the predecessor auditor regarding information +that might bear on the integrity of management, disagreements with management as to accounting +principles or auditing procedures, communications to audit committees regarding fraud or illegal +acts by clients, and the predecessor auditor’s understanding as to the reasons for the change of +auditors. +5. Egeberg violated AU § 230 by conducting the purported Fox Petroleum audits for +Fiscal Years 2010 and 2011, without exercising appropriate due professional care or professional +skepticism and violated AU § 326 by failing to obtain sufficient evidential matter. Egeberg did so +by failing to perform any audit tests or procedures to determine the accuracy of Fox Petroleum’s +financial statements. On a checklist Egeberg completed for Fox Petroleum, he noted, for example, +that the company’s large accounts payable balance was a troublesome audit area.4 Egeberg, +however, performed no tests to determine whether the balance was accurate. Instead, Egeberg +simply concluded that management’s representations were adequate. See also AU § 333.02, +Management Representations, which states, in part, “…[R]epresentations from 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.” +6. Similarly, Egeberg noted that unrecorded liabilities were a potential fraud risk for +Fox Petroleum, but that his concerns were satisfied by the company’s “overhauled financials.” +Egeberg never identified what he was specifically referring to by that, nor did he point to any +documentation showing how the supposed overhauls satisfied him. Egeberg’s acceptance of these +assertions at face value, without further inspection or procedures, constituted a failure to exercise +due professional care and skepticism and a failure to obtain sufficient competent evidential matter. +7. Egeberg was also required to inquire with the prior auditor for Fox Petroleum’s +2009 financial statements, the period immediately prior to the 2010 financial period. Egeberg +never inquired with the previous auditor regarding Fox Petroleum, in violation of AU § 315. Fox +Petroleum’s 2010 financial statements had already been audited and filed with the Commission in +a Form 10-K, but the prior auditor, who was hired to audit just that one period, had his PCAOB +registration permanently revoked on October 19, 2010 for non-cooperation with a PCAOB +investigation. Egeberg was unaware that his audit of the 2010 financial statements was a re-audit, +even though it was public knowledge and the Form 10-K was available on the Commission’s +website. Egeberg was required to try to inquire with the prior auditor regarding the re-audit of the +2010 financial statements for Fox Petroleum, pursuant to AU § 315.14. + +4 Egeberg downloaded the checklist from the American Institute of Certified Public Accountants’ (“AICPA”) +website. This checklist came from the AICPA’s Peer Review Program Manual. AICPA STANDARDS FOR +PERFORMING AND REPORTING ON PEER REVIEWS § 20, 400, et seq. (Am. Inst. of Certified Pub. Accountants 2009). +The checklist was designed as part of the AICPA’s Peer Review Programs and was designed for independent +reviewers to examine member-auditors’ engagements after completion of the engagement to promote accounting +and auditing quality. (AICPA STANDARDS FOR PERFORMING AND REPORTING ON PEER REVIEWS § 1000.02 (Am. +Inst. of Certified Pub. Accountants 2013). + 4 +8. Egeberg also violated AU § 230 by conducting the purported RPM Advantage +audits without excercising appropriate due professional care or professional skepticism and +violated AU § 326 by failing to obtain sufficient competent evidential matter. Much like with Fox +Petroleum, Egeberg failed to document any audit procedures he performed for any of RPM +Advantage’s financial balances on its financial statements. Moreover, it is questionable that +Egeberg actually audited RPM Advantage’s financial statements, because they were arithmetically +incorrect. + +9. Egeberg claimed he inquired about RPM Advantage’s predecessor auditor, but he +determined that the auditor was “unavailable.” RPM Advantage’s prior auditor had, on January 7, +2010, just one month prior to Egeberg’s engagement, been suspended from appearance or practice +before the Commission as an accountant with the right to apply for reinstatement after five years +pursuant to Rule of Practice 102(e)(1)(ii) and (iii) for numerous audit deficiencies, including +failure to exercise due professional care and failure to maintain adequate audit documentation. The +order suspending the prior auditor was publicly available, and a minimal search would have +informed Egeberg of the suspension. +10. An example of Egeberg’s lack of due care and skepticism on the RPM Advantage +audits is the lack of work to obtain audit evidence to analyze the impact of the balances carried +over from the 2005 financial statements on the 2006 financial statements and consistency of +accounting principles. See AU § 315.12. Egeberg noted on his checklist for RPM Advantage, +under the section for past adjustments and risk, that the financial statements were materially +misstated and that “there was no method to ascertain.” Egeberg claimed that the only records the +company had were the previous SEC filings, and thus he had no method to ascertain past +adjustments. Egeberg failed to point to any actual procedures that he performed. Egeberg had no +audit work papers, and had no other evidence to overcome his lack of audit documentation on the +subject. Because there were no records for prior periods and because Egeberg did not make +inquiries of the prior auditor for RPM Advantage, due professional care and skepticism should +have caused him to apply appropriate auditing procedures to account balances at the beginning of +fiscal year 2006 and to transactions in prior periods, but he did not. See AU § 315.12. See also +AU § 315.13 (“[t]he successor auditor’s review of the predecessor auditor’s working papers may +affect the nature, timing, and extent of the successor auditor’s procedures with respect to the +opening balances and consistency of accounting principles.”) +Failure to Obtain Engagement Quality Reviews. +11. Auditing Standard No. 7, Engagement Quality Review, requires an engagement +quality review and concurring approval of issuance for each audit engagement and for each +engagement to review interim financial information for fiscal years beginning after December 15, +2009. The engagement quality reviewer may not be the same person as the engagement partner. +A sole practice firm, like Egeberg’s, is thus required to engage a qualified individual from outside +the firm to serve as the engagement quality reviewer. +12. Egeberg failed to obtain an engagement quality review for the Fox Petroleum audit +engagement for its fiscal years ended February 28, 2011 and February 28, 2012, and for the audit + 5 +of RPM Advantage’s financial statements for its fiscal year ended December 31, 2010, in violation +of Auditing Standard No. 7. + Deficiencies in the Audits of Fox Petroleum’s Subsidiaries. +13. In September 2011, Fox Petroleum purchased two companies, Renfro Energy, LLC +(“Renfro”) and Cameron Parish Pipelines, LLC (“CPP”). Fox Petroleum engaged Egeberg to +conduct audits of Renfro and CPP for each company’s fiscal years ended December 31, 2009 and +December 31, 2010. On November 1, 2011, at 11:49 p.m., the CEO of Fox Petroleum emailed +Egeberg informing him of the purchase of the two companies. The CEO told Egeberg that the two +companies’ financial statements would need to be audited as part of the purchase agreement, and +that the two separate auditors for each company were unable to complete the audits by November +3, less than two days later. The Fox Petroleum CEO asked whether Egeberg would be able to +complete the audits for both companies for fiscal years 2009 and 2010 within the less than two-day +period, and told Egeberg that a $5 million credit line was contingent upon the deal closing, and that +if the deal closed on time, Egeberg would be able to collect outstanding bills for his audit of Fox +Petroleum that he had thus far been unable to collect. Less than forty hours later, Egeberg signed +off on the audits of four years’ worth of financial statements for Renfro and CPP. Egeberg +provided audit reports stating that he conducted the audits in accordance with PCAOB standards. +Those audit reports, along with the financial statements for Renfro and CPP, were both included in +a Form 8-K that Fox Petroleum publicly filed on November 3, 2011. +14. It is implausible that Egeberg could have conducted proper audits for Renfro and +CPP, each with two years of financial statements, in such a short time, regardless of the +companies’ small sizes. Further, each company had separate auditors who were each unable to +complete the audits in this short time, despite having already begun the work. Similarly troubling +is that Fox Petroleum’s CEO enticed Egeberg to complete the two audits under significant pressure +by promising him past-due payment owed for the Fox Petroleum audits, but only if Egeberg could +complete the audits in the two-day timeframe. These circumstances suggest that Egeberg rubber- +stamped the audit reports to help Fox Petroleum acquire the $5 million credit line in hopes of +payment for his completed audit of Fox Petroleum. +15. Neither Renfro nor CPP were SEC issuers. Notwithstanding, Egeberg included in +his audit report for each company the statement that the audits were conducted “in accordance with +standards required by the [PCAOB].” The audit reports were subsequently included on Forms 8-K +filed by Fox Petroleum with the Commission. The egregiously deficient audits of Renfro and CPP +further demonstrate Egeberg’s pattern of poor audit work and strengthen the need for the Rule +102(e) suspension. +16. Egeberg violated Auditing Standard No. 3, Audit Documentation, for his audits of +Renfro and CPP because he had no evidence demonstrating that he performed audit work for +Renfro or CPP. Egeberg’s failure to maintain documentation places a burden upon the auditor to +provide persuasive other evidence that sufficient procedures were performed, sufficient evidence +was obtained, and appropriate conclusions were reached with respect to the relevant financial +statement assertions, which Egeberg failed to do. + 6 +17. Egeberg failed to perform the audits of Renfro and CPP with due professional care +and professional skepticism, in violation of AU § 230. Egeberg also failed to collect competent +evidential matter for those audits, in violation of AU § 326. Egeberg has provided no documented +evidence of procedures performed to ensure that Renfro’s and CPP’s financial statements were +presented fairly and accurately. Similarly, Egeberg could not identify any procedures performed to +determine the accuracy of the financial statements. +18. Egeberg violated Auditing Standard No. 7 by failing to obtain an engagement +quality review for Renfro’s and CPP’s fiscal years ended December 31, 2010. + Additonal Audit Deficiencies in RPM Advantage and Fox Petroleum Audits. +19. Egeberg lacked the knowledge, proficiency, training, and skill to audit issuers +registered with the Commission. AU §§ 210 and 230, Training and Proficiency of the Independent +Auditor and Due Professional Care in the Performance of Work, respectively, which require that +an audit be performed by “a person or persons having adequate technical training and proficiency +as an auditor.” AU § 210.01. PCAOB auditing standards further require that auditors engage in +audit tasks “commensurate with their level of knowledge, skill, and ability so that they can +evaluate the audit evidence they are examining,” and that “[t]he auditor with final responsibility for +the engagement should know, at a minimum, the relevant professional accounting and auditing +standards . . . .” AU § 230.06. +20. Egeberg has never had any audit training. He has taken only four courses during +his professional career relating to audits and audit procedures, with at least two of them being self- +directed online courses completed as part of his continuing professional education requirements. +The extent of Egeberg’s professional practice since college has primarily been preparing tax +returns and general ledger bookkeeping for individuals and businesses. Yet he issued audit reports +covering financial statements for as many as twenty public companies before withdrawing his +PCAOB registration. +21. Because he had no training, Egeberg conducted all of his audits according to a +checklist he downloaded from the AICPA’s website, as discussed supra in footnote 4. This +checklist came from the AICPA’s Peer Review Program Manual. AICPA + STANDARDS FOR +PERFORMING AND REPORTING ON PEER REVIEWS § 20,400, et seq. (Am. Inst. of Certified Pub. +Accountants 2009). The peer review checklist that Egeberg used for his engagements was not +designed to substitute for the more rigorous and detail-oriented requirements for audit +engagements. Furthermore, AICPA’s Peer Review Program is not applicable to Commission +issuers. Id. §1000.03. +22. By following the Peer Review Program checklist, without any other experience or +guidance, Egeberg demonstrated his complete lack of understanding of public company audits. +Following these checklists also contributed to Egeberg’s performance of grossly deficient audits. + Failure to Design and Plan Audits. +23. AU § 311, Planning and Supervision, required that for audits of companies with +fiscal years beginning before December 15, 2010, + 7 +the auditor should consider the nature, extent, and timing of work to be +performed and should prepare a written audit program (or set of written +audit programs) for every audit. The audit program should set forth in +reasonable detail the audit procedures that the auditor believes are necessary +to accomplish the objectives of the audit. The form of the audit program +and the extent of its detail will vary with the circumstances. In developing +the program, the auditor should be guided by the results of the planning +considerations and procedures. As the audit progresses, changed conditions +may make it necessary to modify planned audit procedures. +AU §311.05. +24. Egeberg was required to design and plan audit procedures and programs for each +audit engagement. The audit programs should have taken into consideration, among other things, +the companies’ industries, the companies’ business practices, and judgments of potential +materiality and risk. AU § 311. Egeberg failed to perform any of these planning activities. +Instead, he simply followed the Peer Review Program checklist for each of his clients, which +simply asks whether the auditor properly designed an audit for the client, and for each of Egeberg’s +clients, he checked “yes.” There was no planning by Egeberg for any of the audits for 2006 to +2011, in violation of AU § 311. +Egeberg’s Complete Lack of Audit Work Papers. +25. Egeberg’s audits completely lacked audit work papers. Thus, Egeberg repeatedly +violated Auditing Standard No. 3, ¶ 6, Audit Documentation , which requires that audit +documentation “contain sufficient information to enable an experienced auditor, having no +previous connection with the engagement (a) to understand the nature, timing, extent, and results +of the procedures performed, evidence obtained, and conclusions reached, and (b) to determine +who performed the work and the date such work was completed as well as the person who +reviewed the work and the date of such review.” An auditor that has not adequately documented +that he performed a procedure, obtained evidence, or reached an appropriate conclusion must +demonstrate with persuasive other evidence that it did so, and oral assertions and explanations +alone do not constitute persuasive other evidence. See Auditing Standard No. 3, ¶ 9. + Egeberg’s Failure to Issue Accurate Audit Reports. +26. PCAOB standards require that the auditor’s report contain an opinion on the +financial statements taken as a whole and contain a clear indication of the character of the auditor’s +work. The auditor can determine that he is able to issue an audit report containing an unqualified +opinion only if he has conducted the audit in accordance with standards set forth by the PCAOB. +(AU § 508.07, Reports on Audited Financial Statements.) +27. Additionally, Regulation S-X, 17 CFR § 210 et seq., prescribes the qualifications of +accountants and the contents of the accountants’ reports that must be submitted with corporate +financial statements. In particular, it requires that the financial statements of a public corporation +must be audited by an accountant in accordance with Generally Accepted Auditing Standards + 8 +(“GAAS”). 17 CFR § 210.1-02(d). “[R]eferences in Commission rules and staff guidance and in +the federal securities laws to GAAS or to specific standards under GAAS, as they relate to issuers, +should be understood to mean the standards of the PCAOB plus any applicable rules of the +Commission.” (See SEC Release No. 34-49708 (May 14, 2004)). Thus, an auditor violates +Regulation S-X Rule 2-02(b)(1) if it issues a report stating that it had conducted its audit in +accordance with PCAOB standards when it had not. See Andrew Sims, CPA, Rel. No. 34-59584, +AAER No. 2950 (Mar. 17, 2009) (settled action). +28. The culmination of Egeberg’s numerous audit deficiencies made any representation +by Egeberg in his audit reports that his audits complied with PCAOB standards inaccurate. +Egeberg falsely made these representations in his audit reports for RPM Advantage and Fox +Petroleum, and Fox Petroleum’s subsidiaries, Renfro and CPP. +D. VIOLATIONS +29. Section 102(e)(1) of the Commission’s Rules of Practice provides 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 by the Commission after notice and +opportunity for hearing in the matter: . . . (ii) to be lacking in character or integrity or to have +engaged in unethical or improper professional conduct; or (iii) to have willfully violated, … any +provision of the Federal securities laws or the rules and regulations thereunder.” Section 4C of the +Exchange Act provides, in relevant part, that: “The Commission may censure any person, or deny, +temporarily or permanently, to any person the privilege of appearing or practicing before the +Commission in any way, if that person is found . . . (2) to … have engaged in … improper +professional conduct; or (3) to have willfully violated, . . . any provision of the securities laws or +the rules and regulations thereunder.” + +30. Section 4C of the Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules +of Practice define improper professional conduct with respect to persons licensed to practice as +accountants. Section 4C of the Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules +of Practice provide that improper professional conduct means “intentional or knowing conduct, +including reckless conduct, that results in a violation of applicable professional standards” Rule +102(e)(1)(iv)(A); and the following two types of negligent conduct: + +(1) a single instance of highly unreasonable conduct that results in a violation of applicable +professional standards in circumstances in which an accountant knows, or should know, +that heightened scrutiny is warranted. +(2) repeated instances of unreasonable conduct, each resulting in a violation of applicable +professional standards, that indicate a lack of competence to practice before the +Commission. Rule 102(e)(1)(iv)(B). +As noted previously, “unreasonable conduct” as used in this provision means ordinary negligence. +See In re Dohan & Co. CPA, et al., Int. Dec. Rel. No. 420, at p. 16 (June 27, 2011), final, +Securities Exchange Act Rel. No. 64970 (July 26, 2011). The Commission defines recklessness +under Rule 102(e) to be the same as recklessness under the antifraud provisions. Thus, recklessness + 9 +is “an extreme departure from the standards of ordinary care, . . . which presents a danger of +misleading buyers or sellers that is either known to the [actor] or is so obvious that the actor must +have been aware of it.” Amendment to Rule 102(e) of the Commission’s Rules of Practice, 63 +Fed. Reg. 57164, 57167 (Oct. 26, 1998). It is “a lesser form of intent,” “not merely a heightened +form of ordinary negligence.” Id. (internal citations and quotations omitted). Egeberg’s conduct +of falsely representing that his audit reports were conducted in accordance with PCAOB standards +was reckless and intentional under Rule 102(e). +31. As a result of the conduct described above, Egeberg engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. Egeberg’s unreasonable conduct +included his failures with respect to his audits of Fox Petroleum for its fiscal years ended February +28, 2010, 2011, and 2012, and his audits of Fox Petroleum subsidiaries Renfro and CPP for their +fiscal years ended December 31, 2009 and 2010. These repeated instances of unreasonable +conduct resulted in violations of PCAOB Standards AU Section 210, AU Section 230, AU Section +311, AU Section 315, AU Section 326, AU Section 508, Auditing Standard No. 3, and Auditing +Standard No. 7. +32. Egeberg engaged in improper professional conduct under Rule 102(e)(1)(ii), and +willfully violated Exchange Act Section 10(b) and Rule 10b-5(b) thereunder, and Rule 2-02(b)(1) +of Regulation S-X, which calls for sanction under Rule 102(e)(1)(iii), because his auditing +practices were so deficient that the audits amounted to no audits as all. SEC v. Price Waterhouse, +797 F. Supp. 1217, 1240 (S.D.N.Y. 1992) citing McLean v. Alexander, 599 F.2d 1190, 1198 (3 +rd +Cir. 1979). An auditor violates Exchange Act Section 10(b) and Rule 10b-5 thereunder by issuing +false audit reports. Egeberg violated these antifraud provisions by intentionally issuing audit +reports that falsely stated that his audits were conducted in accordance with PCAOB standards, and +these statements were material. Egeberg’s audits were not conducted in accordance with PCAOB +standards, but instead constituted complete departures from professional standards. +33. Egeberg willfully violated Regulation S-X Rule 2-02(b)(1) because he issued +reports stating that he had conducted his audits of RPM Advantage, Fox Petroleum, Renfro, and +CPP in accordance with PCAOB standards, when he had not. +III. + +In view of the allegations made by the Division of Enforcement, the Commission deems it +necessary and appropriate in the public interest that public administrative and cease- and-desist +proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondent an opportunity to establish any defenses to such allegations; + +B. What, if any, remedial action is appropriate in the public interest against Respondent +pursuant to Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice; and +C. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the +Exchange Act, Respondent should be ordered to cease and desist from committing or causing + 10 +violations of and any future violations of Exchange Act Section 10(b), and Rules 10b-5(b) and +Regulations S-X Rule 2-02(b)(1) thereunder, whether Respondent should be ordered to pay a civil +money penalty pursuant to Section 8A(g) of the Securities Act and Section 21B of the Exchange +Act, and whether Respondent should be ordered to pay disgorgement pursuant to Section 8A(e) of +the Securities Act, and Sections 21B(e) and 21C(e) of the Exchange Act. + +IV. + +IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions +set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days +from service of this Order at a time and place to be fixed, and before an Administrative Law Judge +to be designated by further order as provided by Rule 110 of the Commission's Rules of Practice, 17 +C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission's Rules of Practice, 17 C.F.R. § 201.220. + +If Respondent fails to file the directed answer, or fails to appear at a hearing after being duly +notified, the Respondent may be deemed in default and the proceedings may be determined against +him upon consideration of this Order, the allegations of which may be deemed to be true as +provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's Rules of Practice, 17 C.F.R. +§§ 201.155(a), 201.220(f), 201.221(f) and 201.310. + +This Order shall be served forthwith upon Respondent personally or by certified mail. + +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial +decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of +the Commission’s Rules of Practice. + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting fu nctions 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. + + + + 11 + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3530.txt b/raw/aaer/2014/AAER-3530.txt new file mode 100644 index 0000000000000000000000000000000000000000..e8555e7f97f647570f0f2159f2fafe49416354e1 --- /dev/null +++ b/raw/aaer/2014/AAER-3530.txt @@ -0,0 +1,428 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71389 / January 24, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3530 / January 24, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15687 + + +In the Matter of + +KPMG LLP, + +Respondent. +ORDER INSTITUTING ADMINISTRATIVE +AND CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C OF +THE SECURITIES EXCHANGE ACT OF +1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e) +of the Commission’s Rules of Practice against KPMG LLP (“KPMG” or “Respondent”).2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”), which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to + +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 Rule 102(e)(1)(ii) provides, in pertinent part, that: + The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or +practicing before it in any way to any person who is found . . . to have engaged in unethical or improper professional +conduct. + + 2 +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 entry of this Order Instituting Administrative and Cease-and- +Desist Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (“Order”), as set forth below: + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +A. Summary + +1. This matter concerns violations of the auditor independence rules by +public accounting firm KPMG. The auditor independence rules are intended to ensure that +auditors remain independent, both in fact and in appearance, from their Commission-registered +audit clients (“SEC audit clients”). KPMG violated these rules concerning its relationships with +and services provided to three of its public company audit clients or their affiliates. At various +times from 2007 through the end of 2011, KPMG provided prohibited non-audit services to +affiliates of three of its SEC audit clients: Company A, Company B and Company C. With +regard to Company A, KPMG hired an employee who had recently retired from a senior position +at Company A’s affiliate, and then loaned him back to that affiliate to do the same work he had +done as an employee of that affiliate. This engagement involved the loaned employee acting as a +manager, employee and advocate for the affiliate, causing KPMG to violate Rule 2-01 of +Regulation S-X of the Exchange Act. With regard to Company B, KPMG was its audit firm, but +also provided various prohibited non-audit services, including restructuring, corporate finance, +and expert services, to an affiliate of Company B. With regard to Company C, KPMG was its +audit firm, but also provided prohibited non-audit services, including bookkeeping and payroll +services, to affiliates of Company C. These non-audit services caused KPMG to violate the +independence rules in relation to Company B and Company C. Finally, certain KPMG +employees also owned stock in Company A and affiliates of Company B resulting in a further +violation of the independence rules. +2. Despite this conduct, KPMG repeatedly represented that it was +“independent” in audit reports issued on their financial statements, which were included or +incorporated by reference in public filings with the Commission. By doing so, KPMG violated +Rule 2-02(b) of Regulation S-X and Rule 10A-2 of the Exchange Act, and caused the three +clients to violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. KPMG’s +conduct also constituted improper professional conduct pursuant to Section 4C of the Exchange +Act and Rule 102(e) of the Commission’s Rules of Practice. +B. Respondent + +3. KPMG is a limited liability partnership registered in Delaware and +headquartered in New York, NY. KPMG is registered with the Public Company Accounting +Oversight Board (the “PCAOB”). KPMG is the U.S. member firm of KPMG International +Cooperative (“KPMGI”). Pursuant to Rule 2-01 of Regulation S-X, KPMGI’s foreign member + + 3 +firms are included within the definition of “accountant,” which is defined to include associated +entities. +C. Other Relevant Entities +4. Company A is a corporation located outside of the United States. Until +September 2010, Company A’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 (“NYSE”) and +one of KPMGI’s member firms served as Company A’s auditor. From August 2007 until June +2009, Company A held a minority interest in one of its U.S. affiliates. During the relevant time +period, KPMG served as the U.S. affiliate’s auditor. +5. Company B is a Delaware limited partnership. Company B’s common +limited partner units are registered with the Commission pursuant to Section 12(b) of the +Exchange Act and trade on the NYSE. KPMG served as Company B’s auditor from 2005 until +late 2011. +6. Company C is a Delaware corporation. Company C’s common stock is +registered with the Commission pursuant to Section 12(b) of the Exchange Act and trades on the +NYSE. KPMG has served as Company C’s auditor since 2008. +D. Legal Background +7. The purpose of Rule 2-01 of Regulation S-X is to ensure that auditors are +qualified and independent of their SEC audit clients3 – both in fact and in appearance. The rule +sets forth a non-exhaustive list of non-audit services which an auditor cannot provide to its audit +clients and be considered independent. See 17 C.F.R. § 210-2.01(c)(4)(i)-(x). Among other +things, it prohibits an auditor from providing bookkeeping services, payroll services, appraisal or +valuation services, internal audit outsourcing services, legal services, expert services, and broker- +dealer, investment adviser or investment bank services. Id. It also prohibits an auditor from +designing and implementing financial information systems or performing human resources or +management functions for its audit clients. See 17 C.F.R. § 210-2.01(c)(4)(ii), (vi) and (vii). +8. Pursuant to Rule 2-01(c)(4)(vi) of Regulation S-X, an auditor is +specifically prohibited from “[a]cting, temporarily or permanently, as a director, officer, or +employee of an audit client, or performing any decision-making, supervisory, or ongoing +monitoring function for the audit client.” 17 C.F.R. § 210-2.01(c)(4)(vi). Similarly, Preliminary +Note 2 to Rule 2-01 of Regulation S-X makes clear that, in applying the general standard of +auditor independence set forth in Rule 2-01(b), the Commission considers, among three other +principles, whether a relationship or service “results in the accountant acting as management or +an employee of the audit client.” 17 C.F.R. § 210-2.01, Preliminary Note 2. + +3 With certain exceptions that are not relevant here, “audit client” is defined as “the entity whose financial +statements or other information is being audited, reviewed, or attested and any affiliates, of the audit client.” 17 +C.F.R. § 210-2.01(f)(6) (emphasis added). In turn, “affiliate” is defined to include “[a]n entity that has control over +the audit client, over which the audit client has control, or which is under common control with the audit client, +including the client’s parents and subsidiaries. . . .” 17 C.F.R. § 210-2.01(f)(4)(i). + + 4 +9. Under the “financial relationships” provision of Rule 2-01 of Regulation +S-X,“[a]n accountant is not independent if, at any point during the audit and professional +engagement period, the accountant has a direct financial interest or a material indirect financial +interest in the accountant’s audit client.” 17 C.F.R. § 210-2.01(c)(1). This provision is triggered +when “[t]he accounting firm or any covered person in the firm, or any of his or her immediate +family members, has any direct investment in an audit client, such as stocks, bonds, notes, +options, or other securities.” 17 C.F.R. § 210-2.01(c)(1)(i)(A). As relevant here, “covered +person” includes any partner in the “chain of command;” any “managerial employee . . . who has +provided ten or more hours of non-audit services to the audit client;” and any partner “from an +‘office’ of the accounting firm in which the lead audit engagement partner principally practices +in connection with the audit.” 17 C.F.R. § 210-2.01(f)(11). +E. Prohibited Services Provided to Affiliate of Company A +10. In or around April 2007, an affiliate of Company A offered early +retirement packages to certain employees as part of the affiliate’s economic recovery plan. One +employee who worked as Senior Tax Counsel in the affiliate’s Office of Tax Affairs’ Trade & +Customs Group accepted an early retirement package effective August 31, 2007. Prior to +retirement, this individual’s work involved senior-level tasks, including tax compliance planning +for the affiliate and its subsidiaries, as well as international customs planning and advice. +Among other things, this individual was involved in planning related to the affiliate’s +international expansion efforts and responding to customs audits by international taxing +authorities. This long-time employee’s retirement created an immediate need for someone to fill +this role for the affiliate of Company A. +11. In November 2007, after discussions with the affiliate of Company A +about its staffing needs in this regard, KPMG hired the former employee of the affiliate to be +loaned back to the affiliate. This employee was hired by KPMG at the manager level and loaned +back to the affiliate of Company A to perform essentially the same senior-level work that this +individual had performed as Senior Tax Counsel for the affiliate. In fact, the KPMG engagement +letter specified that this individual was expected to devote all professional time over a period of +two years “to assisting [the affiliate of Company A] with such tax consulting matters as [the +affiliate’s] management may specify related to global customs compliance matters.” The +individual had no other duties at KPMG. +12. Over the course of this engagement, the Company A affiliate’s former +employee performed a range of tax consulting work for the affiliate, all under the supervision of +this individual’s former supervisor at the affiliate. This individual’s work was substantially the +same as the work performed as an employee of the affiliate. It included responding to +international customs audits and inquiries, as well as advocating on the affiliate’s behalf in +dealings with customs officials. As part of this work, this individual gathered information +responsive to customs officials’ inquiries and provided advice to the affiliate, based on prior +experience at the affiliate, about how to present this information to these officials. During +Fall/Winter of 2008, this individual also traveled with a team of the affiliate’s employees to +various European countries to meet with government officials on the affiliate’s behalf. In +addition, this individual took part in discussions regarding major operational and structural +issues, including discussions regarding the structure of the affiliate’s European operations. + + 5 +13. From November 2007 until December 2008 (when KPMG terminated the +engagement pursuant to which it loaned the Company A affiliate’s former employee to the +affiliate of Company A), all of this individual’s professional time was spent doing work for the +affiliate. In total, KPMG provided 1,897 hours of services in connection with this engagement +with Company A’s affiliate. +14. This engagement violated the independence rules because the affiliate’s +former employee acted as both a manager and an employee of Company A’s affiliate and +provided advocacy services for the affiliate. In addition, this individual was allowed to hold +stock in Company A while providing manager-level services to Company A’s affiliate for over a +year, in further violation of the independence rules. +F. Prohibited Services Provided to Affiliate of Company B +15. KPMG was Company B’s outside audit firm from 2005 until December +2011. On September 1, 2006, Company B became an affiliate of a large financial services firm +when one of the financial services firm’s subsidiaries purchased all the issued and outstanding +stock of a controlling affiliate of Company B. The transaction resulted in the financial services +firm becoming the owner of Company B’s General Partner, which owned and controlled +Company B. As a result of this transaction, and because KPMG was Company B’s auditor at the +time, the financial services firm should have been identified for independence purposes by +KPMG as an affiliate of Company B as of September 1, 2006. +16. The financial services firm was a non-audit client of KPMG from at least +2006 through the end of 2011. KPMG provided a variety of non-audit services to the financial +services firm, described further below. These services were appropriate until such time that +Company B and the financial services firm became affiliates, at which point the non-audit +services provided to the financial services firm became prohibited under the auditor +independence rules. +17. From September 1, 2006 forward, Company B disclosed its relationship to +the financial services firm in every annual report it filed with the Commission and also included +a visual depiction of the relationship in these filings. Despite these public disclosures, the +KPMG audit engagement teams for the Company B audits did not recognize the financial +services firm as a controlling affiliate for independence purposes until late 2011. As a result, +from September 1, 2006 until late 2011, KPMG provided a range of prohibited non-audit +services to the financial services firm, including 67 instances of management functions, 20 +instances of restructuring services, 13 instances of loaned staff services (involving KPMG +employees providing services such as bookkeeping and expert services), six instances of +corporate finance services and three other instances of expert services. KPMG also received +contingent fees for services provided to the financial services firm in 26 instances, which was +prohibited by Rule 2-01(c)(5). See 17 C.F.R. § 210-2.01(c)(5). +18. In late 2011, KPMG realized that the financial services firm should have +been identified as an affiliate of Company B. In early December 2011, KPMG reported this fact +to the Audit Committee of Company B’s General Partner. On December 15, 2011, the Audit +Committee terminated KPMG as Company B’s auditor. + + 6 +19. In addition, six partners in the KPMG chain of command and two partners +in the KPMG office that conducted Company B’s audits owned stock in the financial services +firm, in further violation of the independence rules. +G. Prohibited Services Provided to Affiliates of Company C +20. During December 2007, KPMG was notified that Company C was +requesting proposals from three firms, including KPMG, to perform the 2008 audit and quarterly +reviews of its consolidated financial statements. During the ensuing client acceptance process +for Company C’s audit engagement, the KPMG audit engagement team learned that KPMG had +been providing certain non-audit services to affiliates of Company C that KPMG would be +prohibited from providing if it became Company C’s independent auditor. These services +included bookkeeping and payroll services provided to affiliates of Company C in eleven +different countries. On February 22, 2008, Company C provided KPMG with a “Transition +Plan” that identified these services, the countries in which the services were being provided, and +actions being taken to transition the services to other providers. The Transition Plan specified +that all such services would end by July 1, 2008. +21. On February 27, 2008, the KPMG audit engagement team – in +consultation with the firm’s Independence Group – concluded that, based on the perceived +immateriality of the locations and services being provided, the Transition Plan was reasonable +and KPMG’s overall independence would not be impaired if it became the auditor for Company +C but also continued providing the non-audit services to Company C’s affiliates through July 1, +2008. On February 28, 2008, KPMG was appointed Company C’s auditor and confirmed by +letter to Company C that it was independent “with respect to [Company C] and its related entities +under applicable SEC and PCAOB independence requirements.” In the letter, KPMG +acknowledged it was currently providing certain non-audit services to Company C’s affiliates, +but concluded that, “[b]ased on the nature of the matters identified and their planned timely +resolution we do not believe these matters compromise the firm’s independence.” +22. In fact, from February 28, 2008 through June 2008, the non-audit services +that KPMG continued to provide to Company C’s affiliates, including bookkeeping and payroll +services, constituted prohibited services in violation of the auditor independence rules (which do +not provide for limited duration transition periods or include any exceptions based on the nature +of the services provided). +H. Violations +23. As a result of the conduct described above, KPMG violated Rule 2-02(b) +of Regulation S-X, which requires that each accountant’s report state whether the audit was +made in accordance with generally accepted auditing standards (“GAAS”) (which standards +require that auditors maintain strict independence from SEC audit clients). See PCAOB + + 7 +Auditing Standards, Independence, AU § 220.03.4 A violation occurred each time that KPMG +issued an audit report for the three 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 independence requirements of GAAS, where either the period covered by the audit, or the +period of the audit work, or both, overlapped with prohibited conduct. +24. As a result of the conduct described above, KPMG violated Rule 10A-2 of +the Exchange Act each time that it provided non-audit services that are prohibited under Rule 2- +01(c)(4) of Regulation S-X to the three audit clients. Rule 10A-2 of the Exchange Act makes it +unlawful for an auditor to fail to be independent of its audit clients under Rule 2-01(c)(4) of +Regulation S-X. +25. As a result of the conduct described above, KPMG caused the three audit +clients 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 accountant. KPMG knew, or should have known, that its conduct would cause the +audit clients to violate these reporting provisions. +26. As a result of the conduct described above, KPMG also engaged in +improper professional conduct, as defined in Exchange Act Section 4C and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice. +I. Undertakings +Respondent has undertaken to: + +Implement internal changes (the “proposed changes”) to enhance KPMG’s ability to +educate and monitor compliance by its personnel with respect to the independence requirements +under PCAOB standards and applicable Commission rules concerning the provision of non-audit +services to SEC audit clients by achieving the following goals: (a) increasing personnel and +expertise within KPMG’s Independence Group, (b) improving KPMG’s review procedures for +both new service offerings and engagement-specific requests for non-audit services, (c) +improving KPMG’s independence policies, guidance, and training, and (d) improving KPMG’s +clearance and compliance procedures related to the independence rules. + +Retain, within sixty (60) days after the entry of this Order, an independent consultant (the +“Independent Consultant”), not unacceptable to the staff of the Commission. The Independent +Consultant’s role will be to review and evaluate whether the proposed changes have been +designed and implemented in a manner reasonably sufficient to achieve the goals stated above +concerning the provision of non-audit services to SEC audit clients. KPMG shall cooperate fully +with the Independent Consultant and shall provide the Independent Consultant with access to its + +4 Pursuant to Commission Release 33-8422, GAAS, as used in Regulation S-X, means “the standards of the PCAOB +plus any applicable Commission rules.” Audit reports dated on or after May 24, 2004 – the effective date of +PCAOB Auditing Standard 1 – are required to state they were performed in accordance with PCAOB standards. +PCAOB rules and standards require auditors to be independent from their audit c lients. See, e.g., PCAOB Rule +3520, PCAOB Rule 3600T, and PCAOB AU § 220. + + 8 +own files, books, records, and personnel as reasonably requested for the review. The +Independent Consultant shall disclose to the staff of the Commission in the event that KPMG or +any of its employees, agents, consultants, contractors, or anyone else acting on its behalf refuses +to provide information necessary for the performance of the Independent Consultant’s +responsibilities. KPMG agrees that it will not take any action to retaliate against the Independent +Consultant for such disclosures. + +Require that the Independent Consultant issue a report, within six (6) months of being +retained, summarizing his or her review and reporting on whether the proposed changes have +been designed and implemented in a manner reasonably sufficient to achieve the goals stated +above concerning the provision of non-audit services to SEC audit clients. Simultaneously with +providing that report to KPMG, the Independent Consultant shall transmit a copy to LeeAnn +Gaunt, Assistant Director, Division of Enforcement, Securities and Exchange Commission, 33 +Arch Street, 23rd Floor, Boston, MA 02110. In the event that the Independent Consultant reports +that the proposed changes have in some way failed to be designed and implemented in a manner +reasonably sufficient to achieve the goals stated above concerning the provision of non-audit +services to SEC audit clients, the report will include recommendations of procedures reasonably +designed to do so. + +Adopt all additional recommendations in the report of the Independent Consultant; +provided, however, that, within sixty (60) days after the Independent Consultant serves the +report, KPMG shall advise the Independent Consultant and the Commission, in writing of any +recommendations that it considers unnecessary, unduly burdensome, impractical or costly. With +respect to any recommendation that KPMG considers unnecessary, unduly burdensome, +impractical or costly, KPMG 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 KPMG and the Independent Consultant do not +agree, such parties shall attempt in good faith to reach an agreement within sixty (60) days after +KPMG serves the written advice. In the event that KPMG and the Independent Consultant are +unable to agree on an alternative proposal, KPMG will abide by the determinations of the +Independent Consultant. + +Require the Independent Consultant to enter into an agreement with KPMG that provides +that, for the period of engagement and for a period of two (2) years from completion of the +engagement, the Independent Consultant shall not enter into any employment, consultant, +attorney-client, auditing, or other professional relationship with KPMG, 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 or she is affiliated or of which he or she is a member, and any person engaged to assist +the Independent Consultant in performance of his or her duties under this Order shall not, +without prior written consent of the Securities and Exchange Commission’s Division of +Enforcement, enter into any employment, consultant, attorney-client, auditing, or other +professional relationship with KPMG, 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 from completion of the engagement. + + + 9 +Certify, in writing, compliance with the undertakings set forth above. The certification +shall identify the undertakings, provide written evidence of compliance in the form of a +narrative, and be supported by exhibits sufficient to demonstrate compliance. The Commission +staff may make reasonable requests for further evidence of compliance, and Respondent agrees +to provide such evidence. The certification and supporting material shall be submitted to +LeeAnn Gaunt, Assistant Director, Division of Enforcement at the address provided above, 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. + +These undertakings shall be binding upon any acquirer or successor-in-interest to +KPMG’s, or substantially all of KPMG’s, audit practice for SEC audit clients. + +For good cause shown, the Commission staff may extend any of the procedural dates set +forth above. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, pursuant to Sections 4C and 21C of the Exchange Act and Section 102(e) of +the Commission’s Rules of Practice, it is hereby ORDERED that: + + A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02 of Regulation S-X, Rule 10A-2 of the Exchange Act, and Section +13(a) of the Exchange Act and Rule 13a-1 thereunder. + +B. Respondent is censured. + +C. Respondent shall, within fourteen (14) days of the entry of this Order, pay +disgorgement of $5,266,347, prejudgment interest of $1,185,002, and a civil money penalty in +the amount of $1,775,000, for a total of $8,226,349, 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;5 +(2) Respondent may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may make payment by certified check, bank cashier’s check, or +United States postal money order, payable to the Securities and Exchange Commission +and hand-delivered or mailed to: + +5 On December 31, 2012, the minimum threshold for transmission of payment electronically was increased to +$1,000,000. For amounts below the threshold, Respondent must make payments pursuant to option (2) or (3) above. + + 10 +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order shall be accompanied by a cover letter identifying KPMG as +the Respondent and including the file number of these proceedings. A copy of the letter and +check or money order must be sent to LeeAnn Gaunt, Assistant Director, Division of +Enforcement at the address provided above. + + +D. Respondent shall comply with the undertakings enumerated in Section III.I above. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3531.txt b/raw/aaer/2014/AAER-3531.txt new file mode 100644 index 0000000000000000000000000000000000000000..32a747274d9dea01101966889af872e44b829b7c --- /dev/null +++ b/raw/aaer/2014/AAER-3531.txt @@ -0,0 +1,1371 @@ + + + + + + + + + + + + + + + + SEC.gov | Deloitte Touche Tohmatsu CPA Ltd. + + + + + + + + !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\/515096","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 + + + Deloitte Touche Tohmatsu CPA Ltd. + + + + + + + + + + + + Deloitte Touche Tohmatsu CPA Ltd. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 22911 / January 27, 2014 + Accounting and Auditing Enforcement Release No. 3531 / January 27, 2014 + Securities and Exchange Commission v. Deloitte Touche Tohmatsu CPA Ltd. , Civil Action No. 1:11-MC-00512 (D.D.C. filed September 8, 2011) + + SEC, Joined by Deloitte China, Files a Motion to Dismiss Without Prejudice the Subpoena Enforcement Action + + + The Securities and Exchange Commission today filed a joint motion with Deloitte Touche Tohmatsu CPA Ltd. ("DTTC") to dismiss without prejudice the subpoena enforcement action that the SEC filed against DTTC in September 2011. Dismissal of the proceeding, as proposed by the parties, is subject to the approval of the district court. + The SEC initiated the subpoena enforcement action to compel DTTC to produce audit workpapers and other documents responsive to an administrative subpoena issued in connection with the SEC's investigation into possible fraud by DTTC's former audit client, China-based Longtop Financial Technologies Limited, a foreign private issuer whose securities were registered with the Commission and traded on U.S. markets. DTTC had argued that it was prohibited under Chinese law from producing the requested documents, which are located in China, to the SEC. + The SEC recently received a substantial volume of documents called for by its subpoena, including DTTC audit workpapers and certain other documents related to Longtop. The production was made by the China Securities Regulatory Commission ("CSRC") in response to the SEC's request for assistance in August 2012. The CSRC produced the documents to the SEC after obtaining them from DTTC. + In light of the substantial volume of documents produced, the cooperation that the CSRC recently has provided to the SEC with respect to Longtop, and DTTC's statement that it will continue to cooperate with respect to CSRC requests for Longtop-related documents the SEC, at present, does not believe that there is a need for judicial relief with respect to the subpoena. However, it is possible that the SEC may later determine that it needs the Court's assistance and accordingly, the SEC, joined by DTTC, is requesting an order dismissing the proceeding without prejudice. + For additional information, see Litigation Release No. 22088 / September 8, 2011 and SEA Release No. 65948 / December 14, 2011. + + + + + 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-3532.txt b/raw/aaer/2014/AAER-3532.txt new file mode 100644 index 0000000000000000000000000000000000000000..3c2f680b75ce94608218780ee3d41fef50dd8e94 --- /dev/null +++ b/raw/aaer/2014/AAER-3532.txt @@ -0,0 +1,115 @@ + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71484 / February 5, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3532 / February 5, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15741 + + +In the Matter of + + LAWRENCE A. O’DONNELL, +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 Lawrence A. O’Donnell +(“Respondent” or “O’Donnell”). + +II. + +The Commission finds that: + +A. RESPONDENT + +1. O’Donnell, age 61, was licensed as a certified public accountant (“CPA”) by +the State of Colorado from July 28, 1977, through October 8, 2010. He audited and reviewed the +financial statements included in annual and other reports and registration statements filed with 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 by Imperiali, Inc. from October 19, 2006, through May 1, 2009. + +B. CIVIL INJUNCTION + +2. On November 8, 2013, the U.S. District Court for the Southern District of +Florida entered a final judgment against O’Donnell, permanently enjoining him from future +violations, direct or indirect, of Section 10(b) of the Securities Exchange Act of 1934 and Rule +10b-5 thereunder. Securities and Exchange Commission v. Imperiali, Inc., et al., Civil Action +Number 9:12-cv-80021-KLR. + +3. The Commission’s complaint alleged that, while serving as Imperiali, Inc.’s +auditor from May 2006 through March 2008, O’Donnell participated in a fraudulent scheme by +issuing false audit reports on Imperiali financial statements. The financial statements, which +appeared in annual and other reports and registration statements filed with the Commission, listed +values for worthless assets in amounts ranging from $3.5 million to $269 million and failed to +disclose the issuance of five million shares of restricted stock. O’Donnell’s audit reports falsely +stated that Imperiali’s financial statements were presented in conformity with generally accepted +accounting principles and falsely stated that his audits were conducted in accordance with Public +Company Accounting Oversight Board Standards. + +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined O’Donnell, 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 O’Donnell be temporarily +suspended from appearing or practicing before the Commission. + +IT IS HEREBY ORDERED that O’Donnell 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 O’Donnell 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). + + 3 +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 O’Donnell personally or by certified mail at his last known +address. + + By the Commission. + + + + Elizabeth M. Murphy + Secretary + + + + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3533.txt b/raw/aaer/2014/AAER-3533.txt new file mode 100644 index 0000000000000000000000000000000000000000..011245862c850a61cd5fc8febc2361de2ed23da3 --- /dev/null +++ b/raw/aaer/2014/AAER-3533.txt @@ -0,0 +1,1378 @@ + + + + + + + + + + + + + + + + SEC.gov | Uriel Sharef 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\/515156","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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Uriel Sharef et al. , Civil Action No. 11-CIV-09073 (S.D.N.Y.) (SAS) + + SEC Concludes Its Case Against Former Siemens Executives Charged with Bribery in Argentina, Obtaining Judgments over $1.8 Million + + + + The Securities and Exchange Commission announced today that on February 3, 2014, the U.S. District Court for the Southern District of New York entered a final judgment against Andres Truppel, a former CFO of Siemens Argentina. On February 4, 2014, the Court also entered a final judgment against Ulrich Bock and Stephan Signer, both former Heads of Major Projects at Siemens Aktiengesellschaft (Siemens). The judgments resolve the Commission's Civil Action against Truppel, Bock and Signer for their role in a decade long bribery scheme at Siemens and its regional company in Argentina. + + On December 13, 2011, the Commission filed a Civil Action charging Bock, Signer, Truppel and four other senior executives of Siemens and its regional company in Argentina with violations of the anti-bribery, books and records, and internal controls provisions of the FCPA. The Commission alleged that between 2001 and 2007, the defendants paid bribes to senior government officials in Argentina to retain a $1 billion contract ("the DNI contract") to produce national identity cards for Argentine citizens. The officials included two Argentine presidents and cabinet ministers in two presidential administrations. + + The Commission's complaint alleged that Bock and Signer, both senior Siemens managers based in Germany, took various actions to revive the DNI contract after it was cancelled by government officials in Argentina, and made sure that the bribery connected to the contract went undetected. Truppel, a former CFO of Siemens Argentina with close ties to government officials, assisted their efforts. The Commission's complaint also alleged that Uriel Sharef, a member of Siemens Managing Board, or "Vorstand," and the most senior officer charged in connection with the scheme, met with payment intermediaries in the U.S. and agreed to pay bribes to Argentine officials while enlisting subordinates to conceal payments and circumvent Siemens' internal accounting controls. + + The final judgment as to Bock and Signer enjoins them from violating Sections 30A and 13(b)(5) of the Exchange Act, and Rule 13b2-1 thereunder, and from aiding and abetting Siemens' violations of Exchange Act Sections 31(b)(2)(A) and 13(b)(2)(B), and orders them to each pay a civil penalty of $524,000, the highest penalty assessed against individuals in an FCPA case. The judgment also orders Bock to pay disgorgement of $316,452, plus prejudgment interest thereon in the amount of $97,505. Bock and Signer failed to respond to the Commission's complaint. + + The final judgment as to Truppel enjoins him from violating Sections 30A and 13(b)(5) of the Exchange Act, and Rule 13b2-1 thereunder, and from aiding and abetting Siemens' violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B), and orders him to pay a civil penalty of $80,000. Truppel settled the Commission's charges without admitting or denying the allegations in the complaint. + + This concludes the SEC's case. The Commission previously announced that on April 16, 2013, a final judgment was entered by the Court against Uriel Sharef, a former officer and board member of Siemens, for his role in the long standing bribery scheme. The final judgment, to which Sharef consented without admitting or denying the allegations in the Commission's complaint, enjoined him from violating the anti-bribery and related books and records and internal controls provisions of the FCPA, and ordered him to pay a $275,000 civil penalty. Bernd Regendantz settled with the Commission when the complaint was filed, and allegations against Herbert Steffen and Carlos Sergi were dismissed. The SEC appreciates the assistance of the Department of Justice, Fraud Section, the Federal Bureau of Investigation, the Office of the Prosecutor General in Munich, Germany and authorities in Argentina. + + + + + + + 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-3534.pdf b/raw/aaer/2014/AAER-3534.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5434d37eecd5ea9536d7e9c20186a4760b915be1 Binary files /dev/null and b/raw/aaer/2014/AAER-3534.pdf differ diff --git a/raw/aaer/2014/AAER-3535.txt b/raw/aaer/2014/AAER-3535.txt new file mode 100644 index 0000000000000000000000000000000000000000..35ae67308b775be2cbed831f892bb4c5c4b64a99 --- /dev/null +++ b/raw/aaer/2014/AAER-3535.txt @@ -0,0 +1,989 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 9548 / February 12, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71546 / February 12, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3535 / February 12, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15750 + + +In the Matter of + +Apple REIT Six, Inc.; Apple +REIT Seven, Inc.; Apple +REIT Eight, Inc.; Apple +REIT Nine, Inc.; Apple Six +Advisors, Inc.; Apple Seven +Advisors, Inc.; Apple Eight +Advisors, Inc.; Apple Nine +Advisors, Inc.; Glade M. +Knight; and Bryan F. Peery, +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, IMPOSING CIVIL +PENALTIES 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 Apple REIT Six, Inc. (“AR6”), Apple REIT Seven, Inc. (“AR7”), Apple REIT +Eight, Inc. (“AR8”), Apple REIT Nine, Inc. (“AR9”), Apple Six Advisors, Inc. (“A6A”), Apple +Seven Advisors, Inc. (“A7A”), Apple Eight Advisors, Inc. (“A8A”), Apple Nine Advisors, Inc. +(“A9A”), Glade M. Knight, and Bryan F. Peery (“Respondents”). + + 2 +II. + In anticipation of the institution of these proceedings, each Respondent has submitted an +Offer of Settlement (“Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting 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, Imposing Civil Penalties and a Cease-and- +Desist Order (“Order”), as set forth below. +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +SUMMARY +1. This matter involves disclosure and internal controls failures relating to valuation, +related party transactions, and executive compensation by four non-traded real estate investment +trusts (“REITs”) – AR6, AR7, AR8, AR9 (collectively the “Apple REITs”) – their respective +advisers, their Chief Executive Officer (“CEO”) and Chairman of the Boards of Directors, Glade +M. Knight (“Knight”), and their Chief Financial Officer (“CFO”), Bryan F. Peery (“Peery”). +2. AR6, AR7, and AR8 made material misrepresentations and omissions concerning +the valuation of their units in their Form S-3 dividend reinvestment plan (“DRIP”) registration +statements and in certain Forms 10-K. The Apple REITs each initially sold units in blind pool +offerings at, according to public disclosures, an arbitrarily established offering price of $11.00 per +unit. After the close of the initial offerings, each of the Apple REITs instituted a DRIP program +wherein existing unitholders could reinvest their distributions in lieu of receiving cash. Internal +Revenue Service (“IRS”) rules require that REITs sell their DRIP units at a reasonably accurate +fair market value so that unitholders reinvesting dividends receive equivalent value to the cash +dividend. In an effort to comply with the IRS framework, the Apple REITs, in language drafted by +outside counsel, represented to unitholders in the DRIP registration statements that the DRIP unit +price “[would] be based on the fair market value of [the REITs’] units as of the reinvestment date +as determined in good faith by [their] board[s] of directors from time to time.” Although the +Forms S-3 disclosed that “the per unit price for the plan will be determined at all times based on +the most recent price at which an unrelated person has purchased our units,” the Forms S-3 failed +to disclose that the $11.00 unit price was not based on an appraisal of the Apple REITs’ assets or +other valuation methodology. The Forms S-3 also failed to disclose that, in contrast to an actively +traded market, the price last paid for a DRIP share by an unrelated person in the context of a non- +traded REIT did not reflect a meaningful estimate of the underlying or realizable value of the units. +Relying in part on DRIP sales and redemptions at $11.00, the Apple REITs also represented in + +1 The findings herein are made pursuant to Respondents’ Offers and are not binding on any other person or +entity in this or any other proceeding. + 3 +Forms 10-K until 2011 that “[t]he per share estimated market value of common stock is deemed to +be the offering price of the shares, which currently is $11.00 per share” without disclosing that +$11.00 did not reflect a meaningful estimate of the underlying value of the units. +3. Additionally, AR6, AR7, and AR8 failed to devise and maintain sufficient +disclosure controls and procedures to meaningfully evaluate whether changes in market conditions +or other factors required changes to their valuation disclosures. Consequently, despite receiving +internal and third-party analyses indicating a value below $11.00 per unit and despite significant +decreases in operating performance, AR6, AR7, and AR8 collectively sold more than 25 million +DRIP units following the 2008 global financial crisis while maintaining that the arbitrarily +established initial offering price of $11.00 constituted the “fair market value” of their DRIP units in +their Forms S-3 and the “estimated market value” of their units in their Forms 10-K. +4. The Apple REITs also failed to disclose numerous related party transactions +involving short-term transfers between REITs to meet cash needs and commercial loans personally +guaranteed by Knight between 2008 and 2011. As part of their business model, the Apple REITs +historically have maintained little cash on hand, relying on cash flows from operations and, as +necessary, credit facilities. However, rather than obtaining additional commercial credit or +requesting funds from the third-party management companies contained in the operating bank +accounts of hotels, Apple REIT management engaged in approximately 25 short-term cash +transfers between the Apple REITs – which at all times were separate companies with separate +boards of directors and separate unitholders. The short-term cash transfers typically were repaid +within a few days, ranged in amounts from $25,000 to $20 million, and were used to, among other +things, fund acquisitions, distributions and redemptions, and to cover clearing checks and debt. +Further, Knight personally guaranteed several short-term commercial loans to the Apple REITs, +some of which were used to fund shareholder redemptions. Neither the short-term transfers nor the +fact of Knight’s personal guarantee was disclosed to unitholders. +5. The Apple REITs further failed to disclose significant compensation paid by the +advisers and Knight to their executive officers between 2008 and 2010. Specifically, the Apple +REIT advisers, which at all relevant times were private companies wholly owned by Knight, paid +undisclosed supplemental compensation out of funds belonging to the advisers to certain executive +officers for work they performed for the REITs. Knight also sold the economic benefits associated +with Series B convertible shares issued to Knight to certain executive officers, including Peery, to +supplement their compensation, which was not disclosed to unitholders. The undisclosed related +party transactions and undisclosed supplemental compensation contradicted affirmative disclosures +to unitholders – including representations that the independent directors would affirmatively +approve transactions between the REITs and their affiliates – and demonstrated insufficient +internal controls. +RESPONDENTS +6. Apple REIT Six, Inc. (“AR6”), at all times relevant herein, was a non-traded +REIT organized under the laws of Virginia with a class of securities registered under Section 12(g) +of the Exchange Act and was subject to the reporting requirements of Section 13(a) of the +Exchange Act. AR6 owned 66 hotels operating in 18 states as of December 31, 2012. AR6 raised + 4 +approximately $1 billion between January 2004 and March 2006, and had approximately 19,500 +beneficial unitholders as of February 15, 2013. AR6 instituted a DRIP by filing a Form S-3 +registration statement on February 10, 2006, which it amended and restated on May 14, 2009. As +of December 31, 2012, AR6 had sold a total of approximately 18.4 million units representing +$202.1 million in proceeds pursuant to these DRIP offerings. AR6 merged with an unrelated entity +on May 14, 2013. In connection with the merger, each AR6 share was exchanged for $9.20 in cash +and one share of redeemable preferred stock of the unrelated entity with an initial liquidation +preference of $1.90. +7. Apple REIT Seven, Inc. (“AR7”), is a non-traded REIT organized under the laws +of Virginia with a class of securities registered under Section 12(g) of the Exchange Act and is +subject to the reporting requirements of Section 13(a) of the Exchange Act. AR7 owned 51 hotels +operating in 18 states as of December 31, 2012. AR7 raised approximately $1 billion between +May 2005 and July 2007, and had approximately 19,800 beneficial unitholders as of February 28, +2013. AR7 instituted a DRIP by filing a Form S-3 registration statement on July 17, 2007, which it +amended and restated on January 13, 2012. As of December 31, 2012, AR7 had sold +approximately 11.3 million units representing approximately $124.5 million in proceeds pursuant +to these DRIP offerings. +8. Apple REIT Eight, Inc. (“AR8”), is a non-traded REIT organized under the laws +of Virginia with a class of securities registered under Section 12(g) of the Exchange Act and is +subject to the reporting requirements of Section 13(a) of the Exchange Act. AR8 owned 51 hotels +operating in 19 states as of December 31, 2012. AR8 raised approximately $1 billion between +January 2007 and April 2008, and had approximately 19,700 beneficial unitholders of February 28, +2013. AR8 instituted a DRIP by filing a Form S-3 registration statement on April 23, 2008; it filed +a post-effective amendment thereto on February 19, 2013. As of December 31, 2012, AR8 had +sold approximately 9.1 million units representing approximately $99.9 million in proceeds +pursuant to these DRIP offerings. +9. Apple REIT Nine, Inc. (“AR9”), is a non-traded REIT organized under the laws +of Virginia with a class of securities registered under Section 12(g) of the Exchange Act and is +subject to the reporting requirements of Section 13(a) of the Exchange Act. AR9 owned 89 hotels +operating in 27 states as of December 31, 2012. AR9 raised approximately $2 billion between +November 2007 and December 2010, and had approximately 38,100 beneficial unitholders as of +February 28, 2013. AR9 instituted a DRIP by filing a Form S-3 registration statement on +December 10, 2010; it filed a post-effective amendment thereto on February 19, 2013. +10. Apple Six Advisors, Inc. (“A6A”), a Virginia corporation wholly owned by Glade +M. Knight was the adviser to AR6 at all times relevant herein. The advisory agreement required +A6A to provide, inter alia, day-to-day management services to AR6 and provides for an annual +asset management fee ranging from 0.1 to 0.25% of the amount raised in the offering. +11. Apple Seven Advisors, Inc. (“A7A”), a Virginia corporation wholly owned by +Glade M. Knight, is the adviser to AR7. The advisory agreement requires A7A to provide, inter +alia, day-to-day management services to AR7 and provides for an annual asset management fee +ranging from 0.1 to 0.25% of the amount raised in the offering. + 5 +12. Apple Eight Advisors, Inc. (“A8A”), a Virginia corporation wholly owned by +Glade M. Knight, is the adviser to AR8. The advisory agreement requires A8A to provide, inter +alia, day-to-day management services to AR8 and provides for an annual asset management fee +ranging from 0.1 to 0.25% of the amount raised in the offering. +13. Apple Nine Advisors, Inc. (“A9A”), a Virginia corporation wholly owned by +Glade M. Knight, is the adviser to AR9. The advisory agreement requires A9A to provide, inter +alia, day-to-day management services to AR9 and provides for an annual asset management fee +ranging from 0.1 to 0.25% of the amount raised in the offering. +14. Glade M. Knight (“Knight”), age 69, of Midlothian, Virginia, was the founder, +Chairman of the Board and Chief Executive Officer of AR6, and is the founder, Chairman of the +Board and Chief Executive Officer of AR7, AR8, and AR9. Knight reviewed and signed the +relevant Forms S-3, 10-Q, and 10-K, which incorporate by reference, in part, the proxy statements. +Knight also certified pursuant to Exchange Act Rule 13a-14 the relevant Forms 10-Q and 10-K. +2 +15. Bryan F. Peery (“Peery”), age 49, of Mechanicsville, Virginia, served as +Executive Vice President and Chief Financial Officer (“CFO”) of AR6, and serves as the +Executive Vice President and CFO of AR7, AR8, and AR9. Peery also was an officer of A6A, and +is an officer of A7A, A8A, and A9A. Peery is a certified public accountant licensed in Virginia. +Peery reviewed and signed the relevant Forms S-3, 10-Q, and 10-K, which incorporate by +reference, in part, the proxy statements. Peery also certified pursuant to Exchange Act Rule 13a-14 +the relevant Forms 10-Q and 10-K. +RELEVANT ENTITY +16. Apple Fund Management, LLC (“AFM”), a wholly owned subsidiary of AR6 +during the relevant time period, was an entity utilized by the advisers, which have no employees, to +provide the management services, including the executive officers, required by the advisory +contracts to, inter alia, AR6, AR7, AR8, and AR9. Previously, AFM was a subsidiary of Apple +Hospitality Five, Inc. (“AH5”). After AH5 merged with a third party in 2007, the board of +directors transferred AFM to AR6. +FACTS +A. Background +17. The Apple REITs are non-traded REITs that, during the relevant period, primarily +owned full service, limited service, and extended stay hotels. As REITs, they are not subject to +federal corporate income taxation as long as they meet certain requirements such as the distribution +of at least 90% of their taxable income annually to unitholders in dividends. The Apple REITs +have a class of securities registered under Section 12(g) of the Exchange Act and are subject to the + +2 In 1976, the Commission settled an action, SEC v. Goodman Securities Corp., et al., CA 76-0007-R (E.D. Va. +1976), involving Knight and others for alleged disclosure violations in connection with a real estate limited +partnership offering. See also In the Matter of Glade M. Knight, et al., Admin. Proc. File 35138, Release No. 13087 +(Dec. 21, 1976). + 6 +reporting requirements of Section 13(a) of the Exchange Act, but their units are not publicly +traded, and generally are considered illiquid. The Apple REITs represent to unitholders that, +although there “can be no assurance that this event will occur,” they “expect that within +approximately seven years from the initial closing” they will execute a liquidity event such as +causing the common shares to be listed on a national securities exchange or merging with a REIT +or similar investment vehicle. +18. Each of the Apple REITs is a separate reporting company with separate unitholders. +However, by virtue of the advisers’ reliance on AFM, a wholly owned subsidiary of AR6, to +provide employees and management services to the Apple REITs, the Apple REITs share common +corporate management. Third-party management companies manage the day-to-day operations of +the hotels under the supervision of the advisory companies. +19. The Apple REITs were sold through their exclusive selling agent, as best efforts, +blind pool offerings at an offering price of $11.00 per share. +3 The Form S-11 registration +statements represented that the “per-unit offering prices have been established arbitrarily … and +may not reflect the true value of the [u]nits; therefore, investors may be paying more for a [u]nit +than the [u]nit is actually worth.” Except for limited redemption programs, there is no public +market for the Apple REITs. +20. Pursuant to redemption programs, unitholders of AR6, AR7, AR8, and AR9 who +had held their shares for at least one year were permitted to request unit redemptions on a quarterly +basis. Pursuant to SEC guidance concerning tender offers, no more than 5% of the weighted +average number of units outstanding could be redeemed during any 12-month period. If +shareholder requests exceeded the number of shares that were authorized to be redeemed during +any quarter, the Apple REITs redeemed on a pro rata basis. +21. Following the close of their initial offerings, the Apple REITs each instituted a +DRIP wherein they each sold DRIP units on a monthly basis during the relevant period.4 The +Apple REITs primarily used the DRIP proceeds to redeem units under their limited unit +redemption programs. Under the terms of the unit redemption programs, the number of units +redeemed could not exceed the aggregate net proceeds received from DRIP sales and the additional +share option program. +22. Between at least 2008 and 2012, the Apple REITs each paid between 7% and 8% in +distributions (which generally included a component of return of capital), with the exception of +AR8, which lowered its distribution to 5% in June of 2011. The Apple REITs generally have paid +more in distributions than they generated in cash from operations. The Apple REITs disclosed in +their Form S-11 registration statements that, although they generally seek to make distributions + +3 Units are initially sold at $10.50 per share until the minimum offering is complete. +4 The Apple REITs’ DRIPs were continuous offerings during the relevant period. However, AR6 suspended its +DRIP in November 2012 upon execution of its merger agreement with an unrelated third party according to public +filings. AR7, AR8, and AR9 also suspended their DRIPs and redemptions on or about June 27, 2013 in connection +with the evaluation of a potential consolidation transaction in which AR7, AR8 and AR9 would be combined +according to a Form 8-K filed on June 27, 2013. + 7 +from operating revenues, they may pay distributions in part from financing proceeds or other +sources, including offering proceeds. +B. Misstatements and Omissions Concerning Valuation +23. During the relevant period, AR6, AR7, and AR8 made material misstatements and +omissions concerning valuation in their Form S-3 DRIP registration statements and in certain of +their Forms 10-K.5 Additionally, the Apple REITs did not have sufficient controls in place to +meaningfully evaluate whether changes in market conditions or other factors required changes to +their valuation disclosures in their Forms S-3 and Forms 10-K. +24. Item 5 of Form S-3 requires registrants to include a description pursuant to Item +505 of Regulation S-K of the “various factors considered in determining [the] offering price” +where common equity is being registered for which there is no established public trading market. +Item 5 of Form 10-K requires registrants to furnish pursuant to Item 201 of Regulation S-K certain +high and low bid information if the principal United States market is not an exchange and to +qualify such quotations with an appropriate explanation “[w]here there is an absence of an +established public trading market.” +25. In a section titled, “How are unit prices determined?”, the Apple REITs’ initial +Forms S-3 registration statements, as drafted by outside counsel, represented that: +6 + +The price of units purchased under the plan directly from +us by dividend reinvestments will be based on the fair market +value of our units as of the reinvestment date as determined in +good faith by our board of directors from time to time. +Our units are not publicly traded; consequently, there is no +established public trading market for our units on which we could +readily rely in determining fair market value . Nevertheless, the +board has determined that, for purposes of this plan, at any given +time the most recent price at which an unrelated person has +purchased our units represents the fair market value of our units. +Consequently, unless and until the board decides to use a different +method for determining the fair market value of our units, the +per unit price for the plan will be determined at all times based on +the most recent price at which an unrelated person has purchased +our units. Notwithstanding the foregoing, the board of directors may +determine a different fair market value and price for our units for +purposes of this plan if (1) in the good faith judgment of the board + +5 Although AR9 made substantially similar representations in its DRIP plan filed on December 10, 2010, AR9 did +not have the same type of operating history available and rarely was included in the internal and third-party strategic +planning analyses that contradicted the disclosures at issue. +6 The Form S-3 filed by AR6 on February 10, 2006, used the term “distribution” rather than “dividend” in the first +sentence of the disclosure, but it was changed to the above quoted language for AR6’s Form S -3 filed on May 14, +2009. + 8 +an amount of time has elapsed since our units have been purchased +by unrelated persons such that the price paid by such persons would +not be indicative of the fair market value of our units or (2) our +board determines that there are other factors relevant to such fair +market value…. (emphasis added)7 +26. Outside counsel drafted the language at issue in part to comply with certain federal +tax requirements prohibiting the deduction of preferential distributions by REITs, which, as +disclosed in the Forms S-3, “could subject the REIT[s] to federal corporate income taxes which +most likely would reduce the after-tax yield on any distributions to shareholders.” The Forms S-3 +represented that “[t]o avoid this result under [the] plan, a reasonably accurate determination of +the fair market value of units by [the REITs’] board[s] of directors is required.” (emphasis +added.) +27. Although the Forms S-3 disclosed that “the per unit price for the plan will be +determined at all times based on the most recent price at which an unrelated person has purchased +our units,” the disclosures omitted to state that the “fair market value” of the units was not based on +an appraisal of the Apple REITs’ assets or other valuation methodology. They also failed to +disclose that, in contrast to an actively traded market, the price last paid for a DRIP share by an +unrelated person in the context of a non-traded REIT did not reflect a meaningful estimate of the +underlying or realizable value of the units. +28. In addition, following the 2008 global financial crisis until the fiscal year ended +December 31, 2011, AR6, AR7, and AR8 represented in their Forms 10-K that “[t]he per share +estimated market value of common stock is deemed to be the offering price of the shares, which +currently is $11.00 per share.” (emphasis added) The Forms 10-K further represented that the +disclosed estimated market value of $11.00 was “supported by the fact that the [REITs are] +currently selling shares to the public at a price of $11.00 per share through … Dividend +Reinvestment Plan[s].” +8 However, the Forms 10-K failed to disclose that $11.00 did not reflect a +meaningful estimate of the underlying value of the units. +29. Consequently, AR6, AR7, and AR8 maintained the arbitrarily established initial +offering price of $11.00 as the “fair market value” and the “estimated market value” of the units +following the 2008 global financial crisis despite internal and third-party analyses suggesting that +the per unit values of the Apple REITs were below $11.00 and despite declines in operating +performance. + +7 AR7 filed an amended and restated Form S-3 on January 13, 2012, which, among other things, disclosed that “the +market value of [its] units and the unit price of units purchased from [it] under the plan will not be based on an +appraisal or other valuation of [AR7], [its] net assets, or the units, and will not necessarily reflect [its] value, earnings, +net worth or other measures of value, but rather will be deemed equal to the most recent price at which an unrelated +person has purchased our units from [it].” AR7, AR8, and AR9 filed post-effective amendments to their Forms S-3 on +February 19, 2013 incorporating substantially similar language. +8 The Apple REITs stopped using the term “estimated market value” in Item 5 in their Forms 10 -K for the fiscal year +ended December 31, 2011. Further, in their Forms 10-K for the fiscal year ended December 31, 2012, the Apple +REITs disclosed that the $11.00 price (or $10.25 in the case of AR9 due to a special distribution of $0.75 to +unitholders relating to an asset sale on April 27, 2012) “[was] not based on an appraisal or valuation of the Company +or its assets.” + 9 +Internal and Third-Party Analyses Contradicted AR6, AR7, and AR8’s Valuation Disclosures +30. Following the 2008 global financial crisis, Apple REIT management received +internal strategic planning analyses between late 2008 and 2011 that contradicted the REITs’ +representations that $11.00 constituted the “fair market value” of the units in their Form S-3 and +the “estimated market value” of the units in their Forms 10-K. +31. For example, in late 2008, an Apple REIT employee created a basic model for an +executive officer estimating AR6, AR7, and AR8’s performance over a five year period. The +model was linked directly to the accounting system, was updated regularly through at least mid- +2011 and was distributed to certain members of management. Although the primary purpose of the +model related to evaluating future cash flow performance, the model included an estimated market +value section calculating the REITs’ enterprise, equity and per share values. The estimated market +values of the AR6, AR7 and AR8 mostly showed per share values below $11.00. A different +analysis performed by the same Apple REIT employee for an executive officer in August 2009 +showed that, without substantial revenue and FFO +9 increases, the per share values of AR6, AR7, +and AR8 would be below $11.00. +32. In addition, starting in approximately mid-2009 through mid-2011, several third- +party investment banks made presentations to Apple REIT management concerning potential +strategic options for the Apple REITs. The estimated valuations included in these presentations +varied and were not a static $11.00 per unit for AR6, AR7, and AR8 as represented in their Forms +S-3 and Forms 10-K. Some of the per-unit valuations were below $11.00 for AR6 and most of the +per unit valuation estimates were below $11.00 for AR7 and AR8. +AR6, AR7, and AR8’s Economic Performance Contradicted the Valuation Disclosures +33. AR6, AR7, and AR8’s operating performance following the 2008 global financial +crisis also should have caused the Apple REITs to amend their disclosure of $11.00 as a “fair +market value” and “estimated market value” of units. AR6, AR7, and AR8’s net incomes declined +more than 40% in 2009 as compared to 2008, and remained below 2008 levels through at least +December 31, 2012. +34. Further, given the up-front fees and ramp up periods10 for the properties, Apple +REIT management knew that growth would be required to reach a fair market value of $11.00 per +share, and further knew or should have known that the economic performance of the REITs +between 2009 and at least 2011 fell short of that growth level. +35. AR6, AR7, and AR8 also increased their debt levels between 2008 and 2012. +Increased debt levels may affect the Apple REITs’ valuations because any debt incurred by the + +9 FFO, or Funds From Operations, is defined by the National Association of Real Estate Investment Trusts as net +income (computed in accordance with GAAP), excluding gains/losses on sales of depreciable property, plus +depreciation and amortization of real property used in operations, less preferred dividends and after adjustments for +unconsolidated partnerships and joint ventures. +10 “Ramp up period” is a term used by the REITs’ management to describe the 6 to 24-month period following +initial property purchase or construction needed to position the property to reach the expected level of return +through, for example, improved management or improved marketing. + 10 +REITs must eventually be repaid, thereby reducing the equity available for distribution to +unitholders in connection with a liquidity event. AR6, AR7, and AR8 nonetheless never adjusted +the $11.00 per unit valuation disclosures. +Failure to Implement Sufficient Processes or Procedures to Evaluate the Valuation Disclosures +36. Despite the representation in the Forms S-3 that the Apple REITs’ boards of +directors would determine in good faith the fair market value of the DRIP units from time-to-time, +the Apple REITs failed to develop or maintain sufficient procedures relating to the disclosure of +the valuation of units sold in the DRIPs. The Apple REITs did not establish a valuation committee +or valuation working group. Nor did they establish any formal or informal valuation guidelines or +otherwise attempt to identify relevant factors for determining fair market value. Further, +management did not provide the boards of directors with the contradictory internal valuations +discussed in paragraph 31 or the contradictory third-party valuations for consideration in +determining fair market value. +37. Consideration of the fair market value of the units for purposes of the DRIP was not +included as a formal agenda item for board meetings. Although the directors periodically +discussed the DRIP program during board meetings, a record of substantive discussion concerning +DRIP prices at board meetings does not appear in meeting minutes until February 2012 even +though the DRIP programs for AR6, AR7, and AR8 had been in place since 2006, 2007 and 2008, +respectively. That discussion was recorded merely as: “There was … a discussion concerning +DRIP and redemption pricing. Those in attendance considered the price currently paid ($11 per +unit) to be appropriate and would reconsider if at some point it is warranted.” Rather, the boards of +directors operated under the theory that as long as there were DRIP sales, they did not need to +reconsider the unit price. +C. Undisclosed Related Party Transactions: Short-Term Transfers Between REITs to +Meet Cash Needs and Commercial Loans Personally Guaranteed by Knight +38. Between 2008 and 2011, the Apple REITs, which were separate companies with +separate unitholders and boards of directors at all relevant times, engaged in numerous undisclosed +cash transfers between REITs to meet short-term cash needs and obtained certain commercial loans +personally guaranteed by Knight, which were undisclosed. The Apple REITs executed most of +these undisclosed related party transactions without following internal controls described in public +filings, including a disclosed policy that such transactions would be approved by an affirmative +vote of the independent directors. Further, although the boards of directors had adopted general +borrowing resolutions for each of the REITs, the independent directors did not affirmatively +approve the fact of the personal guarantee by Knight or the short-term transfers. +39. Item 7 of Form 10-K and Item 3 of Form 10-Q both require registrants to “identify +and separately describe internal and external sources of liquidity” pursuant to Item 303 of +Regulation S-K, which requires identification of “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.” Item 13 of Form 10-K and Item 7 of Schedule 14A +both require registrants to describe “any transaction … in which the registrant was or is to be a + 11 +participant and the amount involved exceeds $120,000, and in which any related person had or will +have a direct or indirect material interest,”11 and to disclose the “registrant’s policies and +procedures for the review, approval, or ratification” of such related party transactions pursuant to +Item 404 Regulation S-K. Accounting Standards Codification Topic 850-10 (hereinafter “ASC +850-10”), Related Party Disclosures,12 requires the disclosure of material related party transactions +in the financial statements, even if no or nominal amounts were ascribed thereto.13 Additionally, +the Commission issued a statement in January 2002 providing that registrants should include a +discussion of material related party transactions in their Management’s Discussion and Analysis of +Financial Condition and Results of Operations (“MD&A”). +Undisclosed Cash Transfers Between REITs To Meet Short-Term Cash Needs +40. As part of their business model, the Apple REITs historically have maintained little +cash on hand, relying on cash flows from operations and, as necessary, credit facilities. On +approximately 25 occasions between 2008 and 2011, rather than obtaining additional commercial +credit or attempting to obtain funds from the third-party management companies contained in the +operating bank accounts of hotels, Peery, in consultation with other members of management, +effectuated or authorized undisclosed, short-term cash transfers between REITs – which are +separate companies with separate unitholders – to meet short-term cash needs. The transfers at +issue ranged between $25,000 and $20 million.14 The “borrowing” REIT typically repaid the +transfer within a few days, and used the assets in connection with property acquisitions, +redemptions and distributions, and to cover clearing checks and debt. The Apple REITs’ records +lacked sufficient detail to determine the business purpose of certain of the transfers. +41. The Apple REITs recorded the transfers between the separate companies in +intercompany accounts as opposed to as payables and receivables, and, except for one of the +largest transfers, did not execute loan documentation or, except for the two largest transfers, did +not charge interest. In addition, the Apple REITs failed to record four of the transfers in their +general ledgers. The Apple REITs also failed to disclose as a source of liquidity pursuant to Item +303 that they adopted a cash management policy in 2011 providing for transfers up to $1 million +between REITs to cover, among other things, “unanticipated cash need[s].” + +11 The Instructions to Item 404(a) define “related person” to include any director or executive officer of the +registrant. Transaction is defined to include “any financial transactions, arrangement, or relationship (including any +indebtedness or guarantee of indebtedness) or any series of similar transactions, arrangements or relationships.” +Under Item 404(a), a related person’s indirect material interest in a firm, corporation, or other entity engaging in a +transaction with the registrant may require disclosure of certain details concerning the transaction. +12 ASC 850-10 formerly was Statement of Financial Accounting Standards (“SFAS”) No. 57 prior to the September +2009 codification. +13 ASC 850-10 defines affiliates as related parties, and provides that similar related party transactions may be +aggregated by type. Affiliate is defined as “[a] party that, directly or indirectly through one or more intermediaries, +controls, is controlled by, or is under common control with an entity.” Related Party is defined to include “[o]ther +parties that can significantly influence the management or operating policies of the transacting parties… .” +14 The $20 million transfer, which was largest of the undisclosed transfers at issue, involved a situation in which +AR8 purchased a $100 million Certificate of Deposit (“CD”), but subsequently identified properties for +acquisition. The closing date for some of the properties was scheduled before the maturity of the CD. Rather than +seeking an early withdrawal from AR8’s CD, Peery, in consultation with others in management, transferred $20 +million from AR9 to AR8, which AR8 repaid with interest in the amount matching that earned in the CD +approximately one month later. + 12 +42. The majority of the transactions at issue exceeded the $120,000 Item 404 disclosure +threshold, even before aggregating similar transactions.15 Further, the practice of making periodic +short-term transfers between the REITs to meet cash needs was material due to qualitative factors +and required to be disclosed because it facilitated their business practice of maintaining little cash +on hand during the relevant period. For example, the related party nature of the relationship +between the REITs was important to this cash management tool because common management +controlled all the relevant bank accounts and could make book transfers between REITs following +which the transferred funds were immediately available for use. Additionally, unlike in connection +with borrowing on commercial credit lines, no advance notice was needed to execute transfers +between REITs. However, Peery treated these transactions as immaterial for disclosure purposes +because, among other reasons, they typically were repaid within a few days. +Undisclosed Loans Personally Guaranteed by Knight +43. Between 2009 and 2010, Knight personally guaranteed, and provided personal +assets as collateral for, four short-term commercial loans and lines of credit to AR6 and AR7: $10 +million in July 2009 to AR6; $2 million in April 2010 to AR6; $2 million in April 2010 to AR7; +and $9 million in July 2010 to AR7. With the exception of the $9 million loan to AR7, neither the +loans nor the personal guarantees were disclosed to unitholders as required by ASC 850-10 and +Items 303 and 404 of Regulation S-K. Although the $9 million loan was disclosed, Knight’s +personal guarantee was not disclosed. Peery and others were aware of these loans. +44. AR6 and AR7 obtained these personally guaranteed loans and lines of credit in part +to fund redemption payments during periods when the Apple REITs had borrowed the maximum +available on their existing lines of credit. Knight received no compensation or other benefit in +exchange for his personal guarantee. +The Short-Term Transfers and Personally Guaranteed Loans at Issue Contradicted Internal +Controls and Affirmative Disclosures to Unitholders +45. The undisclosed short-term cash transfers between REITs and the undisclosed +personally guaranteed loans, contradicted several affirmative disclosures and internal controls set +forth in the Apple REITs’ public disclosures. +46. The Forms S-11 represented that it was the Apple REITs’ policy not to “sell, +transfer or lend assets or property to any of [their] affiliates” nor to “purchase, borrow, or +otherwise acquire assets or property from any of [their] affiliates” unless the transactions were +approved by an affirmative vote of the majority of independent directors. The Apple REITs’ +bylaws, which are exhibits to numerous public filings, contained similar language. +16 Although the + +15 The Apple REITs amended their Form 10-K disclosures for the fiscal year ended December 31, 2010 to include +that “the individual companies may make payments for any or all of the related companies” in order “[t]o efficiently +manage cash disbursements” and that “[t]he amounts due to or from the related individual co mpanies are reimbursed +or collected and are not significant in amount.” However, these amended disclosures failed to accurately +characterize the nature, frequency and purpose of the transfers between REITs. Additionally, s ome of the 2010 cash +transfers exceeded Item 404’s $120,000 disclosure threshold, even before aggregating similar transactions. +16 AR8 and AR9’s Forms S-11 also represented that a majority of disinterested directors would approve any material +agreement or arrangement between, or transactions involving the Apple REITs and their affiliates, and that the + 13 +boards of directors had adopted general borrowing resolutions for each REIT, management failed +to seek the affirmative approval of the independent directors for all but one of the undisclosed +short-term transfers and personally guaranteed loans at issue. +47. Some of the undisclosed transfers between REITs also were inconsistent with +representations to unitholders concerning the use of proceeds. Neither the Forms S-11 nor the +Forms S-3, which specifically set forth the use of proceeds, disclosed the possibility that a REIT +might use investor assets to make loans to affiliates.17 The Forms S-11 also represented that “[t]he +proceeds of [the] offering [would] be received and held in trust for the benefit of the investors in +compliance with applicable securities laws, to be used only for the purposes set forth in [the] +prospectus.” Additionally, the Forms S-11 stated that the Apple REITs “expect[ed] borrowings to +come from third party, non-affiliated lenders,” and that they had “no current plan or intention to +make loans to other persons or entities.” + 18 +48. The advisory agreements provided that either the REITs paid directly or the +advisers paid and sought reimbursement for certain enumerated expenses on behalf of the Apple +REITs, such as distributions to unitholders, interest expense, and all costs of personnel. The +advisory agreements also required the advisers to prepare statements documenting any such +reimbursable expenses within 45 days and required the Apple REITs to reimburse the advisers +within 60 days after the end of the quarter. Here, rather than following the procedures outlined in +the advisory agreements, Peery authorized and/or transferred funds directly between the Apple +REITs in varying amounts and at varying intervals as cash needs arose. In addition, +notwithstanding their actual cash management practices, AR6, AR7, AR8, AR9 misrepresented +that the expense reimbursements flowed from the Apple REITs to their advisers consistent with the +advisory agreements in their Forms 10-K for 2008 and 2009 and in their proxies filed in 2008, +2009, and 2010.19 +D. Undisclosed Compensation Arrangements +49. AR6, AR7, AR8 and AR9 failed to disclose material compensation arrangements in +their Forms 10-K for 2008, 2009, and 2010, and in their Schedule 14A proxy statements, including +those filed in April 2011 in which they solicited nonbinding advisory votes approving executive +compensation (i.e., “say-on-pay” votes). + +officers, directors and employees were required to report to the board related party transactions where the amount +exceeded $120,000. +17 The Forms S-11 represented that the proceeds of the offering would be used to pay organization expenses, to +repay any outstanding balance on the Apple REITs’ lines of credit, to pay expenses and fees of selling the units, to +invest in properties, to pay expenses associated with acquisition properties, and to establish a working capital +reserve. The Form S-3 registration statements provided that the REITs expected to use the proceeds from DRIP +sales for general corporate purposes which may include redeeming units, enhancing properties, satisfying financing +obligations and other expenses, increasing working capital, funding various corporate operations, and acquiring +hotels or other properties. +18 The Forms S-11 represented that the unitholders were entitled to rely on the fiduciary duties of the advisers and +similar duties of officers to provide substantial protection for unitholders’ interests. +19 The Apple REITs Form 10-K disclosures continued to be materially misleading in 2010 and 2011 because they +state that expenses were reimbursed by the advisers to AR6 (as the owner of AFM) or paid directly to AR6 on behalf +of the advisers when they knew or should have known that the payments were always made directly between REITs. + 14 +50. Item 11 of Form 10-K and Item 8 of Schedule 14A20 both require that registrants +furnish the information required by Item 402 of Regulation S-K, including “clear, concise and +understandable disclosure of all plan and non-plan compensation awarded to, earned by, or paid to +the named executive officers … by any person for all services rendered in all capacities to the +registrant and its subsidiaries,” including compensation involving “transactions between the +registrant and a third party where a purpose of the transaction is to furnish compensation to any +such named executive officer or director….” +Failure to Disclose Payments from the Advisers to the Apple REITs’ Officers +51. Knight, the 100% owner of the advisers to the Apple REITs, entered into written +agreements with four executive officers, including Peery (as to A8A and A9A only) to share +profits earned by the advisers. Although the supplemental compensation was paid from the assets +of the advisers, and although the Apple REITs disclosed the advisory fees from which the +payments to executive officers were made, they failed to disclose the profit-sharing agreement in +their Forms 10-K for the fiscal years ended December 31, 2008, 2009, and 2010, or in the proxy +statements incorporated by reference therein, thereby materially understating the compensation +paid to executive officers. +52. The total amount of undisclosed compensation paid by the advisers exceeded the +disclosed compensation for executive officers by between $85,375 and $1.197 million per REIT as +presented in the compensation tables in the fiscal years ended December 31, 2008, 2009, and 2010. + + +A6 AR7 AR8 AR9 + +Disclosed +Compensation +Paid by the +Apple REITs +Undisclosed +Supplemental +Compensation +Paid by the +Advisers +Disclosed +Compensation +Paid by the +Apple REITs +Undisclosed +Supplemental +Compensation Paid +by the Advisers +Disclosed +Compensation +Paid by the +Apple REITs +Undisclosed +Supplemental +Compensation Paid +by the Advisers +Disclosed +Compensation +Paid by the +Apple REITs +Undisclosed +Supplemental +Compensation Paid +by the Advisers +2008 $368,611 $1,197,306 $368,611 $732,249 $368,611 $478,622 $368,611 $85,375 +2009 $476,271 $720,657 $476,271 $493,074 $476,271 $510,397 $476,271 $360,868 +2010 $468,127 $721,866 $468,127 $488,942 $468,127 $517,407 $468,127 $744,882 +Failure to Disclose the Sale of Benefits Relating to B Shares from the CEO to Executive Officers +of the Apple REITs +53. AR6, AR7, AR8, and AR9 failed to disclose in the Forms 10-K and Schedule 14A +proxy statements as required by Item 402 of Regulation S-K that Knight sold the economic +benefits relating to nearly 30% of his Series B convertible preferred shares (“B shares”) in AR6, +AR7, AR8, and AR9 to certain officers of the Apple REITs, including Peery, to supplement the +compensation paid to those officers. +54. Depending on its size, each REIT issued between 240,000 and 480,000 B shares to +Knight in his capacity as founder at $0.10 per share. The B shares are convertible into common + +20 Schedule 14A’s requirement to disclose the information required by Item 402 and Item 404 of Regulation S-K +applies if action is to be taken with respect to, among other things, election of directors, which was the case in all the +Apple REITs’ relevant Schedule 14A filings. + 15 +shares upon the occurrence of certain events such as a sale or transfer of substantially all of the +REIT’s assets, or a listing on any securities exchange. +55. The executive officers paid $0.10 per share to Knight for the economic benefits +associated with the B shares transferred to them. The interest in the B shares represented +compensation for work done for the REITs and their advisers that should have been disclosed. +56. Knight’s sale of benefits relating to the B shares also was inconsistent with +affirmative disclosures in each of the Apple REITs’ Schedule 14A proxy statements that Knight +was the 100% owner of those shares, and disclosures in the Forms 10-K that all of the B shares +were issued to Knight. +Misstatements and Omissions in the Apple REITs’ Compensation Discussion and Analysis Section +of their Proxy Statements +57. Given the fact of undisclosed compensation described above, the Apple REITs also +misstated or omitted material information required by Item 402(b) of Regulation S-K from the +Compensation Discussion and Analysis section of their proxy statements filed in 2009, 2010, and +2011. Item 402(b) requires a discussion of “all material elements of the registrant’s compensation +of the executive officers” including information concerning the registrant’s compensation +objectives and rationale. +58. The Apple REITs represented to unitholders, without disclosing the payments to +executive officers by the advisers or the B Share sales, that the base salaries and bonuses for the +executive officers are “designed to be competitive with comparable employers” and that the REITs +believe that a “simplistic approach to compensation better matches the objectives of all +stakeholders.” They also represented that their executive officer compensation targets were +developed “using comparisons to compensation paid by other public hospitality REITs” and that +the targets were set “sufficiently high to attract and retain a strong and motivated leadership team, +but not so high that it creates a negative perception with … other stakeholders.” +E. Failure to Timely File Forms 3 and Forms 4 +59. The directors and executive officers of the Apple REITs were subject to the +reporting requirements of Section 16(a) of the Exchange Act, which requires the filing of +beneficial ownership forms with the Commission. Section 16(a) and Rule 16a-3 of the Exchange +Act require directors and officers to file initial reports of ownership on Form 3 and changes of +ownership on Form 4 with the Commission. +21 During the relevant period, Glade Knight failed to +timely file one Form 3 and one Form 4 related to AR9. Bryan Peery failed to timely file one Form +3 relating to AR9. + +21 Section 16(a)(2) requires that a reporting person of an issuer that is registering securities for the first time under +Section 12 of the Exchange Act must file Form 3 no later than the effective date of the registration statement. Once +the initial report is filed, any changes in holdings must be reported on Form 4 within two business days of the +change. + 16 +60. In addition, Item 10 of Form 10-K and Item 7 of Schedule 14A both require +disclosure of the information required by Item 405 of Regulation S-K, including any reporting +violations by insiders in a clearly marked section, the number of late reports, the number of +transactions not reported on a timely basis, and any known failure to file a required Form. Item +405 explicitly states that a known failure to file includes a failure to file a Form 3, which is +required of all reporting persons. AR6, AR7, AR8 and AR9 misrepresented in their proxy +statements until April 2011 that the Apple REITs’ executive officers had filed reports with the +Commission with respect to their initial ownership of common shares and that the REITs believed +that each of its officers complied with any applicable filing requirements. +VIOLATIONS +61. In the offer or sale of securities, Section 17(a)(2) of the Securities Act makes it +unlawful “to obtain money or property by means of any untrue statement of a material fact or any +omission to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading;” and Section 17(a)(3) proscribes “any +transaction, practice, or course of business which operates or would operate as a fraud or deceit on +the purchaser.” Violations of Sections 17(a)(2) and 17(a)(3) may be established by a showing of +negligence. +62. Section 13(a) of the Exchange Act requires issuers that have securities registered +pursuant to Section 12 of the Exchange Act to file such periodic and other reports as the +Commission may prescribe and in conformity with such rules as the Commission may promulgate. +Exchange Act Rules 13a-1and 13a-13 require the filing of annual and quarterly reports, +respectively. In addition to the information expressly required to be included in such reports, Rule +12b-20 under the Exchange Act requires issuers to add such further material information, if any, as +may be necessary to make the required statements, in the light of the circumstances under which +they are made, not misleading. A violation of the reporting provisions is established if a report is +shown to contain materially false or misleading information. No showing of scienter is necessary +to establish a violation of Section 13(a). +63. Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep books, +records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer.” Section 13(b)(2)(B) of the Exchange Act requires issuers +to devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that, among other things, transactions are executed in accordance with management’s +general or specific authorization and that transactions are recorded to permit the 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. No showing of +scienter is required to establish a violation of Section 13(b)(2)(A) or Section 13(b)(2)(B). +64. Exchange Act Rule 13a-14, among other things, requires principal executive +officers and principal financial officers to certify in quarterly and annual reports filed under +Section 13(a) of the Exchange Act certain information in the form set forth in Item 601(b)(31)(i) of +Regulation S-K, including, inter alia, that they have reviewed the reports, that they are responsible + 17 +for designing and maintaining certain controls, and that they have designed or caused the design of +such controls. +65. Section 14(a) of the Exchange Act requires registrants that solicit any proxy or +consent or authorization in connection with any security registered pursuant to Section 12 of the +Exchange Act (other than an exempted security) to comply with such rules as the Commission may +promulgate. Exchange Act Rule 14a-9 prohibits the use of proxy statements containing materially +false or misleading statements or materially misleading omissions. No showing of scienter is +required to establish a violation of Section 14(a) of the Exchange Act and Rule14a-9 thereunder. +66. Section 16(a) of the Exchange Act and Rule 16a-3 thereunder require, inter alia, +timely and accurate filing of Forms 3 and Forms 4 with the Commission. +67. By engaging in the conduct described above relating to valuation, AR6, AR7, and +AR8 violated Section 17(a)(2) and Section 17(a)(3) of the Securities Act. +68. By engaging in the conduct described above, AR6, AR7, AR8, and AR9 violated +Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, +13a-13, and 14a-9 thereunder. +69. By engaging in the conduct described above, Knight and Peery each caused AR6, +AR7, AR8 and AR9’s violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), 14(a) of the +Exchange Act and Exchange Act Rules 12b-20, 13a-1, 13a-13, and 14a-9 thereunder, and Knight +and Peery each violated Section 16(a) of the Exchange Act and Exchange Act Rules 13a-14 and +16a-3. +70. By engaging in the conduct described above, A6A, A7A, A8A, and A9A caused, +respectively, AR6, AR7, AR8, and AR9’s violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), +and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 14a-9 thereunder. + +UNDERTAKINGS + Respondents AR7, AR8, AR9,22 and their successors, have undertaken to: +71. AR7, AR8, and AR9, and/or their successors, each will maintain a Disclosure +Committee that will be responsible for oversight of disclosures made to their respective securities +holders in order to ensure accurate, complete, and timely disclosure of all matters requiring +disclosure. The Disclosure Committee will be chaired by an independent director, and will consist +of at least three members and outside counsel. The Disclosure Committee shall meet no less than +quarterly to review the companies’ disclosure of financial statements, results of operations, and +other matters required by the federal securities laws, and shall require all officers and directors to +submit annual Officer/Director Questionnaires. + +22 The undertakings required by this Order are not applicable to AR6 due to AR6’s May 2013 merger with an +unrelated entity. According to a Form 15 terminating the registration of shares under Section 12(g) of the Exchange +Act filed with the Commission on May 14, 2013, AR6 merged into an unrelated entity on May 14, 2013, at which +time the separate corporate existence of AR6 ended. + 18 +72. Should AR7, AR8, and AR9, and/or their successors re-establish their DRIPs, AR7, +AR8, and AR9, and/or their successors, will hire an Independent Consultant, not unacceptable to +the staff of the Commission, to address the determination of fair market value for purposes of their +Form S-3 DRIP registration statements, including advising on setting the price for sales thereunder, +and other public disclosures. Should AR7, AR8, and AR9, and/or their successors, re-establish +their DRIPs, AR7, AR8, and AR9, and/or their successors, will maintain a Valuation Committee +comprised of independent board members that will be responsible for the oversight of all valuation +issues relating to their respective REITs. Each of the Valuation Committees will establish and +maintain written policies and procedures relating to valuation of the Apple REITs, and will consult +with third-party valuation services and/or experts concerning their valuations policies, procedures, +and methodologies. +73. The independent members of the Boards of Directors of AR7, AR8, and AR9, or +their successors, will have separate counsel and will meet no less than quarterly outside the +presence of senior management. +74. AR7, AR8, and AR9, and/or their successors, will hire an Independent Consultant, +not unacceptable to the staff of the Commission, to evaluate and address: (1) policies, procedures, +and internal controls relating to appropriate oversight by the respective Boards of Directors; (2) +policies, procedures and internal controls relating to related party transactions; (3) policies, +procedures and internal controls relating to executive compensation; (4) policies, procedures, and +internal controls relating to public disclosure, including compliance with applicable disclosure +requirements; and (5) policies, procedures, and internal controls relating to the oversight of +external advisers, to the extent utilized, including, but not limited to, evaluation of compliance with +the advisory agreements and evaluation of adviser performance. The Independent Consultant will +review each of the Apple REIT’s internal accounting, internal controls relating to record-keeping, +and regulatory and compliance functions, including, but not limited to, compliance with all of the +provisions found to have been violated by this Order. +75. Management shall provide the Audit Committee or other subcommittee of +independent directors of AR7, AR8, and AR9, and/or their successors, on a quarterly basis a list of +all related party transactions, including, but not limited to, transactions, directly or indirectly, +between or among the separate REITs, the advisers, members of management, board members, or +other related parties. The Audit Committee or other subcommittee of independent directors of +AR7, AR8, and AR9, and/or their successors, each will undertake to develop and implement +written internal policies and controls concerning related party transactions, including that all +related party transactions be recorded on a monthly and quarterly basis in sufficient detail to permit +the determination of their business purpose, and that the CFO of each of AR7, AR8, and AR9, +and/or their successors, be designated to ensure compliance with the related party transactions +policy and to certify compliance on a quarterly basis. +76. AR7, AR8, AR9, and/or their successors, will require the Independent Consultants +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 Consultants shall not enter into any +employment, consultant, attorney-client, auditing or other professional relationship with AR7, +AR8, AR9, or their successors, or any of its present or former affiliates, directors, officers, + 19 +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 Consultants in performance of +his/her duties under this Order shall not, without prior written consent of the Commission staff, +enter into any employment, consultant, attorney-client, auditing or other professional relationship +with AR7, AR8, AR9, or their successors, 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. +77. AR7, AR8, AR9, and/or their successors, 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 Douglas McAllister, Assistant Director, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-6561, +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 Respondents’ Offers. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondents Apple REIT Six, Inc., Apple REIT Seven, Inc. and Apple REIT Eight, Inc. cease and +desist from committing or causing any violations and any future violations of Sections 17(a)(2) and +17(a)(3) of the Securities Act and Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-13, and 14a-9 thereunder. +B. Pursuant to Section 21C of the Exchange Act, Respondent Apple REIT Nine, Inc., +cease and desist from committing or causing any violations and any future violations of Sections +13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, +and 14a-9 thereunder. +C. Pursuant to Section 21C of the Exchange Act, Respondents Apple Six Advisors, +Inc., Apple Seven Advisors, Inc., Apple Eight Advisors, Inc., and Apple Nine Advisors, Inc. cease +and desist from committing or causing any violations and any future violations of Sections 13(a), +13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-13, and +14a-9 thereunder. +D. Pursuant to Section 21C of the Exchange Act, Respondents Glade M. Knight and +Bryan F. Peery, cease and desist from committing or causing any violations and any future + 20 +violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), 14(a), and 16(a) of the Exchange Act and +Rules 12b-20, 13a-1, 13a-13, 13a-14, 14a-9, and 16a-3 thereunder. +E. Respondents shall comply with the undertakings enumerated in Sections 71-77 +above. + +F. Respondent Apple Six Advisors, Inc. shall, within 10 days of the entry of this +Order, pay a civil money penalty in the amount of $437,500 to the United States Treasury. If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. Payment +must be made in one of the following ways: +(1) Respondents may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(2) Respondents may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand-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 +Apple Six Advisors, 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 Gerald Hodgkins, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-6010. + +G. Respondent Apple Seven Advisors, Inc. shall, within 10 days of the entry of this +Order, pay a civil money penalty in the amount of $375,000 to the United States Treasury. If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. Payment +must be made in one of the following ways: +(1) Respondents may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(2) Respondents may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand-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 +Apple Seven Advisors, 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 Gerald Hodgkins, + 21 +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-6010. + +H. Respondent Apple Eight Advisors, Inc. shall, within 10 days of the entry of this +Order, pay a civil money penalty in the amount of $437,500 to the United States Treasury. If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. Payment +must be made in one of the following ways: +(1) Respondents may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(2) Respondents may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand-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 +Apple Eight Advisors, 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 Gerald Hodgkins, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-6010. + +I. Respondent Apple Nine Advisors, Inc. shall, within 10 days of the entry of this +Order, pay a civil money penalty in the amount of $250,000 to the United States Treasury. If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. Payment +must be made in one of the following ways: +(1) Respondents may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(2) Respondents may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand-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 +Apple Nine Advisors, 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 Gerald Hodgkins, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-6010. + + 22 +J. Respondent Glade M. Knight shall, within 10 days of the entry of this Order, pay a +civil money penalty in the amount of $125,000 to the United States Treasury. If timely payment is +not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. Payment must be made in +one of the following ways: +(1) Respondents may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(2) Respondents may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand-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 +Glade M. Knight 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 Gerald Hodgkins, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-6010. +K. Respondent Bryan F. Peery shall, within 10 days of the entry of this Order, pay a +civil money penalty in the amount of $50,000 to the United States Treasury. If timely payment is +not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. Payment must be made in +one of the following ways: +(1) Respondents may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(2) Respondents may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand-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 +Bryan F. Peery 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 Gerald Hodgkins, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-6010. + + By the Commission. + + Elizabeth M. Murphy + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3536.txt b/raw/aaer/2014/AAER-3536.txt new file mode 100644 index 0000000000000000000000000000000000000000..23594f45c40f217a535badeec4de993ceabda1a2 --- /dev/null +++ b/raw/aaer/2014/AAER-3536.txt @@ -0,0 +1,41 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71576 / February 19, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3536 / February 19, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15116 + +____________________________________ + : +In the Matter of : + : + BDO China Dahua CPA Co., Ltd., et al. : EXTENSION ORDER + : +Respondents : +____________________________________: + + + The Division has requested an extension of time in which to file a response to +Respondents’ motion for leave to adduce additional evidence. Respondents’ do not +object to the extension. Therefore, + + It is ORDERED that the time for filing the Division’s response is extended to +February 28, 2013. Respondents’ reply is due March 11, 2014. + + For the Commission, by its Secretary, pursuant to delegated authority. + + + + + Lynn M. Powalski + Deputy Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3537.txt b/raw/aaer/2014/AAER-3537.txt new file mode 100644 index 0000000000000000000000000000000000000000..b4242547a6988310843dc2a45f5795515d9790b7 --- /dev/null +++ b/raw/aaer/2014/AAER-3537.txt @@ -0,0 +1,636 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71585 / February 20, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3537 / February 20, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15760 + + + + +In the Matter of + + SAM KAN, CPA, and + SAM KAN & COMPANY, + +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) 2 and (iii) 3 of the Commission’s Rules of +Practice against Sam Kan, CPA (“Kan”) and Sam Kan & Co. (“Kan & Co.” or the “firm”) +(collectively “Respondents”). + +1 Section 4C provides, in relevant part, that: "The Commission may censure any person, or deny, +temporarily or permanently, to any person the privilege of appearing or practicing before the Commission +in any way, if that person is found . . . (1) not to possess the requisite qualifications to represent others . . . +(2) to be lacking in character or integrity, or to have engaged in unethical or improper professional conduct; +or (3) to have willfully violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder." + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: "The Commission may . . . deny, temporarily or +permanently, the privilege of appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct." + + 2 +II. + + In anticipation of the institution of these proceedings, Respondents have submitted +an Offer of Settlement (the “Offer”) which the Commission has determined to accept. +Solely for the purpose of these proceedings and any other proceedings brought by or on +behalf of the Commission, or to which the Commission is a party, and without admitting or +denying the findings herein, except as to the Commission’s jurisdiction over them and the +subject matter of these proceedings, which are admitted, Respondents consent to the entry +of this Order Instituting Public Administrative and Cease-and-Desist Proceedings Pursuant +to Sections 4C and 21C of the Exchange Act 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 finds that: + +A. SUMMARY +1. In connection with audits and quarterly reviews of four microcap issuers, +Kan and Kan & Co. failed to comply with auditing standards issued by the Public +Company Accounting Oversight Board (“PCAOB”). Respondents repeatedly engaged in +unreasonable conduct that resulted in violations of applicable professional standards and +demonstrated a lack of competence to practice before the Commission. Respondents’ +improper professional conduct extended over an 18-month period (November 2010 to +May 2012) and was inconsistent with seven PCAOB standards. Respondents failed to: +(1) comply with requirements for engagement quality reviews; (2) perform appropriate +procedures to ascertain the occurrence of subsequent events; (3) properly document +procedures relating to the evaluation of the adequacy of disclosure in the financial +statements; (4) prepare engagement completion documents; (5) obtain sufficient evidence +to support the firm’s audit opinion; (6) properly supervise audits; and (7) obtain written +representations from management. + + 2. Additionally, Respondents willfully violated Rule 2-02(b)(1) of Regulation +S-X because each audit report at issue falsely claimed that the audit had been conducted in +compliance with PCAOB standards. + +3 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 +B. RESPONDENTS + +1. Sam Kan, age 35, resides in Alameda, California. Kan has been licensed +as a certified public accountant in the State of California since 2003. Kan is the founder +and sole owner of Kan & Co. + + 2. Sam Kan & Company, is an auditing and accounting firm with its +principal place of business in Alameda, California. Kan & Co. was registered with the +PCAOB on July 14, 2008. + +C. RELEVANT ENTITIES + +1. Issuer A is a Nevada corporation. Issuer A’s common stock is registered +with the Commission pursuant to Section 12(g) of the Exchange Act and is traded on the +OTC Market. Issuer A’s public filings state that it sells computer monitoring software. +In fiscal year 2010 the company reported no revenues. In fiscal year 2011 it reported +gross revenues of approximately $6,000 and operating expenses of over $1.6 million. As +of December 2011 the company had an accumulated deficit of over $2.5 million. Kan & +Co. issued five audit reports regarding Issuer A, relating to financial statements and +restatements for fiscal years 2009, 2010, and 2011. These reports were dated November +19, 2010; March 17, 2011; April 25, 2011; March 30, 2012; and May 18, 2012. + + 2. Issuer B is a Nevada corporation. Issuer B voluntarily files periodic +reports with the Commission. Its stock is traded on the OTC Market. Issuer B’s public +filings state that it pursues oil and gas exploration activities. From its inception in 2006 +until August 2012, it had no revenues. Kan & Co. issued an audit report dated December +29, 2011, on Issuer B’s fiscal year 2010 and 2011 financial statements. + +3. Issuer C is a Nevada corporation. Issuer C files periodic reports and is +believed to be a voluntary filer. The shares of Issuer C are traded on the OTC Market. +Issuer C’s public filings state that it is a development stage mineral exploration and +carbon development company. From its inception in 2007 through December 2011, the +company had no revenues. Kan & Co. issued audit reports dated April 14, 2011 and +April 16, 2012, on Issuer C’s financial statements for fiscal years 2009, 2010, and 2011. +Respondents also conducted quarterly reviews for the quarters ended March 31, 2011, +June 30, 2011, and September 30, 2011. + +4. Issuer D is a Delaware corporation. Issuer D’s common stock is +registered with the Commission pursuant to Section 12(g) of the Exchange Act and is +traded on the OTC Market. Issuer D’s public filings state that it is engaged in the +development and commercialization of iodine-based agents and antimicrobials. In fiscal +year 2010 it had revenue of approximately $23,000 and at year end had an accumulated +deficit of over $22.5 million. Kan & Co. issued an audit report dated April 15, 2011 on +Issuer D’s fiscal year 2009 and 2010 financial statements. Respondents also conducted a +quarterly review for the quarter ended March 31, 2011. + + 4 +D. THE CONDUCT AT ISSUE + +Failure to Comply with the Requirements for +Engagement Quality Reviews (AS No. 7) + +1. PCAOB standards require an engagement quality review and concurring +approval of issuance for each audit engagement.4 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. PCAOB standards require that the +engagement quality reviewer be independent of the company, perform the engagement +quality review with integrity, and maintain objectivity in performing the review. In order +to ensure the necessary level of objectivity, the person who served as the engagement +partner during either of the two audits preceding the audit subject to the engagement +quality review may not be the engagement quality reviewer. AS No. 7, Engagement +Quality Review, at .01-.02, .06, and .08. + +2. The engagement quality review must be sufficiently documented and +include information that identifies: (1) the engagement quality reviewer; (2) the +documents reviewed by the engagement quality reviewer; and (3) the date the +engagement quality reviewer provided concurring approval of issuance. 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, Engagement Quality +Review, at .12-.13, and .19. + +3. Issuer A: Respondents failed to comply with the engagement quality +review requirements in connection with three audits of Issuer A. First, Respondents +failed to obtain an engagement quality review in connection with the audit of Issuer A's +restated financial statements for 2010. After Issuer A informed Kan that there was a +material accounting error in its 2010 financial statements, Respondents audited the +restated financial statements and issued an audit report dated April 25, 2011. They failed +to obtain an engagement quality review of their audit of the restated financial statements. + + 4. Second, the engagement quality review for the audit of Issuer A for fiscal +year 2011 was performed by Kan himself even though he had acted as engagement +partner for the audits of Issuer A for fiscal 2010 and 2009. Because Kan served as +engagement partner for the preceding audit, he was prohibited from performing the +engagement quality review for the fiscal 2011 audit. + + 5. Third, when Issuer A was required to restate its financial statements for +fiscal year 2011, Kan & Co. audited the restated financial statements and issued an audit + +4 PCAOB standard AS No. 7, Engagement Quality Review, was effective for engagement quality +reviews of audits and interim reviews for fiscal years beginning on or after December 15, 2009. + 5 +report dated May 18, 2012. Here too, Kan & Co. failed to obtain an engagement quality +review of its audit. + +6. Issuer C: For fiscal year 2011, Respondents failed to obtain the +engagement quality review before completing their audit and granting Issuer C +permission to use their audit report. The audit report was dated April 16, 2012. Issuer C +filed its 2011 Form 10-K, with the Kan & Co. report, on April 17, 2012. But Kan’s +engagement quality reviewer did not complete the review until April 18, 2012, after the +report was filed with the Commission. + + 7. Issuer D: The engagement quality review was completed after Kan & +Co.'s audit report for Issuer D's fiscal year 2010 was filed with the Commission. Kan's +audit report was dated April 15, 2011. That same day Issuer D filed its 2010 Form 10-K, +including the audit report. But the engagement quality reviewer did not perform the +review until May 16, 2011, a month after the report was filed with the Commission. + +Failure to Perform Appropriate Procedures to +Ascertain the Occurrence of Subsequent Events (AU § 560) + +8. An independent auditor's report ordinarily is issued in connection with +historical financial statements that purport to present the issuer's financial position at a +stated date and results of operations and cash flows for a period ended on that date. +However, events or transactions sometimes occur subsequent to the balance-sheet date, +but prior to the issuance of the financial statements, that have a material effect on the +financial statements and therefore require adjustment or disclosure in the statements. +Failure to ascertain whether a material subsequent event has occurred requiring +adjustments to or disclosure in the financial statements may result in the misstatement of +the financial statements or misleading disclosure. PCAOB standards require the +independent auditor to perform procedures, at or near the date of the auditor’s report, to +evaluate these “subsequent events.” These procedures generally include: + + Read the latest available interim financial statements; compare them +with the financial statements being reported upon; and make any other +comparisons considered appropriate in the circumstances. + + Inquire of and discuss with officers and other executives having +responsibility for financial and accounting matters as to whether any +substantial contingent liabilities or commitments existed at the date of +the balance sheet being reported on or at the date of inquiry; whether +there was any significant change in the capital stock, long-term debt, +or working capital to the date of inquiry; the current status of items, in +the financial statements being reported on, that were accounted for on +the basis of tentative, preliminary, or inconclusive data; and whether +any unusual adjustments had been made during the period from the +balance-sheet date to the date of inquiry. + + 6 + Read the available minutes of meetings of stockholders, directors, and +appropriate committees. + + Inquire of client’s legal counsel concerning litigation, claims, and +assessments. + + Obtain a letter of representations, dated as of the date of the auditor’s +report, from appropriate officials as to whether any events occurred +subsequent to the date of the financial statements being reported on +that in the officials’ opinion would require adjustment or disclosure in +these statements. + +AU § 560, Subsequent Events, at .01, .02 and .12. + +9. Issuer A was required to reissue its financial statements for 2010 and 2011. +For each reissuance, Respondents merely reviewed Issuer A’s Form 8-Ks and asked +management whether there were any subsequent events. They failed to: (1) make +inquiries of appropriate personnel as to the existence of contingent liabilities, changes in +equity, debt or working capital, and whether any unusual adjustments had been made +since the date of the auditor’s previous review; (2) request from management and read +any minutes of stockholders’ or directors’ meetings that were held since the date of the +auditor’s previous review; and (3) obtain a letter of representations, dated as of the date +of the auditor’s report, as to whether any events occurred that in the opinion of +management would require adjustment or disclosure in the financial statements. + +Failure to Properly Document Procedures Relating to the Evaluation +of the Adequacy of Disclosure in Financial Statements (AS No. 3) + + 10. AS No. 3 requires that an auditor prepare and retain documentation +providing a written record of the basis for the auditor’s conclusions. This includes +documentation of the procedures performed, evidence obtained, and conclusions reached +with regard to the relevant financial statement assertions. AS No. 3, Audit +Documentation, at .01 and .06. + + 11. Kan & Co. repeatedly failed to document the work performed with regard +to the notes to the financial statements. Kan’s work papers for the following five +engagements do not adequately document such work: (i) Issuer A -- audit report dated +11/19/10 covering fiscal year 2009; (ii) Issuer A -- audit report dated 3/17/11 covering +fiscal year 2010; (iii) Issuer C -- audit report dated 4/14/11 covering fiscal years 2009 and +2010; (iv) Issuer C -- audit report dated 4/16/12 covering fiscal year 2011; and (v) Issuer +D -- audit report dated 4/15/11 covering fiscal years 2009 and 2010. These work papers +provide no evidence that the dollar amounts in the notes were agreed to the books and +records of the company or other supporting documents as required by AU § 326.5 6 + +5 PCAOB standards require that the auditor’s substantive procedures must include reconciling the +financial statements to the accounting records. See AU § 326 Evidential Matter at .19. In addition, the +auditor considers the adequacy of disclosure in the financial statements, including the notes to the financial + 7 +Failure to Prepare an Engagement Completion Document (AS No. 3) + +12. PCAOB standards require an auditor to prepare, for each engagement, an +engagement completion document which identifies all significant findings or issues. AS +No. 3, Audit Documentation, at .13. An engagement completion document discusses the +significant findings or issues which are substantive matters important to understanding +the procedures performed, evidence obtained, or conclusions reached during the audit. +See AS No. 3, Audit Documentation, at .12. + +13. Issuer B: No engagement completion document was prepared in +connection with the audit of Issuer B’s fiscal year 2010 and 2011 financial statements +for which the audit report was dated 12/29/11. + +14. Issuer C: No engagement completion document was prepared for +the audit of Issuer C’s fiscal year 2011 financial statements. + +15. Issuer D: Respondents also failed to prepare an engagement completion +document in connection with the audit of Issuer D’s fiscal year 2009 and 2010 financial +statements for which the audit report was dated 4/15/2011. Although the work papers +included a checklist noting the need for an engagement completion document, there was +no engagement completion document in the work papers. + +Failure to Obtain Sufficient Evidence to Support the Audit Opinion and +Adequately Document the Procedures Performed (AU § 326 and AS No. 3) + +16. AU § 326 requires an auditor to obtain sufficient competent evidential +matter to support the opinion expressed in the auditor's report, including evidential matter +with respect to management’s assertions of completeness, presentation, and disclosure +elements of the financial statements. AU § 326, Evidential Matter, at .01-.03. + 17. Respondents failed to obtain sufficient evidence to support the firm’s audit +of Issuer B’s fiscal year 2010 and 2011 financial statements for which the audit report +was dated 12/29/2011. Issuer B was a development stage company that had no recorded +revenues since its inception in September 2006, but for fiscal years 2010 and 2011 +recorded significant operating expenses. The work papers lacked sufficient evidence to +show that expenses for professional fees, travel and promotions, and general and + +statements. See AU § 431 Adequacy of Disclosure in Financial Statements. AU § 431 states: “The +presentation of financial statements in conformity with generally accepted accounting principles includes +adequate disclosure of material matters. These matters relate to the form, arrangement, and content of the +financial statements and their appended notes, including for example, the terminology used, the amount of +detail given, the classification of items in the statements, and the bases of the amounts set forth. An +independent auditor considers whether a particular matter should be disclosed in light of the circumstances +and facts of which he is aware at the time. ” AU § 431 at .02. + +6 AU § 326 was superseded by AS No. 15, Audit Evidence, effective for fiscal years beginning on or +after December 15, 2010. AU § 431 was superseded by AS No. 14, Evaluating Audit Results, effective for +fiscal years beginning on or after December 15, 2010. + 8 +administrative fees were adequately tested. These expenses comprised 34% and 31%, +respectively, of total operating expenses. +18. Additionally, for the audit of Issuer B’s fiscal year 2010 financial +statements, Kan & Co. failed to prepare adequate work papers. The work papers did not +include documentation of the procedures performed or the conclusions reached, as +required by AS No. 3 at .06. +Failure to Properly Plan and Supervise the Audit (AU § 311 and AS No. 10) + +19. AU § 311 requires that the work be adequately planned and that assistants, +if any, be properly supervised. AU § 311, Planning and Supervision, at .01.7 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. +The work performed by each assistant should be reviewed to determine whether it was +adequately performed and to evaluate whether the results are consistent with the +conclusions to be presented in the auditor’s report. AU § 311 at .11 and .13. + +20. The vast majority of Kan & Co.’s relevant audit work was performed by a +staff member who had no auditing experience at the time he started his employment with +Kan in June of 2009. This staff member reported directly to Kan, who was responsible +for the supervision and review of the work. Kan was required to consider the staff +member’s lack of auditing experience and correspondingly increase his supervision and +review. + +21. Kan failed to properly supervise and review the work performed by his +staff. This failure is evidenced by his not having detected that the audit documentation +did not comply with PCAOB standards and that required procedures had not been +performed. In multiple audit engagements Kan’s staff member, and not Kan himself, +signed off as having performed the procedures in the checklist relating to determining +that the work papers contained adequate documentation and that all required checklists +and audit programs had been completed. + +22. Issuer A: Kan failed to properly supervise his staff’s work relating to +whether the work performed for the audits of Issuer A for fiscal years 2009 and 2010 was +properly documented, and for Issuer A's amended financial statements for fiscal year +2010 Kan failed to properly plan the restatement audit to ensure an engagement quality +review was performed. + +23. Issuer B: Kan failed to properly supervise his staff to determine whether +an engagement completion document was included for the fiscal year 2010 and 2011 + +7 AU § 311 was superseded by AS No. 10, Supervision of the Audit Engagement, which applies to +audits of fiscal years beginning on or after December 15, 2010. AS No. 10 requires the engagement partn er +(or other engagement team members performing supervisory activities) to review the work of engagement +team members to evaluate whether the work was performed and documented; the objectives of the +procedures were achieved; and the results of the work support the conclusions reached. AS No. 10, +Supervision of the Audit Engagement, at .03 and .05. + 9 +Issuer B audits. For these audits Kan also failed to detect that there was insufficient +evidential matter to support the audit with regard to Issuer B’s operating expenses, and to +confirm that his firm completed substantive testing of those expenses. + +24. Issuer C: Kan failed to properly supervise the audits of Issuer C for fiscal +years 2009 and 2010 as required by AU § 311, and 2011 as required by AS No. 10 +relating to whether his staff’s work was properly documented. Kan also failed to +determine whether an engagement completion document was prepared for the fiscal year +2011 audit. When he completed the “Supervision and Review” checklist for that audit, +Kan represented that he reviewed the engagement completion document -- but in fact no +engagement completion document was prepared. + +25. Issuer D: Kan failed to properly supervise his staff’s work relating to +whether the work performed for Issuer D’s fiscal year 2009 and 2010 audits was properly +documented and failed to determine whether his staff prepared an appropriate +engagement completion document. + +Failure to Obtain Written Management Representations +for Reviews of Interim Financial Information (AU § 722) + +26. AU § 722 provides that written representations from management should +be obtained for all interim financial information presented and for all periods covered by +the auditor’s review. The representations should address, inter alia, financial statements, +internal controls, completeness of information, procedures for recognition, measurement +and disclosure, and subsequent events. AU § 722, Interim Financial Information, at .24. + +27. Respondents failed to obtain written representations from management in +connection with three quarterly reviews: the reviews of Issuer C's interim financial +statements for the quarters ended March 31 and June 30, 2011 and the review of Issuer +D's interim financial statements for the quarter ended March 31, 2011. + + Misrepresentations Regarding Compliance with PCAOB Standards + +28. Rule 2-02(b)(1) of Regulation S-X requires that an accountant’s audit +report “state whether the audit was made in accordance with generally accepted auditing +standards . . . .” 17 C.F.R. 210.2-02(b)(1). As used in Commission regulations, the +phrase “generally accepted auditing standards” includes the standards issued by PCAOB. +29. In each of the audit reports at issue, Kan & Co. stated that it had +conducted its audits in accordance with PCAOB standards. Those representations were +false. +30. Kan was the sole proprietor of Kan & Co. Kan approved the signing of the +firm’s name to the audit reports and their issuance for inclusion in the filings with the +Commission as the engagement partner for all but one of the audits at issue. As a result, +Kan too falsely stated that the audits were conducted in accordance with PCAOB +standards. + 10 +E. VIOLATIONS + + 1. Rule 2-02(b)(1) -- Misrepresentations Regarding Compliance: An +auditor violates Rule 2-02(b)(1) of Regulation S-X by issuing a report falsely stating that +an audit was conducted in accordance with PCAOB standards. As a result of the conduct +described above, Respondents willfully violated Rule 2-02(b)(1). + +2. Rule 102(e)(1)(ii) -- Improper Professional Conduct: 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. As a result of the conduct described +above, Respondents 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. + + 3. Rule 102(e)(1)(iii) -- Violations of Federal Securities Laws: Rule +102(e)(1)(iii) 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 found +“[t]o have willfully violated, or willfully aided and abetted the violation of, any provision +of the Federal securities laws or the rules and regulations thereunder.” As a result of the +conduct described above, Respondents willfully violated certain provisions of the federal +securities laws or rules and regulations thereunder pursuant to Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice. + +F. FINDINGS + +1. Based on the foregoing, the Commission finds that Respondents willfully +violated Rule 2-02(b)(1) of Regulation S-X. + +2. 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 +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + + 3. Based on the foregoing, the Commission finds that Respondents willfully +violated certain provisions of the federal securities laws or the rules and regulations +thereunder pursuant to Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice. + 11 +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: + +1. Respondents shall cease and desist from committing or causing any +violations and any future violations of Rule 2-02(b)(1) of Regulation S-X. + + 2. Respondents are denied the privilege of appearing or practicing before the +Commission as an accountant. + + 3. After three years from the date of this order, Kan & Co. may request +that the Commission consider its reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the +Commission as an independent accountant. Such an application must satisfy the +Commission that: + +a. Kan & Co. is registered with the PCAOB in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be effective. However +if registration with the PCAOB is dependent upon reinstatement by the Commission, +the Commission will consider the application on its other merits; + +b. Kan & Co. has 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 Kan & Co.’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 Kan & +Co.’s employees will not receive appropriate supervision. Kan & Co. 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 Kan & Co., or any of its present or former +affiliates, directors, officers, employees, or agents acting in their capacity. The +agreement will also provide that the consultant will require that any firm with which +he/she is affiliated or of which he/she is a member, and any person engaged to assist +the consultant in performance of his/her duties under this Offer shall not, without prior +written consent of the staff, enter into any employment, consultant, attorney-client, +auditing or other professional relationship with Kan & Co., 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. Kan & Co. has resolved all disciplinary issues with the PCAOB, + 12 +and has complied with all terms and conditions of any sanctions imposed by the +PCAOB (other than reinstatement by the Commission); and + +d. Kan & Co. 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. + + 4. Kan & Co. shall pay disgorgement of $40,000 and prejudgment interest of +$1,155.26 and a civil money penalty in the amount of $40,000 to the United States +Treasury. Kan & Co. shall also pay post-judgment interest in the amount of $264.10. +Payment shall be made in the installments noted below. If any payment is not made by +the date the payment is required by this Order, the entire outstanding balance of +disgorgement, prejudgment interest, and civil penalties, plus any additional interest +accrued pursuant to SEC Rule of Practice 600 or pursuant to 31 U.S.C. 3717, shall be due +and payable immediately, without further application. Payment must be made in one of +the following ways: + +a. Kan & Co. 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 + +b. Kan & Co. 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 Kan & Co. 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. + + 5. Accordingly, Kan & Co. shall make payments in accordance with the +following schedule: + +(1) March 1, 2014: $20,315.19 +(2) May 1, 2014: $20,341.60 +(3) August 1, 2014: $20,368.04 +(4) November 1, 2014: $20,394.53 + + 13 + 6. After three years from the date of this order, Kan may request that the +Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the +Commission as: + + a. a preparer or reviewer, or a person responsible for the preparation +or review, of any public company’s financial statements that are filed with the +Commission. Such an application must satisfy the Commission that Kan’s work in his +practice before the Commission will be reviewed either by the independent audit +committee of the public company for which he works or in some other acceptable +manner, as long as he practices before the Commission in this capacity; and/or + + b. an independent accountant. Such an application must satisfy +the Commission that: + + (1) Kan, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance with the Sarbanes-Oxley Act of +2002, and such registration continues to be effective; + + (2) Kan, 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 Kan’s or the firm’s quality control system that would +indicate that Kan will not receive appropriate supervision; + (3) Kan has resolved all disciplinary issues with the PCAOB, +and has complied with all terms and conditions of any sanctions imposed by the PCAOB +(other than reinstatement by the Commission); and + + (4) Kan acknowledges his responsibility, as long as Kan +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. + + + + + + + + + + + + + + 14 +7. The Commission will consider an application by Kan 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 Kan’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-3538.pdf b/raw/aaer/2014/AAER-3538.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4a5dd7880a268a92d257f0f60ecf4593b7cff0bd Binary files /dev/null and b/raw/aaer/2014/AAER-3538.pdf differ diff --git a/raw/aaer/2014/AAER-3538.txt b/raw/aaer/2014/AAER-3538.txt new file mode 100644 index 0000000000000000000000000000000000000000..cd0a0999c38d1d679cb551736440fe92fa96d6f8 --- /dev/null +++ b/raw/aaer/2014/AAER-3538.txt @@ -0,0 +1,40 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71595 / February 21, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3538 / February 21, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-14171 +____________________________________ + : +In the Matter of : + : + JAMES M. SCHNEIDER, CPA, : + : EXTENSION ORDER +Respondent. : +____________________________________: + + + The Division of Enforcement (“Division”) and counsel for Respondent James M. +Schneider, CPA have submitted an agreed motion for an extension of time for the +Division to respond to Respondent Schneider’s February 18, 2014 Motion Under SEC +Rules of Practice 154 or in the alternative Application for Modification of Commission +Order Imposing Remedial Sanctions Against James M. Schneider. It appears appropriate +to grant the requested extension in this matter. Therefore, + + It is ORDERED that the time for filing the Division’s response is extended to +March 21, 2014 and Respondent’s reply, if any, shall be filed by April 4, 2014. + + For the Commission, by its Secretary, pursuant to delegated authority. + + + + + Jill M. Peterson + Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3539.txt b/raw/aaer/2014/AAER-3539.txt new file mode 100644 index 0000000000000000000000000000000000000000..8130436dc25c460e448c9c9e060e2176cd7afd41 --- /dev/null +++ b/raw/aaer/2014/AAER-3539.txt @@ -0,0 +1,1377 @@ + + + + + + + + + + + + + + + + SEC.gov | Christopher Sells and Timothy Murawski + + + + + + + + !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\/515191","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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Christopher Sells and Timothy Murawski , Civil Action No. 4:11-cv-04941-CW (N.D. Cal. filed October 6, 2011) + + SEC Settles Claims Against Two Former Employees of Hansen Medical, Inc. Relating to Fraudulent Sales Scheme + + + The United States District Court for the Northern District of California has approved settlements resolving claims by the Securities and Exchange Commission against two former sales executives of Hansen Medical, Inc., a Mountain View, California medical equipment company. The SEC's complaint alleged the former sales executives participated in fraudulent sales transactions to inflate the company's reported revenues. + + +The SEC's complaint alleged that Christopher Sells, Hansen Medical's former Vice President of Commercial Operations, and Timothy Murawski, a former Vice President of Sales, took steps to complete improper sales transactions in 2008 and 2009. According to the Complaint, Mr. Sells and Mr. Murawski engaged in a scheme to provide false information to Hansen Medical's finance department, resulting in publicly-disclosed financial statements that reported overstated revenue and sales numbers. + + +Without admitting or denying the allegations, Mr. Sells agreed to pay a civil money penalty of $85,000. The final judgment, entered by the District Court on February 21, 2014, permanently enjoins Mr. Sells from violating Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934 and Rules 10b-5, 13b2-1 and 13b2-2 thereunder, and Sections 17(a)(1) and 17(a)(3) of the Securities Act of 1933, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. The judgment also prohibits Mr. Sells from acting as an officer or director of a public company under the Exchange Act for five years. + + +Without admitting or denying the allegations, Mr. Murawski agreed to pay a civil money penalty of $35,000. The final judgment, entered by the District Court on November 6, 2013, permanently enjoins Mr. Murawski from violating Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5(a), 10b-5(c), and 13b2-1 thereunder, and Sections 17(a)(1) and 17(a)(3) of the Securities Act, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. +For additional information, see Litigation Release No. 22116 and Accounting and Auditing Enforcement Release No. 3326 (October 6, 2011). + + + + + SEC Complaint --> + +   + + + + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. 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From 1986 to at least 2012, Desjourdy was a certified public accountant licensed +in Massachusetts. + +2. Desjourdy is an attorney, whom the Commonwealth of Massachusetts admitted to +practice law in 1989. + +2. On January 16, 2014 , a judgment was entered convicting Desjourdy of one count +of mail fraud and one count of conspiracy to commit securities fraud in violation of 18 United +States Code Sections 1341 and 371 before the United States District Court for the District 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 + +Massachusetts, in United States v. Desjourdy, No. 1:11-CR-10396-JLT. + +3. As a result of this conviction, Desjourdy was sentenced to 18 months’ probation, +a $200 special assessment, and ordered to forfeit $54,000 as proceeds of his crimes. + +III. + +In view of the foregoing, the Commission finds that Desjourdy 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 Paul Desjourdy 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. + + + +Elizabeth M. Murphy +Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3542.pdf b/raw/aaer/2014/AAER-3542.pdf new file mode 100644 index 0000000000000000000000000000000000000000..767e341aeaaa91220b3247eb3ebbac4f46a8fe9e Binary files /dev/null and b/raw/aaer/2014/AAER-3542.pdf differ diff --git a/raw/aaer/2014/AAER-3542.txt b/raw/aaer/2014/AAER-3542.txt new file mode 100644 index 0000000000000000000000000000000000000000..78bb48cd842d7f99c1f450e4f4ca0782c0ee370b --- /dev/null +++ b/raw/aaer/2014/AAER-3542.txt @@ -0,0 +1,276 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9557 / March 11, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71688 / March 11, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3542 / March 11, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15783 + + + +In the Matter of + +Clayton T. Marshall, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS, PURSUANT TO +SECTION 8A OF THE SECURITIES ACT OF +1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER AND NOTICE OF HEARING + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Clayton T. +Marshall (“Marshall” or “Respondent”) pursuant to Section 8A of the Securities Act of 1933 +(“Securities Act”), Sections 4C and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), +and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +1 + + +1 Section 4C provides, in relevant part, that: +The Commission may . . . 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. + +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 + + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of +1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order and Notice of Hearing (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds +2 that + +Respondent + + 1. Clayton T. Marshall, age 37, is a resident of Grand Junction, CO. He +joined AgFeed Industries, Inc. in September 2010 as a divisional chief financial officer (“CFO”). +He then served as AgFeed’s CFO from July 15, 2011 until August 2012, when he left the +company. Marshall has a bachelor’s degree in accounting and is not a certified public accountant. + +Other Relevant Entity + + 2. AgFeed Industries, Inc. (“AgFeed” or “the Company”), is a Nevada +corporation with its principal place of business in Hendersonville, TN. At all relevant times, +AgFeed was an animal nutrition and hog production company with operations in China and the +United States. On July 15, 2013, AgFeed filed a Chapter 11 bankruptcy petition and is currently in +liquidation. Until February 2012, AgFeed’s common stock was registered with the Commission +pursuant to Section 12(g) of the Exchange Act. At all relevant times, AgFeed’s stock was quoted +on The NASDAQ Stock Market LLC, until the company was delisted on March 24, 2012. +AgFeed’s stock is currently quoted on OTC Link operated by OTC Markets Group Inc. + + + + + +2 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +Facts + + 3. From approximately mid-2008 through June 30, 2011, AgFeed’s publicly- +reported revenues were inflated falsely by approximately $239 million due to actions by former +members of AgFeed’s Chinese management including, among other things, inflating revenues by +booking sales of non-existent hogs and manipulating hog weights, and later covering it up by, +among other things, reporting that the fake hogs had died. + + 4. In September 2010, AgFeed began a plan of expansion by merging with a +privately-held U.S. company. Respondent, who had no prior experience with Commission- +reporting companies, joined AgFeed as part of the merger. By approximately early June 2011, +Respondent was generally aware that allegations of fraud had been reported regarding operations +in the Jiangxi region, one of the five Chinese regions where AgFeed maintained hog farms, and +that the Company was investigating the fraud allegations. + + 5. In or about mid-June 2011, Respondent, and others, learned of a new report +of fraud allegations regarding operations in another AgFeed Chinese region (the Fujian region). +Among other things, the report alleged that the Company had recorded false revenues and inflated +fixed assets. Thereafter, Respondent knew or should have known that AgFeed failed to undertake +a meaningful investigation regarding the Fujian region fraud allegations. Further, Respondent +knew or should have known that the Company, following a limited review of its fixed assets, was +unable to substantiate its fixed asset values. Further, Respondent learned that information had been +discovered relating to the maintenance of two sets of accounting books in the Company’s China +operations. Respondent, even after he was promoted on July 15, 2011 to CFO of the Company, +did not ensure that appropriate action was taken to determine whether AgFeed’s current or prior +financial statements were accurate. + + 6. On August 2, 2011, AgFeed published its earnings release for the period +ended June 30, 2011. Respondent knew or should have known that AgFeed’s financial +statements included therein were false and misleading. + + 7. On August 9, 2011, Respondent signed the Company’s management +representation letter to AgFeed’s independent auditor. The management representation letter +was materially false or misleading as it, among other things, failed to disclose the fraud +allegations relating to the Fujian region. + + 8. On August 9, 2011, AgFeed filed with the Commission the Company’s +Form 10-Q for the period ended June 30, 2011 (the “Form 10-Q”), which Respondent signed and +certified as CFO. The Form 10-Q was incorporated into the Company’s active June 2009 Form S- +3 registration statement. The Form 10-Q also incorporated by reference the Company’s Form 10- +K for the period ended December 31, 2010. Respondent knew or should have known that the +Company’s Form 10-Q for the period ended June 30, 2011 was false and misleading. + +4 + + 9. On December 19, 2011, AgFeed finally disclosed that “financial accounting +staff and management based in China engaged in accounting improprieties” and that “the +Company’s previously issued unaudited financial statements for the quarters ended March 31 and +June 30, 2011, as well as its audited financial statements for the years ended December 31, 2010 +and 2009, should be restated. As a result, the Company’s consolidated balance sheets as of March +31 and June 30, 2011 and December 31, 2010 and 2009, the Company’s consolidated statements of +operations and other comprehensive income (loss) for the quarters ended March 31 and June 30, +2011 and the years ended December 31, 2010 and 2009, the Company’s consolidated statements of +cash flows for the quarters ended March 31 and June 30, 2011 and the years ended December 31, +2010 and 2009 and the footnotes thereto should no longer be relied upon.” On January 31, 2012, +AgFeed further disclosed that due to the “accounting irregularities” in China, “the Company’s +audited financial statements for the year ended December 31, 2008 should no longer be relied +upon.” + +Violations + + 10. Section 17(a)(2) of the Securities Act prohibits any person from obtaining +money or property by means of untrue statement of material facts or omissions, in the offer or sale +of securities. Section 17(a)(3) of the Securities Act proscribes “any transaction, practice or course +of business which operates or would operate as a fraud or deceit…” in the offer or sale of +securities. A violation of these provisions may be established by a showing of negligence. Aaron +v. SEC, 446 U.S. 680, 697 (1980). + 11. Section 13(a) of the Exchange Act and Rule 13a-13 thereunder require +issuers of securities registered pursuant to Section 12 of the Exchange Act, such as AgFeed, to file +with the Commission accurate quarterly reports. Rule 12b-20 of the Exchange Act requires that +these reports contain such further material information as may be necessary to make the required +statements in the reports not misleading. Section 13(b)(2)(A) of the Exchange Act requires issuers +to “make and keep books, records, and accounts, which, in reasonable detail, accurately and fairly +reflect the transactions and dispositions of the assets of the issuer.” Exchange Act Rule 13b2-1 +prohibits any person from directly or indirectly falsifying, or causing to be falsified, any book or +record subject to Section 13(b)(2)(A). Section 13(b)(2)(B) of the Exchange Act requires reporting +companies to devise and maintain an adequate system of internal accounting controls. Rule 13b2-2 +of the Exchange Act prohibits officers and directors from, directly or indirectly, making or causing +to be made materially false or misleading statements or omissions to accountants in connection +with an audit or preparation of reports to be filed with the Commission. Rule 13a-14 of the +Exchange Act requires that the principal executive and financial officers certify each periodic +report containing financial statements filed by an issuer pursuant to Section 13(a) of the Exchange +Act. +3 + + +3 Under Section 302 of the Sarbanes-Oxley Act of 2002, the principal executive and financial officers are required to +certify, among other things, that: (1) they reviewed annual and quarterly reports; (2) based upon their knowledge, +the report does not omit or misstate a material fact; and (3) they had disclosed any fraud, whether or not material, +involving management to the audit committee and the auditors. +5 + + 12. As a result of the conduct described above, Marshall willfully4 violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act, and Rules 13a-14, 13b2-1 and 13b2-2 under +the Exchange Act, and was a cause of AgFeed’s violations of Sections 13(a), 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + +IV. + + 13. Pursuant to this Order, Respondent agrees to additional proceedings in this +proceeding to determine what, if any, civil penalties pursuant to Section 8A(g) of the Securities +Act and Section 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 federal securities laws described in this Order; (b) +Respondent agrees that he may not challenge the validity of this Order; (c) solely for the +purposes of such additional proceedings, the allegations of the Order shall be accepted as and +deemed true by the hearing officer; and (d) the hearing officer may determine the issues raised in +the additional proceedings on the basis of affidavits, declarations, excerpts of sworn deposition +or investigative testimony, and documentary evidence. + +V. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Marshall’s Offer. + + Accordingly, pursuant to Section 8A of the Securities Act, Sections 4C and 21C of the +Exchange Act, and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice it is hereby +ORDERED that: + +A. Respondent Marshall shall cease and desist from committing or causing any +violations and any future violations of Section 17(a) of the Securities Act, Sections 13(a), +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 13a-13, 13a-14, 13b2-1, 13b2-2 and +12b-20 promulgated thereunder. + +B. Respondent Marshall is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. After five 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 an accountant. + + +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)). + +6 + +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 a public hearing for the purpose of taking evidence on the questions set forth in Section IV +hereof shall be convened at a time and place to be fixed, and before an Administrative Law Judge +to be designated by further order as provided by Rule 110 of the Commission’s Rules of Practice, +17 C.F.R. § 201.110, following the entry of a final judgment against the last remaining +defendant(s) in Securities and Exchange Commission v. AgFeed Industries, Inc., et al. (M.D. TN) +(the “Related Actions”). +If Marshall fails to appear at a hearing after being duly notified, Marshall 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 Marshall personally or by certified mail. +E. IT IS FURTHER ORDERED pursuant to Rule 100(c) of the Commission’s Rules +of Practice, 17 C.F.R. § 201.100(c), in the interest of justice and without prejudice to any party, +that the Administrative Law Judge shall issue an initial decision no later than 120 days from the +date of the entry of a final judgment in the Related Actions. +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as +witness or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule +making” within the meaning of Section 551 of the Administrative Procedure Act, it is not deemed +subject to the provisions of Section 553 delaying the effective date of any final Commission action. +By the Commission. + + + + Jill M. Peterson + Assistant Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3543.pdf b/raw/aaer/2014/AAER-3543.pdf new file mode 100644 index 0000000000000000000000000000000000000000..79d8078b1d17ffd8030c2bd35a961d85f414e45e Binary files /dev/null and b/raw/aaer/2014/AAER-3543.pdf differ diff --git a/raw/aaer/2014/AAER-3543.txt b/raw/aaer/2014/AAER-3543.txt new file mode 100644 index 0000000000000000000000000000000000000000..66b4b1801ae9ee52a912a740d8fb424f2772bc9d --- /dev/null +++ b/raw/aaer/2014/AAER-3543.txt @@ -0,0 +1,135 @@ + + +1 + +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71761 / March 20, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3543 / March 20, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15659 + + +In the Matter of + + THOMAS D. MELVIN, CPA + + +ORDER DENYING PETITION +TO LIFT TEMPORARY SUSPENSION +AND DIRECTING HEARING + + +On December 20, 2013, we issued an order instituting proceedings against Thomas D. +Melvin pursuant to Commission Rule of Practice 102(e)(3) +1 that temporarily suspended him +from appearing or practicing before the Commission based on his having been enjoined from +violations of antifraud provisions of the securities laws.2 Melvin petitions now that we lift that +suspension. 3 As discussed below, we deny Melvin's request to lift the temporary suspension and +set the matter down for a hearing before an administrative law judge. + +1 Rule of Practice 102(e)(3)(i), 17 C.F.R. § 201.102(e)(3)(i), provides, in part, that +The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, temporarily suspend from appearing or practicing before it any attorney, +accountant, engineer, or other professional or expert who has been by name: +(A) 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 Thomas D. Melvin, Exchange Act Release No. 71161, 2013 WL 6705182 (Dec. 20, +2013). +3 Because it contains an explicit request to lift the temporary suspension, we deem the +document styled "Entry of Appearance and Request for Hearing" a petition to lift the temporary +suspension pursuant to Rule 102(e)(3)(ii). + + +2 + +The Order Instituting Proceedings in this matter alleges that Melvin is a certified public +accountant and a partner in the accounting firm of Melvin, Rooks and Howell in Griffin, +Georgia.4 On August 14, 2013, the U.S. District Court for the Northern District of Georgia +entered a final judgment against Melvin, permanently enjoining him from future violations of +Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.5 The +Commission's complaint, which forms the basis for the district court's injunction, alleges that +Melvin and others were engaged in a fraudulent insider trading scheme. According to the +complaint, Melvin misappropriated confidential information from one of his clients about an +upcoming merger involving a company of which the client was director. +6 With this information, +the complaint alleges, Melvin tipped four friends and business associates about the merger in +violation of his fiduciary duties to his client, and the tippees then purchased shares of the target +company and realized large profits. +7 +In instituting these disciplinary proceedings, we found it "appropriate and in the public +interest" that Melvin be temporarily suspended from appearing or practicing before the +Commission based on the district court's final judgment. We stated that the temporary +suspension would become permanent unless Melvin filed a petition challenging it within thirty +days of service of the order, pursuant to Rule 102(e)(3)(ii). We further advised that, pursuant to +Rule 102(e)(3)(iii), upon receipt of such a petition, we would either lift the temporary +suspension, set the matter down for hearing, or both. +In his petition, Melvin requests that the temporary suspension be lifted, arguing that (i) +the suspension order was "untimely under the Commission's Rules of Practice," and (ii) the +Commission, "in conjunction with the negotiation of a settlement in corresponding civil +enforcement proceedings," entered into a "binding agreement" with Melvin that he "would not be +suspended in excess of the three years." +In its opposition to Melvin's petition, the Division of Enforcement contends that the +December 20, 2013 suspension order was timely because it was issued within 90 days of the +expiration of Melvin's time to appeal the district court's judgment. +8 The Division further + +4 Melvin, 2013 WL 6705182, at *1. +5 SEC v. Thomas D. Melvin, Jr., No. 1:12-cv-2984 (N.D. Ga. Aug. 14, 2013). +6 Complaint for Injunctive Relief at 2-3, SEC v. Thomas D. Melvin, Jr., No. 1:12-cv-2984 +(N.D. Ga. Aug. 28, 2012), available at http://www.sec.gov/litigation/complaints/2012/ +comp22468.pdf. +7 Id. at 3. +8 Rule 102(e)(3), 17 C.F.R. § 201.102(e)(3), provides, "No order of temporary suspension +shall be entered by the Commission . . . more than 90 days after the date on which the final +judgment or order entered in a judicial or administrative proceeding became effective, whether +upon completion of review or appeal or because further review or appeal procedures are no +longer available." + + +3 + +contends that it made no such agreement with Melvin regarding the length of his suspension, and +that such an agreement is inconsistent with the terms of the consent Melvin executed in +conjunction with the settlement of the underlying case. +Rule 102(e)(3)(i)(a) permits the Commission to suspend any accountant or other +professional or expert who has been "[p]ermanently enjoined . . . from violating . . . any +provision of the Federal securities laws or of the rules and regulations thereunder."9 At this +stage, it appears that the injunction issued against Melvin, based on alleged securities fraud +violations, "justif[ies] the continuance of his suspension until it can be determined what, if any, +action may be appropriate to protect the Commission’s processes."10 We therefore believe it is +in the public interest to deny Melvin's request to lift the suspension.11 We will set the matter +down for a hearing before an administrative law judge, as provided in Rule 102(e)(3)(iii).12 We +express no opinion as to the merits of Melvin's claims. +Accordingly, IT IS ORDERED that the petition of Thomas D. Melvin to lift the +temporary suspension entered on December 20, 2013, is denied and the suspension will remain +in effect pending a hearing and decision in this matter; it is further +ORDERED that this proceeding be set down for public hearing before an administrative +law judge in accordance with Rule of Practice 110. As specified in Rule of Practice +102(e)(3)(iii), the hearing in this matter shall be expedited in accordance with Rule of Practice +500; and it is further +ORDERED that the administrative law judge shall issue an initial decision no later than +210 days from the date of service of this order. +By the Commission. + + Jill M. Peterson + Assistant Secretary + +9 17 C.F.R. § 201.102(e)(3)(i)(a). +10 Williams D. Shovers, Exchange Act Release No. 59874, 2009 WL 1271170, at *2 (May +6, 2009). +11 Cf. Virginia K. Sourlis, Exchange Act Release No. 69358, 2013 WL 1453371, at *2 (Apr. +10, 2013) (denying request by an attorney to lift a Rule 102(e)(3) temporary suspension because +"[c]ontinuing [petitioner's] temporary suspension pending a hearing on the issues raised in [the] +petition serves the public interest and protects the Commission's processes"); Stewart A. Merkin, +Exchange Act Release No. 68981, 2013 WL 661621, at * 2 (Feb. 25, 2013) (same). +12 17 C.F.R. § 201.102(e)(3)(iii). \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3544.pdf b/raw/aaer/2014/AAER-3544.pdf new file mode 100644 index 0000000000000000000000000000000000000000..6d97a7f82ad781c8abb35adc39022554d9bf595c Binary files /dev/null and b/raw/aaer/2014/AAER-3544.pdf differ diff --git a/raw/aaer/2014/AAER-3545.pdf b/raw/aaer/2014/AAER-3545.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4d2325cb5ec2c88c3e149558b9d9e3c4be1838c8 Binary files /dev/null and b/raw/aaer/2014/AAER-3545.pdf differ diff --git a/raw/aaer/2014/AAER-3545.txt b/raw/aaer/2014/AAER-3545.txt new file mode 100644 index 0000000000000000000000000000000000000000..11d3b6508de21a15683428cbddcdd4ea683e2782 --- /dev/null +++ b/raw/aaer/2014/AAER-3545.txt @@ -0,0 +1,394 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 9565 / March 27, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71823 / March 27, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3545 / March 27, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15815 + + +In the Matter of + +L&L ENERGY, INC. +and DICKSON LEE, CPA + +Respondents. + + +ORDER INSTITUTING ADMINISTRATIVE +AND CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 8A OF THE +SECURITIES ACT OF 1933 AND SECTIONS +4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND RULE 102(e) +OF THE COMMISSION’S RULES OF +PRACTICE AND NOTICE OF HEARING + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”) and Sections 4C +and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e) of the +Commission’s Rules of Practice against Dickson Lee, and cease-and-desist proceedings be, and +hereby are, instituted pursuant to Section 8A of the Securities Act and Section 21C against L&L +Energy, Inc. + +II. + + After an investigation, the Division of Enforcement alleges that: + + + 2 +SUMMARY + + This action arises out of a fraudulent scheme by L&L Energy and Dickson Lee to create the +appearance that L&L was run by a professional management team and conceal Lee’s single-handed +control of the company. L&L Energy is a Seattle-headquartered coal company with all of its +operations in China and Taiwan. At all relevant times, it was led by Dickson Lee, its current +Chairman of the Board and Chief Executive Officer. From approximately August 2008 to June +2009, L&L and Lee repeatedly and fraudulently misrepresented to the public that it had certain +persons serving in critical executive management roles at the company when, in reality, those +persons served in no such roles. + + First, in its Form 10-K for the fiscal year 2008, L&L falsely represented that Lee’s brother +served as the company’s CEO when, in reality, Lee served in that role and ran the day to day +operations of the company. In that same filing, L&L represented that a former company employee +(“the purported Acting CFO”) had served as the company’s Acting Chief Financial Officer when, in +reality, the purported Acting CFO had emailed Lee a month prior to the 2008 Form 10-K and +rejected the Acting CFO position. In the company’s next three quarterly report filings for 2009, +L&L and Lee continued to misrepresent that the purported Acting CFO was in fact the company’s +Acting CFO. For example, L&L’s public filings contained certifications required under the +Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley) that ostensibly bore the purported Acting CFO’s +electronic signature when, in reality, the purported Acting CFO had not signed any L&L public +filings during this period; did not provide authorization for her signature to be placed on any L&L +public filings; and did not perform any of the reviews necessary to have a basis for any of the +attestations contained on the Sarbanes-Oxley certifications. + + In approximately May 2009, the purported Acting CFO learned that L&L had been falsely +representing her as the company’s Acting CFO and confronted Lee and the chair of L&L’s Audit +Committee. In response, Lee separately admitted to the purported Acting CFO and the Audit +Committee Chair that the purported Acting CFO had not performed the duties of L&L’s Acting +CFO, and then directed the Audit Committee Chair to conceal this fact from both the company’s +Board and the public. Lee maintained his fraudulent scheme by continuing to falsely represent to +L&L’s Board of Directors that the purported Acting CFO had served as the Acting CFO. Lastly, +during the fall of 2009, in connection with an application for L&L to gain listing on NASDAQ, Lee +misled NASDAQ by informing it that the company had made all of the required Sarbanes-Oxley +certifications – including during the period of the purported Acting CFO’s ostensible service. As a +result, L&L became listed on the NASDAQ. + +RESPONDENTS + +1. L&L is a Seattle, Washington headquartered coal company with all of its operations +in China and Taiwan. The company became public through a reverse merger in August 2001. +L&L’s common stock is registered with the Commission pursuant to Exchange Act Section 12(b), +and its stock is currently listed on NASDAQ. +2. Dickson Lee, age 65, is the company’s founder and has been L&L’s Chairman of +the Board and Chief Executive Officer since August 2008. Lee previously served as CEO from + 3 +1995 through July 2007 and Chairman at various periods. He previously held CPA licenses in +Washington and New York (both licenses have lapsed, with the Washington license lapsing in June +2012) and previously audited public companies. Lee obtained his Series 7 license in 1998 and his +Series 24 and 27 licenses in 2000. Lee was an associated person with a number of broker dealers +until about 2005. + FACTS +A. The Purported Acting CFO Rejects Acting CFO Position + +3. In August 2007, L&L publicly announced that Lee had resigned his position as +L&L’s Chairman of the Board and CEO. Lee resigned those positions shortly after he was +disciplined by the National Association of Securities Dealers, Inc. (“NASD”) and received a one- +year suspension for conducting private placement offerings of L&L securities in which the private +placement memoranda contained false statements. Lee believed that, if he was an L&L officer, his +suspension would impede L&L from becoming listed on a stock exchange. +4. At that time, Lee installed his brother as the CEO of L&L (hereinafter “Lee’s +brother”). During the one-year period (August 2007 – August 2008) in which Lee’s brother held +the title of L&L’s CEO, however, Lee continued to run the company as he had when he held the +title of CEO. +5. In January 2008, L&L’s stock became quoted on the Over-The-Counter Bulletin +Board (“OTCBB”). In order to gain listing on a larger trading venue, such as NASDAQ, Lee +sought to hire a Chief Financial Officer (“CFO”). +6. L&L hired a CFO in February 2008, but within two months that person resigned. +As L&L sought a replacement CFO, Lee proposed the name of a former employee and L&L +director (hereinafter, “the purported Acting CFO”) as a candidate for L&L’s Acting CFO position. +7. In approximately June 2008, Lee, on L&L’s behalf, engaged a U.S.-based placement +agent (the “placement agent”) to assist L&L in raising money from investors. This placement agent +encouraged L&L to hire a CFO. In a June 18, 2008 email, Lee referred to the purported Acting +CFO as a member of the management team that had been requested by the placement agent. In +another June 2008 email, Lee wrote that the purported Acting CFO could become L&L’s Acting +CFO in order to meet the placement agent’s “requirement.” +8. On June 23, 2008, members of L&L’s board and Lee held a meeting. At that +meeting, Lee communicated that the purported Acting CFO would be appointed as the company’s +Acting CFO because the placement agent “suggested that L&L needs to have [an] Acting CFO (a +Non-Officer position) as one of the conditions to move L&L’s funding forward.” +9. On that same day, at Lee’s instruction, Lee’s assistant sent the purported Acting +CFO an email thanking her for becoming L&L’s Acting CFO. The purported Acting CFO, +however, had never accepted the Acting CFO position. + 4 +10. On July 14, 2008, the purported Acting CFO forwarded to Lee the June 23, 2008 +email she received from his assistant regarding the Acting CFO position and informed Lee that she +was “unable to become L&L Acting CFO as I don’t have time to make any contribution to L&L. I +need to take care of my own job and my kids as well . . . I wish you could find a more suitable CFO +soon.” +B. L&L Falsely Represents Lee’s Brother and the Purported Acting CFO as the +Company’s CEO and Acting CFO + +11. On August 12, 2008, L&L filed its Form 10-K with the Commission for its fiscal +year ended April 30, 2008 (the “2008 Form 10-K”). Lee reviewed the filing before it was made +public. +12. L&L, in its 2008 Form 10-K, falsely represented that Lee’s brother had performed +the functions of the company’s CEO when, in reality, Lee continued to perform the functions of the +company’s CEO. +13. Moreover, in that same filing, L&L reported for the first time that the purported +Acting CFO had been named as the company’s Acting CFO, disclosing that “she is a CPA with +experience of both U.S. and China accounting practices. She was a senior auditing manager for a +New York CPA firm with PCAOB qualification, and conducted US GAAP audits for US public +listed companies.” These representations were false because the purported Acting CFO had +rejected the Acting CFO position. +14. L&L’s 2008 Form 10-K contained certifications required under Sarbanes-Oxley for +the company’s principal executive officer and principal financial officer, namely, its CEO and CFO. +These certifications contained the electronic signatures of both Lee’s brother and the purported +Acting CFO by which each of them attested to, among other things, the fact that the 2008 Form 10- +K contained no untrue statements of material fact. +15. Neither Lee’s brother nor the purported Acting CFO, however, provided any such +attestation and neither Lee’s brother nor the purported Acting CFO provided any authorization to +have their electronic signatures placed on their respective Sarbanes-Oxley certifications. +16. L&L, in its 2008 Form 10-K, also falsely represented that it had – with the +participation of its CEO (Lee’s brother) and CFO (the purported Acting CFO) – evaluated the +effectiveness of the design and operation of its disclosure controls and procedures, and based on +such evaluation, the company, its CEO (Lee’s brother), and CFO (the purported Acting CFO) +concluded that the disclosure controls and procedures were effective. + +C. L&L and Lee Continue their Scheme to Falsely Represent the Purported Acting CFO +as the Acting CFO + +17. On August 25, 2008, after his one-year NASD suspension was over, Lee officially +returned to the position of L&L’s CEO and Chairman of the Board. + 5 +18. On September 15, 2008, L&L filed with the Commission its Form 10-Q for the +period ended July 31, 2009 (the “First Quarter 2009 Form 10-Q”). Lee signed the filing. Like the +2008 Form 10-K, the First Quarter 2009 Form 10-Q contained a Sarbanes-Oxley certification that +was ostensibly electronically signed by the purported Acting CFO. Moreover, the First Quarter +2009 Form 10-K also contained the representation that the CEO (Lee) and the purported Acting +CFO had evaluated the effectiveness of the design and operation of the company’s disclosure +controls and procedures and those controls and procedures were effective. +19. The purported Acting CFO, however, did not serve as the company’s Acting CFO in +any capacity; did not authorize her electronic signature to be placed on the Sarbanes-Oxley +certifications; did not perform any of the reviews or functions enumerated on the Sarbanes-Oxley +certifications; and did not evaluate the effectiveness of the company’s disclosure controls and +procedures. +20. The First Quarter 2009 Form 10-Q also contained a Sarbanes-Oxley certification for +Lee. In his Sarbanes-Oxley certification, Lee falsely certified that, to his knowledge, L&L’s First +Quarter 2009 Form 10-Q contained no untrue statements of material fact. +21. In approximately December 2008, L&L retained a U.S.-based investment research +firm to write a research report concerning L&L. In late December 2008, the research firm emailed +Lee a draft research report for his review. The research report contained a prominent section on +L&L’s management team, listed the purported Acting CFO as the company’s CFO and stated that +the purported Acting CFO “coordinates all accounting for L&L.” Lee sent a revised version of the +research report to the research firm with some “minor changes,” but did not correct the false +statements regarding the purported Acting CFO. This report was published in approximately April +2009 and included the false statements regarding the role of the purported Acting CFO. +22. On December 22, 2008, L&L filed with the Commission its Form 10-Q for the +period ended October 31, 2008, and on March 23, 2009, L&L filed with the Commission its Form +10-Q for the period ended January 31, 2009. Lee signed both of these filings. These two public +filings again contained false, electronically signed, Sarbanes-Oxley certifications by the purported +Acting CFO. Moreover, these two filings contained the false statements concerning the purported +Acting CFO’s evaluation of the effectiveness of the company’s disclosure controls and procedures. +23. These two public filings also contained Lee’s own Sarbanes-Oxley certification in +which he again falsely certified that, to his knowledge, the Form 10-Qs contained no untrue +statements of material fact. +24. As noted above, L&L placed electronic signatures on the public filings to reflect that +the purported Acting CFO had signed the requisite Sarbanes-Oxley certifications. The Commission +staff requested from L&L, but never received, the actual signature pages bearing the purported +Acting CFO’s signature for each of the requisite Sarbanes-Oxley certifications. +25. On August 12, 2009, L&L filed its 2009 Form 10-K, which contained Lee’s +Sarbanes-Oxley certification that, based on his and the CFO’s most recent evaluation of the +company’s internal control over financial reporting, all fraud involving management had been + 6 +disclosed to the company’s auditors and to the company’s Audit Committee. This certification was +false because Lee had not disclosed to the company’s external auditors or the company’s entire +Audit Committee that the purported Acting CFO was misrepresented in L&L’s previous filings as +its Acting CFO. +D. Lee Admits to Purported Acting CFO that She Did Not Perform the Work of the +Acting CFO + +26. In approximately May 2009, the purported Acting CFO became aware that L&L had +falsely represented her as the company’s Acting CFO in the company’s public filings and, on May +6, 2009, sent Lee an email that included her July 14, 2008 email in which she rejected the Acting +CFO position. In the email, the purported Acting CFO wrote that she “clearly indicated that [she] +would not accept the offer of being the Acting CFO of L&L,” and asked Lee for an immediate +explanation. +27. On May 13, 2009, Lee emailed the purported Acting CFO and wrote, “[t]here is a +misunderstanding of the Acting CFO role . . . Based on your input, your name is removed to please +you.” The purported Acting CFO replied that – just because she and Lee had known each other for +ten years – it did not mean “that you could use my name, without authorisation, to the file 10K to +the U.S. SEC.” In response, on May 19, 2009, Lee emailed the purported Acting CFO and +separately admitted, “[y]ou did not actually conduct the work as Acting [CFO].” +E. Lee Admits to L&L’s Audit Committee Chair That Purported Acting CFO Did Not +Serve as Acting CFO + +28. On May 21, 2009, the purported Acting CFO emailed Shirley Kiang, who was then +the Chair of L&L’s Audit Committee and member of its Board of Directors. In the email, the +purported Acting CFO told Kiang that she had a “serious and urgent” matter related to L&L’s +public information made without her knowledge and asked Kiang to investigate. +29. Kiang subsequently contacted Lee and asked whether the purported Acting CFO had +actually served as the company’s Acting CFO. Lee initially informed Kiang that the purported +Acting CFO had served as the company’s Acting CFO and was making false allegations in an +attempt to obtain money from the company. +30. Kiang asked Lee for evidence to support his assertion that the purported Acting CFO +had served as the company’s Acting CFO. In response, Lee provided Kiang with a letter that +appeared to be addressed to the purported Acting CFO, dated May 28, 2008, and purported to be +signed by Lee’s brother as the company’s CEO. The letter asked the purported Acting CFO to +confirm that she had agreed to accept the Acting CFO position and stated that if the company did +not receive a response to the letter within ten days, the company would treat her lack of response as +her acceptance of the position. +31. This letter, however, was not created on May 28, 2008; was not signed by Lee’s +brother; and was never sent to the purported Acting CFO. Rather, this letter was created on May 26, + 7 +2009 – almost one year after the purported Acting CFO had rejected the Acting CFO position – and +was stored in Lee’s L&L computer network folder. +32. On June 4, 2009 – after receiving no response from Kiang – the purported Acting +CFO emailed Kiang again. The purported Acting CFO again asked Kiang to investigate her +allegations, specifically that she was misrepresented in L&L’s filings as the company’s Acting +CFO, and included her July 14, 2008 email to Dickson Lee rejecting the Acting CFO position. +33. After receiving the June 4 email, Kiang again asked Dickson Lee for an explanation. +Lee then admitted to Kiang that the purported Acting CFO had not actually served as the company’s +Acting CFO and that he had used the purported Acting CFO’s name on L&L’s public filings +without the purported Acting CFO’s permission. Lee directed Kiang to not disclose this +information to anyone, including the company’s Board of Directors or the public, and told her that if +this information became publicly known, L&L’s stock price would drop. +34. After this, Lee continued to falsely represent to the company’s Board of Directors +that the purported Acting CFO had served as the company’s Acting CFO. +35. During the nearly one-year period in which the purported Acting CFO was falsely +represented as the company’s Acting CFO, L&L raised approximately $750,000 from investors +using stock purchase agreements in which L&L expressly attested to the accuracy of its public +filings and private placement documents that referred the investor to publicly available additional +information about the company. +F. L&L Makes Materially False and Misleading Statements on NASDAQ Application to +Gain NASDAQ Listing + +36. In approximately September 2009, L&L completed an application to become listed +on the NASDAQ. As part of the application process, NASDAQ requested a variety of information, +including confirmation that the company had made all of the required Sarbanes-Oxley certifications. +37. L&L, in a communication from Lee, confirmed that the company had made all of +the required Sarbanes-Oxley certifications. L&L misled NASDAQ in this communication because +it did not inform NASDAQ that its required CFO Sarbanes-Oxley certifications for its 2008 Form +10-K or its three 2009 Form 10-Qs were false. As a result, L&L gained listing on NASDAQ in +February 2010. + + VIOLATIONS +38. By engaging in the conduct described above, L&L violated – and Lee willfully +violated – Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibits fraudulent +conduct in connection with the purchase or sale of securities. Also, by engaging in the conduct +described above, Lee willfully aided and abetted and caused L&L’s violations of Section 10(b) of +the Exchange Act and Rule 10b-5(b) thereunder. + 8 +39. By engaging in the conduct described above, L&L violated – and Lee willfully +violated – Section 17(a) of the Securities Act, which prohibits fraudulent conduct in the offer or sale +of securities. +40. By engaging in the conduct described above, L&L violated – and Lee willfully aided +and abetted and caused violations of – Section 13(a) of the Exchange Act and Rules 13a-1 and 13a- +13 thereunder, which require issuers of registered securities to file factually accurate annual and +quarterly reports. Also, L&L violated – and Lee willfully aided and abetted and caused violations +of – Rule 12b-20 of the Exchange Act, which requires the addition to such reports of further +material information necessary to make the required report statements not misleading. +41. By engaging in the conduct described above, L&L violated – and Lee willfully +violated, and willfully aided and abetted and caused violations of – Rule 13a-14 of the Exchange +Act, which requires, among other things, that principal executive and financial officers certify that +based on their knowledge, the issuer’s financial statements are accurate, and that, based on the +principal executive and financial officer’s most recent evaluation of the company’s internal control +over financial reporting, they have disclosed all fraud, whether or not material, involving +management to the company’s auditors and Audit Committee. +42. By engaging in the conduct described above, L&L violated – and Lee willfully aided +and abetted and caused violations of – Rule 13a-15 of the Exchange Act, which requires each +issuer’s management, with the participation of the company’s principal executive officer and +principal accounting officer, or persons performing similar functions, to evaluate the effectiveness +of the company’s disclosure controls and procedures on a quarterly basis. +43. By engaging in the conduct described above, L&L violated – and Lee willfully aided +and abetted and caused violations of – Section 302 of Regulation S-T of the Exchange Act, which +requires that (i) a signatory to an electronic filing actually sign the signature page before or at the +time of the electronic filing; (ii) the filer retain the original executed document for five years; and +(iii) that the filer provide the Commission staff with a copy of the document upon request. +III. + In view of the allegations made by the Division of Enforcement, the Commi ssion deems +it necessary and in the public interest that public administrative and cease-and-desist proceedings +against Lee, and public cease-and-desist proceedings against L&L, be instituted to determine: +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondents an opportunity to establish any defenses to such +allegations; +B. What, if any, remedial action is appropriate in the public interest against L&L, +including, but not limited to, disgorgement and civil penalties pursuant to Section +21B of the Exchange Act and Section 8A of the Securities Act; + 9 +C. What, if any, remedial action is appropriate in the public interest against Lee, +including, but not limited to, disgorgement and civil penalties pursuant to Section +21B of the Exchange Act and Section 8A of the Securities Act; +D. What, if any, remedial action is appropriate in the public interest against Lee, +including, but not limited to, a permanent officer and director bar pursuant to Section +21C(f) of the Exchange Act and Section 20(e) of the Securities Act; +E. What, if any, remedial action is appropriate in the public interest against Lee, +including, but not limited to, being permanently denied the privilege of appearing or +practicing before the Commission pursuant to Section 4C of the Exchange Act and +Rule 102(e) of the Commission’s Rules of Practice; +F. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the +Exchange Act, L&L should be ordered to cease and desist from committing or +causing violations of and any future violations of Section 17(a) of the Securities Act +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 13(a) of +the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, Exchange Act +Rules 13a-14 and 13a-15, and Section 302(b) of Regulation S-T of the Exchange Act; +and +G. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the +Exchange Act, Lee should be ordered to cease and desist from committing or causing +violations of and any future violations of Section 17(a) of the Securities Act, Section +10(b) of the Exchange Act and Rule 10b-5 thereunder and Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder, Exchange Act Rules +13a-14, and 13a-15, and Section 302(b) of Regulation S-T of the Exchange Act. +IV. + +IT IS ORDERED that a public hearing for the purpose of taking evidence on the +questions set forth in Section III hereof shall be convened 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 L&L and Lee shall file Answers to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule +220 of the Commission's Rules of Practice, 17 C.F.R. § 201.220. + +If Respondents fail to file the directed answer, or fail to appear at a hearing after being +duly notified, the Respondents may be deemed in default and the proceedings may be determined +against them upon consideration of this Order, the allegations of which may be deemed to be true +as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's Rules of Practice, 17 +C.F.R. §§ 201.155(a), 201.220(f), 201.221(f) and 201.310. + + 10 +This Order shall be served forthwith upon Respondents personally or by certified mail. + +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial +decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) +of the Commission’s Rules of Practice. +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as +witness or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule +making” within the meaning of Section 551 of the Administrative Procedure Act, it is not deemed +subject to the provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + + + Jill M. Peterson + Assistant Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3546.pdf b/raw/aaer/2014/AAER-3546.pdf new file mode 100644 index 0000000000000000000000000000000000000000..a6f209761ccf621c244037f9fd21bbcb60c02fa9 Binary files /dev/null and b/raw/aaer/2014/AAER-3546.pdf differ diff --git a/raw/aaer/2014/AAER-3546.txt b/raw/aaer/2014/AAER-3546.txt new file mode 100644 index 0000000000000000000000000000000000000000..afbe023f6fc0e83b361e7281953d202d6dca9e0a --- /dev/null +++ b/raw/aaer/2014/AAER-3546.txt @@ -0,0 +1,192 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71824 / March 27, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3546 / March 27, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15816 + + +In the Matter of + +SHIRLEY KIANG + +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 Shirley Kiang (“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over her and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + + 2 + + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds +1 that: + +Summary + + From August 2008 to approximately June 2009, L&L Energy, Inc. (L&L), a Seattle- +headquartered coal company with all of its operations in China – led by its Chairman of the Board +and Chief Executive Officer, Dickson Lee – misrepresented in public filings with the Commission +that a person served as the company’s Acting Chief Financial Officer when, in reality, she never did +(hereinafter, the “purported Acting CFO”). In May 2009, the purported Acting CFO became aware +that L&L had falsely represented her as the company’s actual Acting CFO and asked Shirley Kiang, +who was then the company’s Audit Committee Chair and a Director, to investigate. Kiang +approached Lee regarding the purported Acting CFO’s allegations, and he told Kiang that the +purported Acting CFO had never served as the company’s actual Acting CFO and to not share this +information with anyone, including the company’s Board of Directors and the public. In August +2009, L&L filed its Form 10-K for the 2009 fiscal year, and it included a false certification required +under the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) that – based on Lee’s and the other +certifying officer’s most recent evaluation of the company’s internal control over financial reporting +– any fraud, whether or not material, involving management had been disclosed to the company’s +auditors and the company’s Audit Committee. Kiang signed this public filing as a Director and +Audit Committee Chair when she knew or should have known that the filing contained this false +Sarbanes-Oxley certification. + +Respondent + +1. Shirley Kiang, age 63, was associated with L&L from 1998 to August 2012 as a +board member. Kiang was also a member of L&L’s Audit Committee from its inception in July +2008 through August 2012, and was the Audit Committee Chair from approximately July 2008 +through at least the filing of L&L’s 2009 Form 10-K on August 13, 2009. Kiang is a U.S. citizen, +currently living in Thailand. +Facts + +2. Beginning in approximately April 2008, L&L did not have a CFO, as its prior CFO +had just resigned. L&L, led by Lee, wanted to hire an Acting CFO and, to that end, thought of the +purported Acting CFO, who had previously been associated with the company as an accountant +from 1997 to 2004, and as a director until 2006. + +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 +3. In a July 14, 2008 email to Lee, the purported Acting CFO rejected an offer to +become L&L’s Acting CFO. +4. Notwithstanding this rejection, L&L falsely represented that the purported Acting +CFO was the company’s actual Acting CFO in four separate public filings with the Commission, +including the company’s Form 10-K for fiscal year 2008, and three subsequent Form 10-Qs for +fiscal year 2009. Each filing included a Sarbanes-Oxley certification with the purported Acting +CFO’s digital signature that she had, among other things, attested to the accuracy of the company’s +financial statements and the appropriateness of the company’s disclosure controls and procedures. +The purported Acting CFO, however, never performed any such functions. +5. In May 2009, the purported Acting CFO became aware that L&L had falsely +represented her as the company’s actual Acting CFO in the above-described filings and sent various +emails to Lee, demanding an explanation. In a May 19, 2009 email, Lee wrote to the purported +Acting CFO that she “did not perform the work of the Acting CFO.” +6. On May 21, 2009, the purported Acting CFO emailed Kiang, who was then the +Chair of the company’s three person Audit Committee and member of the company’s Board of +Directors. Prior to this email, Kiang had no interaction with the purported Acting CFO with regard +to any L&L business. In the email, the purported Acting CFO told Kiang that she had a “serious +and urgent” matter related to L&L’s filings that were made without her knowledge and asked her to +investigate. +7. Kiang subsequently contacted Lee and asked whether the purported Acting CFO had +actually served as the company’s Acting CFO, and was informed that the purported Acting CFO +had actually served as the company’s Acting CFO and was making false allegations in an attempt to +obtain money from the company. Kiang contacted no one else, including anyone at the company or +the company’s external auditors, to investigate whether the purported Acting CFO had actually +served as the company’s Acting CFO. +8. On June 4, 2009 – after receiving no response from Kiang – the purported Acting +CFO emailed her again. The purported Acting CFO asked whether Kiang had investigated the +allegations that she had not actually served as the company’s Acting CFO, and in the email, +included her July 14, 2008 email in which she rejected the offer to be L&L’s Acting CFO. +9. After receiving the email, Kiang asked Lee for an explanation. Lee told Kiang that +the purported Acting CFO had not actually served as the company’s Acting CFO; that he had used +the purported Acting CFO’s name on L&L’s public filings without the purported Acting CFO’s +permission; told Kiang not to worry about it because it was in the past +2; told Kiang to not tell +anyone about the purported Acting CFO, including the company’s Board of Directors or the public; +and that, if she shared this information with anyone, L&L’s reputation would be affected negatively +and its stock price would drop. + +2 On June 23, 2009, L&L issued a Form 8-K in which it announced that it had hired a California resident as +the company’s Acting CFO. The California resident, unlike the purported Acting CFO, actually did perform the +duties of a CFO. + 4 +10. On August 12, 2009, L&L filed its 2009 Form 10-K, which contained a false +Sarbanes-Oxley certification that – based on Lee’s and the other certifying officer’s most recent +evaluation of the company’s internal control over financial reporting – any fraud, whether or not +material, involving management had been disclosed to the company’s auditors and to the +company’s Audit Committee. Kiang signed L&L’s 2009 Form 10-K as Audit Committee Chair and +a Director, when she knew or should have known that any fraud, whether or not material, involving +management had not been disclosed to the company’s auditors and the company’s Audit +Committee. +Violation +11. Under Section 21C of the Exchange Act, the Commission may impose a cease- +and-desist order upon, among others, any person that is, was, or would be a cause of the +violation, due to an act or omission the person knew or should have known would contribute to +such violation of any provision of the Exchange Act. +12. Section 13(a) of the Exchange Act requires issuers that have securities registered +pursuant to Section 12 of the Exchange Act to file such periodic and other reports as the +Commission may prescribe and in conformity with such rules as the Commission may promulgate. +Exchange Act Rule 13a-1 requires the filing of annual reports. In addition to the information +expressly required to be included in such reports, Rule 12b-20 under 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’l, 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). +13. L&L violated Exchange Act Section 13(a) and Rules 12b-20 and 13a-1 thereunder +by filing an annual report – the 2009 Form 10-K – that included a false Sarbanes-Oxley certification +that – based on the CEO’s and the other certifying officer’s most recent evaluation of the company’s +internal control over financial reporting – any fraud, whether or not material, involving management +had been disclosed to the company’s auditors and the company’s Audit Committee. +14. By engaging in the conduct described above, Kiang caused L&L’s violations of +Exchange Act Section 13(a) and Rules 12b-20 and 13a-1 thereunder. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Respondent’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + 5 +A. Respondent Kiang cease and desist from committing or causing any violations and +any future violations of Exchange Act Section 13(a) and Rules 12b-20 and 13a-1 promulgated +thereunder. +B. To effect compliance with the above-referenced provision and rules of the +Exchange Act, Kiang permanently refrain from signing any Commission public filing that contains +any certification required pursuant to the Sarbanes-Oxley Act of 2002. + +By the Commission. + + + + Jill M. Peterson + Assistant Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3547.txt b/raw/aaer/2014/AAER-3547.txt new file mode 100644 index 0000000000000000000000000000000000000000..aed8a9361433c49775ffc5838c318a6cc10f2b25 --- /dev/null +++ b/raw/aaer/2014/AAER-3547.txt @@ -0,0 +1,383 @@ +UNITED STATED OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71833 / March 31, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3547 / March 31, 2014 + +Admin. Proc. File No. 3-15012 + + +In the Matter of + +S.W. HATFIELD, CPA and +SCOTT W. HATFIELD, CPA +9002 Green Oaks Circle, 2nd Floor +Dallas, Texas 75243-7212 + + + +ORDER DIRECTING +THE FILING +OF ADDITIONAL BRIEFS + +The Division of Enforcement appeals from the decision of an administrative law judge in +a proceeding brought pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 +and Rule 102(e)(1)(i) and (iii) of the Commission's Rules of Practice.1 The law judge found, +among other things, that S.W. Hatfield, CPA ("the Firm"), a Texas accounting firm, and Scott W. +Hatfield, the Firm's sole proprietor (together, "Respondents"), did not violate Exchange Act +Section 10(b) with respect to certain audit reports that Respondents allegedly issued while the +Firm's state license was expired.2 This order requests that the parties address (1) the legal +theories and facts regarding the "in connection with" requirement under Exchange Act Section +10(b); (2) the implication on the Division's request for sanctions under Exchange Act Section 4C +and Rule 102(e) of the disciplinary sanctions imposed on Respondents in a separate disciplinary +proceeding after the conclusion of briefing in this matter before the law judge; and (3) the +applicability of Rule of Practice 102(e)(1)(i) to Respondents where the Firm's state license had +been renewed and was current as of the date of the institution of this proceeding. +I. The "in connection with" requirement under Exchange Act Section 10(b) +A September 6, 2012 Corrected Order Instituting Proceedings ("OIP") alleges that +Respondents "issued thirty-eight audit reports that twenty-one issuers included in periodic +reports and registration statements filed with the Commission." An appendix attached to the OIP + +1 15 U.S.C. §§ 78d-3, 78u-3; 17 C.F.R. § 201.102(e)(1)(i) and (iii). +2 15 U.S.C. § 78j(b). +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 2 +identifies, among other things, the dates of each of the thirty-eight reports, and the date on which +each report was included as part of a filing with the Commission. +The OIP further alleges that Respondents issued those audit reports between +January 31, 2010 and May 19, 2011, a period during which the Firm's state license was expired +("Expired License Period"). The OIP alleges that the following activity occurred during the +Expired License Period with respect to the securities of some of the twenty-one issuers: + Five of the issuers (888 Acquisition Corp., Eight Dragons Co., HPC Acquisitions, Inc., +Truewest Corp., and X-Change Corp.) were quoted on the Over-The-Counter Bulletin Board +("OTCBB"), and trading occurred during the Expired License Period for a specified number +of days in each issuer's securities; the dates on which the trades occurred are not identified.3 + SMSA Kerrville Acquisition Corp. issued restricted, unregistered common stock on +December 15, 2010.4 + Asia Green Agriculture Corp., f/k/a SMSA Palestine Acquisition Corp. ("SMSA Palestine"), +issued shares for 100% of the outstanding common stock of Sino Oriental Agriculture Group +Limited "in August 2010," and filed a Form S-1 on September 20, 2010 and subsequent +amendments before going effective on July 15, 2011.5 + Three of the issuers (Signet International Holdings, Inc., SMSA Crane Acquisition Corp., +and SMSA Gainesville Acquisition Corp.) "disclosed issuances" of unregistered, restricted +common stock for acquisitions and for services during the Expired License Period.6 + X-Change Corp. issued securities to convert or retire outstanding debt and to obtain certain +intellectual property rights during the Expired License Period.7 +In the factual discussion of its motion for summary disposition, the Division reiterates the +activity of the five issuers who were quoted on the OTCBB; SMSA Kerrville Acquisition Corp.; +the three issuers who "disclosed issuances" of unregistered, restricted common stock; and X- +Change Corp.'s issuance of securities. But the Division does not refer to SMSA Palestine. In the +argument section of its motion, the Division states that "Respondents' actions were made in +connection with the purchase and sale of securities of the 21 issuers for whom they issued audit +reports." But, in support of this argument, the Division references only the five issuers whose +securities traded on the OTCBB and a sixth issuer, SMSA Kerrville Acquisition Corp. The +Division provides no analysis or citation to any authority other than SEC v. Zandford,8 for the + +3 OIP ¶ A.8. +4 OIP ¶ A.9. +5 OIP ¶ A.9. +6 OIP ¶ A.10. +7 Id. +8 535 U.S. 813, 819-20 (2002). +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 3 +proposition that the "in connection with" requirement under Exchange Act Section 10(b) should +be read broadly, and Ames Dep't Stores Inc. Stock Litig.,9 for the proposition that the "in +connection with" requirement is satisfied if the misrepresentation occurs in periodic reports filed +with the Commission. +The Division's reply brief in support of its motion for summary disposition alleges that a +"[m]ore-[t]han [s]ufficient" number of misstatements were made in connection with the purchase +and sale of securities, citing in support the same six issuers as discussed in the argument section +of its motion for summary disposition, and arguing that the "in connection with" requirement +was met because "Respondents' fraud 'somehow touche[d] upon' and had 'some nexus' with 'any +securities transaction.' SEC v. Clark, 915 F.2d 439, 449 (9th Cir. 1990) (emphasis added)." But +the reply brief also argues that the fees earned for all thirty-eight reports issued for the twenty- +one issuers are "directly traceable to Respondents' fraud" and should be disgorged. The +Division's brief on appeal provides no further clarification of its theory of the "in connection +with" element of its fraud charge. + After the Division filed its brief on appeal, the Supreme Court issued its decision in +Chadbourne & Park, LLP v. Troice,10 which addresses the scope of the "in connection with" +element of Exchange Act Section 10(b) and Rule 10b-5 thereunder in the context of an implied +private right of action. For purposes of determining whether the Securities Litigation Uniform +Standards Act of 1988 ("SLUSA") forbade the bringing of a state securities class action, the +Court determined that, under SLUSA, "[a] fraudulent misrepresentation or omission is not made +'in connection with' such a 'purchase or sale of a covered security' unless it is material to a +decision by one or more individuals (other than the fraudster) to buy or to sell a 'covered +security.'"11 The Court clarified that its holding "does not limit the Federal Government's +authority to prosecute 'frauds like the one here.'"12 Rather, the Court pointed out that, "despite +the Government's and the dissent's hand wringing, neither has been able to point to an example +of any prior SEC enforcement action brought during the past 80 years that our holding today +would have prevented the SEC from bringing."13 The parties have not had the opportunity to + +9 991 F.2d 953, 962 (2d Cir. 1993). +10 134 S. Ct. 1058 (Feb. 26, 2014). +11 Id. at 1066. SLUSA forbids the bringing of large securities class actions "based upon the +statutory or common law of any State" in which the plaintiffs allege "a misrepresentation or +omission of a material fact in connection with the purchase or sale of a covered security." +15 U.S.C. § 78bb(f)(1). A covered security is one that trades on a national exchange. Id. at +§ 78bb(f)(1)(5)(E). In the underlying case, the plaintiffs alleged that the defendants helped Allen +Stanford and his companies implement a Ponzi scheme by misrepresenting that the uncovered +securities (certificates of deposit in Stanford International Bank) plaintiffs purchased were +backed by highly-marketable and stable covered securities. The district court dismissed the case, +concluding that the alleged misrepresentations provided the requisite "connection" to +transactions in covered securities. +12 Chadbourne & Park, LLP, 134 S. Ct. at 1062 (emphasis in original). +13 Id. at 1070. +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 4 +address any implications of that case on the analysis of the "in connection with" issue in this +matter. +For the foregoing reasons, we direct the Division to submit supplemental briefing to: + Identify specifically the issuers for which the Division argues that Respondents made +misstatements "in connection with" the purchase or sale of the issuer's securities. + For each issuer identified in response to the above, identify specifically: the purchases or +sales of securities in connection with which alleged misstatements were made; Respondents' +reports in which those alleged misstatements were made and the filing or filings with the +Commission in which those alleged misstatements appeared; and when the purchases or sales +of securities occurred in relation to when each of the filings were made. + For each issuer identified in response to the above, explain in what way Respondents' alleged +misstatements touch upon and have some nexus with any securities transaction. + If, in responding to the above, the Division identifies alleged misstatements in fewer than all +thirty-eight reports for the twenty-one issuers listed in the appendix to the OIP, explain the +basis for the assertion that fees earned for all thirty-eight reports issued for the twenty-one +issuers, are "directly traceable to Respondents' fraud" for purposes of assessing +disgorgement. + Address the significance, if any, of the decision in Chadbourne & Park, LLP v. Troice on any +of the Division's arguments in this case. +II. Exchange Act Section 4C and Commission Rule 102(e) + +A. Sanctions under Exchange Act Section 4C and Commission Rule 102(e) + +The OIP instituted public administrative and cease-and-desist proceedings to determine +whether, among other things, Respondents should be censured or denied, temporarily or +permanently, the privilege of appearing or practicing before the Commission as accountants +pursuant to Exchange Act Section 4C and Rule 102(e). In the Division's brief in support of its +motion for summary disposition, and in a similar statement in its reply brief, the Division states +that "Respondents are currently licensed as CPAs who continue to provide attest services to +public—and possibly non-public—companies. They therefore pose a continuing threat to the +Commission's processes and to the investing public." (citations omitted) Thus, the Division +argues, "Respondents should be permanently barred from appearing before the Commission in +accordance with Rule 102(e)(1)(i) and (iii)." + +The parties completed their briefing before the law judge in March 2013. On July 3, +2013, the Commission issued an adjudicatory opinion regarding an appeal filed by Respondents +that challenged disciplinary action taken by the Public Company Accounting Oversight Board +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 5 +("PCAOB") against Respondents for conduct not at issue in this proceeding.14 The Commission +found that Respondents violated certain PCAOB rules by repeatedly failing to adhere to the +PCAOB's interim auditing standards during the audits of two unrelated public companies. The +Commission sustained the PCAOB's decision to permanently revoke the firm's registration and +permanently bar Hatfield from association with a registered public accounting firm.15 The +Commission concluded that the PCAOB's sanctions were necessary "to protect the integrity of +the Commission's processes and encourage more rigorous compliance with auditing standards +both by [Respondents] and by other independent auditors."16 Respondents did not appeal the +Commission's decision. + +We have stated that "[t]he Commission disciplines professionals pursuant to Rule 102(e) +in order to 'protect the integrity of its processes.'"17 There is a similarity between the purpose +and scope of the PCAOB sanctions discussed above and the bar sought by the Division under +Exchange Act Section 4C and Rule 102(e). The parties did not have the opportunity to address +before the law judge, and have not addressed before the Commission, any implications that the +July 3, 2013 Commission decision may have on the analysis of sanctions under Exchange Act +Section 4C and Rule 102(e) in this matter. We direct the Division to submit supplemental +briefing to explain the extent to which there is overlap, if any, between the PCAOB sanctions +and sanctions under Exchange Act Section 4C and Rule 102(e), and whether such additional +sanctions are necessary in the public interest in light of the PCAOB sanctions. + +B. Applicability of Exchange Act Section 4C(a)(1) and Rule 102(e)(1)(i) + +Exchange Act Section 4C(a)(1) and Rule 102(e)(1)(i) provide that the Commission may +impose sanctions on any person who is found "not to possess the requisite qualifications to +represent others."18 The OIP alleges that "Respondents do not possess the requisite +qualifications to represent others, pursuant to Section 4C(a)(1) and Rule 102(e)(1)(i) of the +Commission's Rules of Practice."19 Similarly, the Division states in its Motion for Summary +Disposition that "Respondents do not possess the requisite qualifications to represent others," +and, in its brief on appeal, that "Respondents lack the requisite qualifications to represent others." +In support of these allegations, the Division points to the lapse in the Firm's state license + +14 S.W. Hatfield, C.P.A. and Scott W. Hatfield, C.P.A., Exchange Act Release No. 69930, +2013 WL 3339647 (July 3, 2013). In the September 10, 2013 initial decision in this matter, the +law judge mentioned the fact of the Commission's July 3, 2013 decision. +15 Id. at *21. +16 Id. at *26. +17 Michael C. Pattison, CPA, Exchange Act Release No. 67900, 2012 WL 4320146, at *12 +& n.70 (Sept. 20, 2012) (citing Robert W. Armstrong, III, Exchange Act Release No. 51920, +2005 WL 1498425, at *11 & n.62 (June 24, 2005) (citation omitted)). +18 15 U.S.C. § 78d-3(a)(1); 17 C.F.R. § 201.102(e)(1)(i). +19 OIP ¶ C.2. +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 6 +commencing on January 31, 2010. But the Firm's state license was renewed on May 19, 2011 +and remained current at the time the Commission issued the OIP. +Moreover, the precedent cited by the Division in its brief on appeal regarding matters +brought under Exchange Act Section 4C(a)(1) and Rule 102(e)(1)(i) involved parties who were +not licensed at the time the Commission issued orders instituting proceedings and imposing +remedial sanctions, i.e., settlement orders.20 Supplemental briefing should address the relevance, +for purposes of Exchange Act Section 4C(a)(1) and Rule 102(e)(1)(i), of the fact that a +respondent's state license is current when an order instituting proceedings issues. +Accordingly, it is ORDERED that the Division file a supplemental brief addressing all of +the above, together with all appropriate citations to relevant facts and authority within fourteen +calendar days from the date of service of this order and not exceeding 7,000 words. Respondents +may file a reply brief responding to the Division's supplemental brief within fourteen days from +the date of service of the Division's supplemental brief and not exceeding 5,000 words. + + For the Commission by the Office of the General Counsel, pursuant to delegated +authority. + + + + + + +Lynn M. Powalski +Deputy Secretary + +20 Alan S. Goldstein, Exchange Act Release No. 34641, 1994 WL 499304, at *2-3 (Sept. 6, +1994); Elliot Stumacher, Exchange Act Release No. 39124, 1997 WL 587063, at *1, *3 +(Sept. 24, 1997). \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3548.pdf b/raw/aaer/2014/AAER-3548.pdf new file mode 100644 index 0000000000000000000000000000000000000000..23b58fb58f55c4e531587773e8f0b287b240f0b9 Binary files /dev/null and b/raw/aaer/2014/AAER-3548.pdf differ diff --git a/raw/aaer/2014/AAER-3548.txt b/raw/aaer/2014/AAER-3548.txt new file mode 100644 index 0000000000000000000000000000000000000000..19f1e1257b903ef03112d71cd5f051d9aac10800 --- /dev/null +++ b/raw/aaer/2014/AAER-3548.txt @@ -0,0 +1,742 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9573 / April 8, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71896 / April 8, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3548 / April 8, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15825 + + + + +In the Matter of + +LAIRD DANIELS, 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 and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted against Laird Daniels (“Respondent” or “Daniels”) pursuant to Section 8A of the +Securities Act of 1933 (“Securities Act”), Sections 4C and 21C of the Securities Exchange Act of +1934 (“Exchange Act”), and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public + 2 +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 finds that: +A. SUMMARY + In the third quarter of 2009, CVS Caremark Corporation (“CVS”) dramatically and without +public disclosure changed its accounting for 525 Longs drugstores that had been acquired in +October 2008. CVS improperly reduced the value of $189 million of personal property in the +Longs stores down to $0. CVS then reversed $49 million of depreciation that had been taken on +those assets since the acquisition. The undisclosed depreciation reversal increased third-quarter +2009 earnings per share (“EPS”) by approximately 2.4¢, enabling CVS to exceed analysts’ +expectations at a time when it was announcing a significant reduction in its earnings projections for +2010. With proper accounting, the asset write-down would have been treated as a current-period +expense, and third-quarter 2009 EPS would have been reduced by as much as 17% (as much as +9.3¢). + Respondent Daniels, then the Retail Controller at CVS, orchestrated the improper +accounting adjustment, causing CVS to value at $0 all the personal property in approximately 430 +of the 525 Longs stores, including more than 360 stores that CVS was going to operate for the long +term. In Daniels’ own words, CVS’s accounting turned the acquisition of the Longs drugstores +from a “bad guy” into a “good guy.” +B. RESPONDENT + Daniels is 44 years old and lives in North Attleboro, Massachusetts. He is licensed in +Connecticut as a certified public accountant. Prior to May 2009, he was Vice President for +Corporate Budgeting at CVS, with responsibility for preparing budgets and forecasts for its retail +pharmacy business. In May 2009, he became Retail Controller, with responsibility for collecting +financial information from units within the retail pharmacy business and supervising the +preparation of budgets, actual financial results, and forecasts. In January 2010, he became Chief +Accounting Officer, with responsibility for the consolidation of financial information for all +segments of CVS. He is currently the Senior Vice President for International Operations and +Business Development at CVS. +C. OTHER RELEVANT ENTITY + CVS is a Delaware corporation with its principal executive offices in Woonsocket, Rhode +Island. Its common stock is traded on the New York Stock Exchange under the symbol “CVS.” It +operates a nationwide chain of more than 7,400 drugstores and currently ranks #13 on the Fortune +500 list, with more than $120 billion of revenue in 2012. + + 3 +D. DANIELS ORCHESTRATED IMPROPER ADJUSTMENTS TO THE +ACCOUNTING FOR THE LONGS ACQUISITION +Introduction +1. On October 20, 2008, CVS acquired the Longs chain of approximately 525 +drugstores. CVS hired a major accounting firm to prepare a valuation for the Longs purchase price +accounting (“PPA”) under Statement of Financial Accounting Standards (“SFAS”) 141 (“Business +Combinations”). +1 On January 27, 2009, the valuation firm submitted a draft report. As required +by its contract with CVS, the valuation firm applied a “continued use” premise – that CVS would +retain and continue using all of the Longs stores’ property, plant and equipment (except for stores +to be closed, as identified by CVS). The firm valued the Longs stores’ property, plant and +equipment at more than $1.2 billion, including $937 million of real property and $229 million of +personal property. The valuation results were included in CVS’s audited financial statements for +the fiscal year ended December 31, 2008, which were incorporated by reference in the annual +report on Form 10-K that CVS filed with the Commission on February 27, 2009. +2. After accounting for the Longs PPA in its financial statements for 2008 and the first +and second fiscal quarters of 2009, CVS, through Daniels, improperly adjusted the way the Longs +PPA was accounted for and included the improper adjustments to the Longs PPA in later financial +statements filed in November 2009. The result of this change was to boost CVS’s financial results +for its quarter ended September 30, 2009 (its third quarter). +3. On November 5, 2009, CVS filed with the Commission a quarterly report on Form +10-Q for its third quarter ended September 30, 2009 containing unaudited financial statements that +included adjustments to the Longs PPA. Compared to the valuation firm’s January 2009 draft +report, the value of Longs tangible assets was reduced by $212 million and goodwill was increased +by the same amount. The reduction of tangible assets resulted primarily from a $189 million +decrease in the value of the Longs stores’ personal property (from $229 million to $40 million). +Despite the “continued use” premise that had been built into the valuation firm’s January 2009 +draft report, CVS now completely wrote off all personal property in approximately 430 of the 525 +Longs stores, including more than 360 stores that were going to be operated for the long term. +4. In its third-quarter 2009 unaudited financial statements, CVS made a one-time +catch-up adjustment reversing $49 million of the depreciation that had been taken on Longs +personal property from October 20, 2008 through June 30, 2009, and it did not take an additional +$19 million of depreciation that would otherwise have been taken on Longs personal property in +the third quarter. The one-time depreciation reversal increased CVS’s third-quarter 2009 earnings +per share (“EPS”) by approximately 2.4¢. +2 +5. The Longs PPA adjustments did not comply with generally accepted accounting +principles (“GAAP”), specifically SFAS 141, because: (1) they did not reflect the expected future +use of the Longs personal property as of the acquisition date in October 2008; (2) they did not + +1 SFAS 141 was superseded by SFAS 141R as of December 2008 – two months after the Longs acquisition. +2 CVS emphasizes, and analysts usually focus on, the company’s “adjusted” EPS – GAAP EPS minus amortization +and net of tax. All references to EPS in this Order are to adjusted EPS. + 4 +reflect information that CVS knew or had arranged to obtain as of the acquisition date; and (3) they +did not account for CVS’s use of the assets to generate revenue after the acquisition date. The +failure to comply with GAAP had a material impact on the company’s third-quarter 2009 financial +results. +6. Between the time that CVS initially included the Longs PPA in its 2008 financial +statements and the time it adjusted the Longs PPA in its financial statements for the 2009 third +quarter, Daniels took a series of steps to improperly alter the Longs PPA in order to get a more +positive accounting impact for CVS. +7. On June 16, 2009, Daniels told a co-worker that he had been making “some good +progress on the tangible asset side” with the valuation firm and that he was now “extremely +confident (by the way that’s the most confident I get) that the final valuation will no longer be a +bad guy but rather a good guy.” (Daniels routinely used the terms “good guy” and “bad guy” to +indicate whether an item improved or harmed CVS’s purported profitability.) +The Original Purchase Price Allocation for the Longs Acquisition +8. In November 2008, CVS hired a major accounting firm to prepare a valuation for +the Longs PPA. The engagement letter specified that, applying SFAS 141, the firm would +determine the “fair value” of the Longs assets “as part of a ‘going concern in continued use,’” and +that “this valuation premise presupposes the continued utilization of the assets in connection with +all other assets as the highest and best use.” The engagement letter called for the firm to submit +“Phase One” summary schedules by December 31, 2008 and a draft “Phase Two” report three +weeks later. +9. On November 4, the valuation firm asked CVS for certain information about the +Longs tangible assets, including “Information regarding any future use / development / +refurbishment projects at existing stores. List of rationalization / store closure plans.” +10. On December 14, Daniels (who was then the Director of Budgeting and +Forecasting) told the CVS real estate group to provide the valuation firm with the latest strategy for +using the Longs drugstores, adding “I know it’s not final but I assume it’s pretty close.” +11. On December 15, the Real Estate Finance Director provided the valuation firm with +the current strategy for each Longs store, along with a cover email from a manager in the real +estate group stating, “I don’t expect many changes.” The list indicated that CVS planned to close +36 stores right away, relocate 19 stores within one year, operate 123 stores with the intent to +relocate them within three years (if possible), and operate 349 stores for the long-term. Soon after, +the Finance Director told another manager in the real estate group that the December 15 list was +“predominately finished, but will have limited ongoing changes.” +12. The valuation firm’s approach to determining the “fair value” of the tangible assets +in the Longs stores depended on CVS’s intended use of each store. +a. For assets in the stores to be operated for more than one year, the firm +applied a “continued use” premise. The firm determined the “direct replacement cost” for the +leasehold improvements and the furniture, fixtures and equipment (“FF&E”) in each store, using + 5 +data from the CVS real estate group that a typical new CVS store had fixed costs of $45,101 and +variable costs of $38.77 per square foot. The firm applied an “indirect cost approach” (historical +cost trended forward) for the computer equipment and the assets in the Longs corporate locations. +b. For the assets in the stores to be closed within one year, the firm determined +the “orderly liquidation value” using data from the CVS real estate group indicating that +approximately 35% of the assets would have liquidation value. +13. On December 23, the valuation firm sent draft schedules to the Retail Controller +(Daniels’ predecessor in this position). For the Longs drugstores, the real property was valued at +$937.2 million and the personal property was valued at $229.3 million. These schedules were the +“Phase One” summary schedules required by the engagement letter. The Retail Controller +forwarded the schedules to CVS’s outside auditors. +14. On January 12, 2009, the Retail Controller asked the valuation firm for “updated +valuation schedules that reflect all changes to date.” He also stated, “We are entering the danger +zone on closing the year. If there are any significant open items affecting the current valuation +estimates, we have to resolve them tomorrow.” Minutes later, a Senior Manager at the valuation +firm replied that, on a recent call with CVS’s outside auditors, “all of the major issues were +discussed and agreed to, which would mean leaving our analysis as is.” +15. On January 13, the valuation firm sent updated schedules to the Retail Controller. +For the Longs retail operations, the valuation of real property ($937.2 million) and personal +property ($229.3 million) was unchanged from the schedules sent on December 23. The Retail +Controller forwarded the schedules to the Controller and to CVS’s outside auditors. +16. Also on January 13, CVS’s outside auditors told the Retail Controller that they +wanted to have “a quick wrap up call this morning on the Longs valuation just to make sure we are +all on the same page and close down our procedures. We wanted to talk about the wrap up process +[and] timing of [the] narrative from [the valuation firm] etc.” +17. As of mid-January, the valuation firm was not performing any additional valuation +work, and both the Retail Controller and CVS’s outside auditors expected that the firm would +submit its report in time for inclusion in the 2008 audit. +18. On January 27, the valuation firm submitted a draft report that applied the +“continued use” valuation premise mandated in the engagement letter (except for the stores to be +closed). The valuation of the Longs drugstores had not changed from the draft schedules sent on +December 23 and January 13: $937.2 million of real property and $229.3 million of personal +property. The draft report was the “Phase Two” narrative report required by the engagement letter. +19. Between November 2008 and January 27, 2009, CVS and its outside auditors were +in regular communication with the valuation firm about its work. At no point did CVS or the +outside auditors express any concerns about the valuation firm’s approach to the valuation. Nor +did CVS tell the valuation firm about any plans to dispose of almost all personal property in most +Longs stores, despite the firm’s specific request for information about “future use / development / +refurbishment projects at existing stores.” As a result, the valuation firm assumed that the +conversion of Longs stores to CVS stores would primarily entail a change of signage. + 6 +20. After submitting its draft report on January 29, the valuation firm waited for +comments from CVS’s outside auditors so it could prepare its final report. On January 30, the +Retail Controller told the firm: “[The auditors] completed their review of the draft valuation report +and had no comments. Please issue your report in final form as soon as you can.” The firm +responded that it would send a draft management representation letter for CVS to sign, as well as +“a final invoice for our work.” +21. On January 31, the Retail Controller told the valuation firm to put finalizing the +valuation report “on hold” in light of an upcoming meeting between the firm and the CVS real +estate group. +22. On February 2, a manager in the CVS real estate group sent the valuation firm a list +of topics to be discussed on a call later that day. Most of the topics concerned the accounting for +leasehold interests and personal property in Longs stores to be closed. None of the topics +concerned the remodeling of any Longs stores. +23. On February 11, the valuation firm sent CVS a “final summary” of the Longs +valuation. The personal property in the Longs drugstores was still valued at $229.3 million. +24. In connection with the year-end 2008 audit, CVS’s outside auditors reviewed the +valuation firm’s approach to valuing tangible assets and concluded that the firm’s methodology +was reasonable. While the outside auditors were working on the 2008 audit, CVS did not disclose +anything about its plans to remodel any Longs stores, and so the auditors did not review the Longs +valuation report for any potential impact of the remodeling. +25. CVS included the values from the January 29 draft valuation report in its audited +financial statements for 2008, which were included in its annual report to shareholders for 2008 +and were incorporated by reference in the annual report on Form 10-K that it filed with the +Commission on February 27. Note 2 to the audited financial statements, entitled “Business +Combinations,” indicated that CVS had acquired Longs for approximately $2.6 billion. Note 3, +entitled “Goodwill and Other Intangibles,” stated that “goodwill increased primarily due to the +Longs Acquisition” and that the increase in amortizable intangible assets “was primarily due to the +preliminary purchase price allocations (which may change and the result of such changes, if any, +may be material).” The audited financial statements did not contain any indication that the +valuation of Longs tangible assets such as personal property was not final. +26. The asset values from the January 29 draft valuation report were loaded into CVS’s +books and records, and CVS began taking depreciation on the Longs assets. +27. On February 27, the Real Estate Finance Director asked the valuation firm about +potential adjustments to the value of assets in the Longs stores to be closed. He also wrote: +Plus, it seems there have been several changes in individual store +strategies over the past few weeks, and I would guess these have +not been picked up by you guys or [the Retail Controller]. I would +like to talk about how these changes and future changes should be +handled with respect to these value adjustments. + 7 +Minutes later, a Senior Manager at the valuation firm responded with a warning: +[K]eep in mind that any changes in strategy that were not known as +of the acquisition date cannot be reflected in the valuation. The +valuation was as of October 30, 2008. So the valuation can only +reflect the strategies in place at that time – which I believe we +accurately reflected. Any changes after the valuation date would +have to be discussed with your audit team. +28. The valuation firm did not perform any further work on the Longs valuation +between February and April, although it responded to occasional questions from CVS. +Daniels Persuaded the Valuation Firm to Reduce its +Valuation of the Longs Stores’ Personal Property by $189 Million +29. In March 2009, the CVS fixed asset group adjusted the depreciation being taken on +Longs FF&E and technology assets by lengthening the remaining useful lives beyond the time +period that the valuation firm had used. In other words, the fixed asset group assumed that these +assets in the Longs stores would remain in use for a longer period than the valuation firm had +assumed. +30. In April, the CVS property accounting group identified a discrepancy between the +depreciation on Longs assets built into the 2009 budget and the actual depreciation being taken on +those assets. On April 30, the Controller complained to the Retail Controller and to Daniels, who +was then Vice President for Corporate Budgeting, that the CVS fixed asset group had apparently +made decisions about the remaining useful lives of Longs assets that were inconsistent with the +valuation firm’s draft report, and the result was an unfavorable variance of $20 million per month. +31. In early May, the Controller fired the Retail Controller. Daniels became the Retail +Controller and took charge of working with the valuation firm on the Longs valuation. (At the +time, the Controller was being scrutinized by CVS senior management as a possible successor to +the CFO, who had expressed his intent to retire.) +32. On May 1, the Controller and Daniels asked for a conference call with the valuation +firm on May 8. On May 7, Daniels prepared a list of four topics for the call: (1) a request for a +summary schedule listing each asset class and the remaining useful lives; (2) a discussion of any +recent changes in the valuation; (3) a discussion of the fair value and remaining useful lives for the +“technology” assets; and (4) an apparent discrepancy in the labeling in two versions of the +valuation schedules. The list did not mention the remodeling of any Longs stores or the disposal of +any Longs assets. The Controller forwarded the list to the valuation firm. +33. As of May 8, the Controller had no concerns about the valuation of Longs drugstore +assets or the projected depreciation on those assets. +34. After the call on May 8, the valuation firm sent Daniels its latest fixed asset +valuation figures and the depreciation and amortization schedules that it had used. There had been +no change to the $229.3 million valuation of personal property in the Longs retail operations. + 8 +35. On May 11, after reviewing the materials he received from the valuation firm on +May 8, Daniels told the Controller that: (1) the blame for the depreciation variance lay with the +fixed asset group; (2) the valuation firm’s estimated fair values and suggested remaining useful +lives were the same as used by CVS in its current budget; and (3) the depreciation variance +problem would likely be resolved in the financial results for April 2009. +36. At no point between January 27 and May 13 did CVS tell the valuation firm about +any plans to dispose of almost all of the Longs stores’ personal property, despite the firm’s specific +request for such information back in November 2008. +37. On May 13, Daniels told the valuation firm during a conference call that: +a. CVS was remodeling the Longs stores that were going to be operated for +the long-term, and as part of the remodeling process, CVS was gutting the stores and discarding all +the personal property; and +b. CVS was not receiving any value for the assets being discarded. +Daniels also told the valuation firm that, as of the acquisition date on October 20, 2008, CVS had +intended to throw out all that personal property in the Longs stores. +38. On May 19, a Senior Manager at the valuation firm warned Daniels that it appeared +CVS was improperly changing its real estate strategy after the acquisition date: +I had the opportunity to discuss our call from last week with [name +omitted]. [He] is the partner in charge of the tangible asset valuation +practice in the US and was the tangible asset partner on the CVS +engagement. We discussed many of the changes in the plans for the +PP&E [property, plant and equipment] that have occurred since the +acquisition. [The valuation firm] valued the PP&E as of the acquisition +date utilizing the plans of CVS at this time. The valuation of the PP&E +cannot be modified for changes in plans that occurred after the +valuation date. The future plans of the company had to be known prior +to the acquisition date. Any changes that have occurred over the last 7 +months that were not known as of October 30, 2008 cannot be +incorporated into the valuation. +One hour later, Daniels sent an email to allay the valuation firm’s concerns: +As a reminder, what we would like to discuss is the assumptions used +regarding the intended use of the assets to ensure that the correct plans +were used. Rest assured we are not looking to change the plans +regarding the use of the acquired assets as the plans remain unchanged +since the close. Rather, we want to make sure the correct assumptions +were used. +39. Also on May 19, the partner responsible for the valuation firm’s overall relationship +with CVS reported on a call with Daniels: + 9 +He said he understands the acctg [accounting] literature and believes +that we were given incorrect info. He said they hadn’t really looked at +our final report until after March when the info that was loaded into +their g/l [general ledger] didn’t look right. +40. On May 20, Daniels told a co-worker that he was working with the valuation firm +“to ensure their valuation assumptions are correct.” +41. On May 26, Daniels had a conference call with the valuation firm. Prior to the call, +Daniels provided the firm with CVS’s current real estate strategy for the Longs stores. The +strategy list indicated that CVS planned to: (1) close 71 stores within one year; (2) operate 124 +stores with the intent to relocate them within three years (if possible); and (3) operate 333 stores for +the long-term. Daniels also sent the firm an overview of the store remodeling project. The +remodel overview indicated that 420 stores would be remodeled to some extent, of which 361 +stores would receive a “full remodel.” (The stores not being remodeled at all were stores that had +been or were about to be closed, as well as stores in Hawaii that were going to retain the “Longs” +name.). The remodel overview indicated that less than one-third of the “full remodel” stores were +going to receive all-new fixtures. However, Daniels told the valuation firm that all assets in all 361 +“full remodel” stores were being scrapped. +42. The valuation firm’s internal manual on SFAS 141 stated that PPA adjustments are +appropriate only if “the necessary information was determinable at the time the preliminary +allocation was reported,” as when, for example, the acquiring entity has commissioned an appraisal +of plant and equipment that is not complete by the acquisition date. +43. The valuation firm accepted Daniels’ statements in May that, as of the acquisition +in October 2008, CVS intended to throw out personal property in the stores to receive a “full +remodel,” and that CVS’s failure to provide the firm with the correct information for six months +after the firm was retained was due to a “miscommunication.” If the valuation firm had received +this information before it submitted its draft report in January 2009, the fair value of the Longs +drugstore assets would have been significantly reduced. +44. On June 3, the valuation firm told Daniels that the personal property in the Longs +drugstores was now valued at $49.6 million (compared with $229.3 million as of May 8). The firm +reduced the value of personal property by $179.7 million based on the supposedly correct +information provided by Daniels in May – that, as of the acquisition date on October 20, 2008, +CVS intended to discard the assets in the stores to be remodeled, and that the discarded assets had +no liquidation value. +45. On June 4, Daniels received a copy of the outside auditors’ internal manual on +SFAS 141R. +3 The manual stated: +The measurement period ends once the acquirer is able to determine +that it has obtained all necessary information that existed as of the + +3 SFAS 141R expanded the subjects that can be modified during the allocation period but did not change the +definition of the allocation period itself. + 10 +acquisition date or has determined that such information is +unavailable… +Once the acquirer obtains the information it has arranged to obtain or +determines that the information does not exist, then the measurement +period is closed. The measurement period is not a fixed twelve-month +period during which all changes in carrying values of assets acquired or +liabilities assumed are considered adjustments to the business +combination accounting. +46. On June 16, Daniels told a co-worker, “Wanted to give you a quick update on the +Longs valuation. We have made some good progress on the tangible asset side based on having +[the valuation firm] update their assumptions to include the correct real estate disposition and +intended use of the assets.” +47. On July 28, the valuation firm sent Daniels an “updated draft” of its valuation +report. The text of the report had not changed since the January 27 draft, but the value of personal +property in the Longs drugstores had been reduced from $229.3 million to $50.8 million. +48. On October 1, the valuation firm sent Daniels a “final draft” of its valuation report. +The text of the report had not changed since the draft sent on July 28. However, the value of +personal property in the Longs drugstores had been further reduced – from $50.8 million to +$39.6 million. The total reduction in the value of personal property in the Longs drugstores since +the firm’s January 27 draft report was approximately $189 million (from $229.3 million to $39.6 +million). +CVS’s Outside Auditors Accepted the $189 Million +Reduction in the Valuation of the Longs Stores’ Personal Property +49. Until the spring of 2009, CVS’s outside auditors were not aware that CVS planned +to discard almost all of the Longs stores’ personal property. +50. In early June 2009, Daniels told the outside auditors that CVS had finalized its +strategy for which Longs stores would be closed, relocated or remodeled, and that the adjustments +to the valuation of the Longs stores could be larger than expected, because CVS was going to scrap +all personal property in the stores being remodeled. That was the first time the outside auditors +heard about the write-off of assets in stores being remodeled. The Coordinating Partner told the +Engagement Partner that he was a “little worried about what he [Daniels] may be trying to do.” +51. On June 19, Daniels told a member of the Longs remodeling team at CVS: +I’m close to completing the valuation work with [the valuation firm] for +Longs. One final step I have is getting our auditors comfortable with +the changes. Our auditors were hoping they could see a summary of +what we are spending on the resets [remodels] that have been +completed. Is it possible to get a summary (with some detail) for the 4 +stores that are done? Since we are writing off a lot of the assets they + 11 +would feel more comfortable seeing that we’re spending a fair amount +per store to reset them. +52. On September 25, the Manager of Property Accounting provided Daniels with a +spreadsheet listing the amount spent on remodeling: (1) each Longs location whose assets had +been written down to zero, and (2) each Longs location whose assets were included in the residual +valuation of $50 million: +You had asked me to compare the Long’s Personal Property acquisition +assets that retained their value ($50M) following the recent revaluation, +to the total spending for the Long’s Reset capital projects. This +analysis is attached. +As you can see on the “Summary” tab, the theory you outlined to me +holds true for the majority of the stores. Those stores that have +retained-value acquisition assets generally have lower levels of +spending on their Reset projects. Conversely, those locations that have +significant Reset spending generally do not have large acquisition asset +activity. There are exceptions, of course, but in general the attached +information supports your position. +53. The language in these emails is very revealing. Daniels asked for data about “reset +spending” at the Longs stores to help the outside auditors get “comfortable” because CVS was +“writing off a lot of the assets.” He did not ask for confirmation that CVS was actually scrapping +all personal property in the stores being remodeled. The Manager of Property Accounting told +Daniels that, “for the majority of the stores,” the data supported “the theory you outlined to me” +and that “in general the attached information supports your position.” The “theory” and “position” +which Daniels had outlined to him was simply that stores with lower retained asset values tended +to have more “reset spending” – not that all assets in the “full remodel” stores were actually being +discarded. +54. On October 5, the outside auditors’ Senior Manager alerted others members of the +audit team about the upcoming finalization of the Longs PPA: +The biggest change is that PP&E went from 229 million in the initial +valuation to 50 million (and in final one expected to be 39 million). +The reason behind this as it has been explained to us is that CVS was +either resetting / relocating / closing a number of the stores that was +never communicated to [the valuation firm] and therefore an asset +value was assigned that was way too high. +55. On October 8, after the valuation firm had further reduced the valuation of the +remaining Longs store assets to $39 million, the Manager of Property Accounting sent Daniels an +updated store-by-store spreadsheet reflecting a total of $97 million of “reset [remodeling] project” +spending and $225 million of “post-acquisition” spending. Daniels forwarded the spreadsheet to +the outside auditors. + 12 +56. On October 14, the valuation firm’s Senior Manager provided Daniels with answers +to questions from the outside auditors about the revised valuation. In response to the auditors’ +request for clarification about the adjustments to personal property, the Senior Manager wrote: +We were provided an updated strategy list from CVS that contained a +future plan for each store. Below is a synopsis of how we valued the +personal property for each strategy. +Remodel – We were informed that stores that were being remodeled +from a Long’s to a CVS were being gutted and the personal property +was being scrapped. CVS was not obtaining any residual value for +these assets as they were being discarded. Therefore the personal +property at stores that were undergoing a complete renovation to a CVS +were given no value (scrap = $0). +Closed Stores – All stores that were closed were being gutted and none +of the personal property was being retained by CVS. The personal +property was valued at $0. +Closing Stores – Stores that would be operated for less than 1 year and +then closed – We valued the personal property with a 1 year RUL +[remaining useful life]. The depreciation was accelerated so that the +personal property would be fully depreciated at the end of 1 year. +Stores that were being converted to CVS for long term use and +underwent minor cosmetic changes – We valued the personal property +in continued use and the signage at $0. +Daniels forwarded the valuation firm’s response to the outside auditors. +57. Daniels never provided the outside auditors with any documents specifically +confirming that CVS was gutting all the “full remodel” stores. Instead, when they accepted the +PPA adjustments, the outside auditors relied on: (1) the representations by Daniels that CVS had +always intended to scrap all assets in the Longs stores to be remodeled; and (2) the data identifying +the amount of capital expenditures at each store. +CVS’s Form 10-Q for the Third Quarter of 2009 +Included Adjustments to the Longs PPA +58. On November 5, CVS filed a Form 10-Q with unaudited financial statements for +the third quarter of 2009 that included adjustments to the Longs PPA. +59. Compared to the valuation firm’s January 2009 draft report, the value of Longs +tangible assets was reduced by $212 million and goodwill was increased by the same amount. The +reduction of tangible assets resulted primarily from the $189 million decrease in the value of +personal property in the Longs drugstores reflected in the firm’s “final draft” valuation report dated +October 1. + 13 +60. CVS made a one-time catch-up adjustment by reversing $49 million of the +depreciation taken on Longs assets from the closing in October 2008 through June 2009. In +addition, CVS did not take $19 million of depreciation that would otherwise have been taken on +Longs assets in the third quarter. +61. The $49 million one-time depreciation reversal increased third-quarter 2009 EPS +by 2.4¢. +Daniels Caused CVS to Make Improper Accounting Adjustments +62. Daniels told a co-worker on June 16, 2009 that he had been making “some good +progress on the tangible asset side” with the valuation firm and that he was now “extremely +confident (by the way that’s the most confident I get) that the final valuation will no longer be a +bad guy but rather a good guy.” +63. Some of Daniels’ statements to the valuation firm and the outside auditors are +inconsistent: +a. Daniels told the valuation firm on May 19 that no one at CVS had really +looked at the January 27, 2009 draft report until after March, and that CVS became worried about +the valuation only when the values that were loaded into its general ledger “didn’t look right.” +However, Daniels told the Controller earlier in May that the valuation firm’s estimates of fair value +and suggested remaining useful lives were the same as used by CVS in its current budget. +b. Daniels told the valuation firm and the outside auditors on several occasions +that CVS had not provided the valuation firm with the correct plans for the Longs stores. +However, on September 28, Daniels told the Controller that the PPA adjustments should not be +considered as the correction of an error: +[W]e don’t fall under this scenario in my opinion as the r/e [real estate] +strategy was still being worked on, thus we didn’t ignore available info +resulting in an error. Rather we were waiting to gather info to complete +the valuation in the first place. +64. More importantly, the facts fatally undermine Daniels’ justification for the PPA +adjustments –that, as of the acquisition date on October 20, 2008, CVS intended to scrap all assets +in the Longs stores to be remodeled. +65. When CVS acquires a chain of drugstores, it typically tries to reuse as many assets +as possible, and it makes a store-by-store determination about the ultimate disposition of the assets. +When it acquired the Longs stores in October 2008, CVS did not know what its remodeling plan +was going to be or which assets in the stores to be retained would have value. As a result, it took +months after the acquisition for CVS to develop its plans for remodeling the Longs stores. +66. On October 17, 2008, the CVS real estate group circulated a “Longs Integration +Update” indicating that CVS would “update the look of the Longs’ fleet of stores” with “CVS +Decor Elements – Graphics, Aisle Guides, Carpet, Paint etc.” The document contained numerous + 14 +references to the minimization of construction costs, the retention of many existing fixtures, and +the need to finalize the scope of work. +67. On January 6, 2009, a member of the CVS real estate group circulated a brief +comparison between the company’s plans for the Longs stores and its treatment of the Albertsons +stores that CVS had acquired a few years earlier: +LDG [Longs]: Retain major elements from Longs > Total Visual +Appeal (TVA) Remodel store program. +ABS [Albertsons]: All new CVS design. +Benefit: Reduced cost while adding CVS look and feel elements (e.g. +aisle markers, graphics, carpet etc). +68. On January 29, members of the Longs integration team reported on a site visit to a +model “Alpha” store that had been built in an empty location to assess possible interior design +elements for the remodeled Longs stores. The report included several suggestions for how to adapt +to the taller shelving in a Longs store and how to respond to customer feedback. + +69. On February 13, members of the Longs integration team submitted a report on the +“Alpha” store that included “reusing existing fixtures where possible, even if not standard for +CVS.” + +70. On February 19, the CVS real estate group circulated a proposed budget of +$202 million for the Longs store remodeling project. For the 419 stores to be remodeled, the report +identified five levels of work, running from the “A+ scope” costing $640,000 per store to the +“C scope” costing $67,000 per store. Another presentation of the proposed budget noted that “the +following areas drive the costs: 1) photo/checkout; 2) former cosmetic service areas; 3) carpets.” +There was no reference to the complete replacement of all fixtures in all remodeled stores. +71. On May 1, members of the Longs integration team reported on lessons learned from +the five “Beta” stores built in March. The report mentioned potential changes to the store design +and concluded, “Save tens or hundreds of thousands of dollars by keeping some existing +elements.” +72. On May 22, the CVS real estate group circulated a “Longs Remodel Overview” +indicating that 420 stores were being remodeled to some extent. 361 stores would receive a “full +remodel” that included: +New CVS checkout: this will require the removal of 1 or 2 grocery +style checkout lanes; +New CVS Photo Lab: this will require the removal of the existing +Longs photo lab in order to accommodate the CVS design; +New Graphics/Wayfinding: all existing Longs department and +merchandise graphics will be replaced with the standard CVS package; + 15 +New exterior signage: replacement of existing Longs banner with +CVS/pharmacy. +The overview indicated that, despite the nomenclature, only 111 of the 361 “full remodel” stores +(fewer than one-third) were going to receive “replacement of existing wall and gondola fixtures.” +73. Although it did not involve the gutting of all stores to be operated for the long-term, +the final remodeling plan was more extensive than either CVS or its outside auditors had initially +expected. +The Longs PPA Adjustments Did Not Comply with GAAP +74. Under SFAS 141 (“Business Combinations”), an acquiring entity should allocate +the cost of the acquired entity to the assets and liabilities assumed “based on their estimated fair +values at [the] date of acquisition.” [¶35.] “Plant and equipment” should be valued at “current +replacement cost … unless the expected future use of the assets indicates a lower value.” +[¶37d(1).] +75. Under SFAS 141, an “allocation period” may be needed “to identify and measure +the fair value” of the assets and liabilities. [Appendix F.] The allocation period “is intended to +differentiate between amounts that are determined as a result of the identification and valuation +process … and amounts that are determined because information that was not previously +obtainable becomes obtainable.” [¶B183.] The allocation period “ends when the acquiring entity +is no longer waiting for information that it has arranged to obtain and that is known to be available +or obtainable.” [Appendix F.] In other words, a PPA adjustment is valid only if it is based on +information that the acquiring entity “has arranged to obtain” and that was “known to be available +or obtainable” on the acquisition date. +4 +76. Under SFAS 141, CVS could only make adjustments to the Longs PPA based on +information that was known or knowable as of the acquisition date on October 20, 2008. Given the +facts set forth above, the PPA adjustments in the third quarter of 2009 (writing off $189 million of +personal property in the Longs stores) were not proper under SFAS 141 because: +a. They did not reflect CVS’s intended future use of those assets as of the +acquisition date on October 20, 2008; +b. They did not reflect information that was known or knowable to CVS as of +October 20, 2008; and +c. They did not account for CVS’s use of the assets to generate revenue after +October 20, 2008. +77. The conclusion that the write-off of assets supposedly discarded during the +remodeling process should not have been treated as a PPA adjustment is consistent with CVS’s + +4 See also Staff Accounting Bulletin No. 103 (“The staff believes that the allocation period should not extend beyond +the minimum reasonable period necessary to gather the information that the registrant has arranged to obtain for +purposes of the estimate.”). + 16 +prior acquisitions, in which: (1) CVS did not write off the assets in stores being remodeled; and +(2) subsequent decisions about which stores to close (not which stores to remodel) were the +primary reason for changes to the PPA. +78. Under SFAS 144 (“Accounting for the Impairment or Disposal of Long-Lived +Assets”),5 if CVS really had discarded $189 million of personal property in the third quarter of +2009, it should have: + a. Written off $140 million of net book value (the original $189 million minus +the $49 million of depreciation to date) as an expense in the period in which it stopped using the +assets; and + b. Left the $49 million of previously recorded depreciation unchanged. +79. With proper accounting, current-period expenses in the third quarter of 2009 would +have been as much as $189 million higher than was actually reported. For the quarter, the failure +to recognize as much as $189 million of current-period expenses overstated operating profit by as +much as 13.7%, overstated income from continuing operations by as much as 12.5%, overstated +net income by as much as 12.5%, and overstated EPS by as much as 17% (as much as 9.3¢). +Violations + 80. As a result of the conduct described above, Daniels: + a. Violated Section 17(a)(2) and (3) of the Securities Act, which prohibits +making untrue or misleading statements of material fact or engaging in conduct which operates or +would operate as a fraud or deceit upon the purchaser in the offer and sale of securities. Sections +17(a)(2) and 17(a)(3) do not require a showing of scienter. Aaron v. SEC, 446 U.S. 680, 697 +(1980); + b. Violated Rule 13b2-1 promulgated under the Exchange Act, which +prohibits any person from directly or indirectly falsifying any books and records subject to Section +13(b)(2)(A) of the Exchange Act; + c. Aided and abetted and caused CVS’s violations of Section 13(a) of the +Exchange Act and Rules 12b-20 and 13a-13 thereunder, which require an issuer to file accurate +quarterly reports with the Commission and require those reports to contain such further material +information as is necessary to make the required statements in the reports not misleading; + d. Aided and abetted and caused CVS’s violations of Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act, which require an issuer to make and keep books and records that +accurately and fairly reflect the dispositions of its assets, and to devise and maintain a system of +internal accounting controls sufficient to ensure that its transactions comport with Generally +Accepted Accounting Principles; and + +5 FASB statements were codified for all interim periods ending after September 15, 2009. SFAS 144 has been +codified as ASC 360, Property, Plant and Equipment. + 17 + e. Pursuant to Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, +willfully violated Section 17(a)(2) and (3) of the Securities Act and Rule 13b2-1 promulgated +under the Exchange Act, and also willfully aided and abetted and caused CVS’s violations of +Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 +thereunder.6 +Findings + 81. Based on the foregoing, the Commission finds that Daniels: (a) willfully violated +Section 17(a)(2) and (3) of the Securities Act and Rule 13b2-1 promulgated under the Exchange +Act; and (b) willfully aided and abetted and caused CVS’s violations of Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder. + +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Daniels’ Offer. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Daniels shall cease and desist from committing or causing any violations and any +future violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules +12b-20, 13a-13, and 13b2-1 thereunder and Section 17(a) of the Securities Act. +B. Daniels is denied the privilege of appearing or practicing before the Commission as +an accountant, pursuant to Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +C. After one year 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: (a) Respondent, or the public +accounting firm with which he is associated, is registered with the Public Company Accounting + +6 As used in these findings, 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)). + 18 +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley Act of 2002, and such +registration continues to be effective; (b) Respondent, or the registered public accounting firm +with which he is associated, has been inspected by the Board and that inspection did not identify +any criticisms of or potential defects in the respondent’s or the firm’s quality control system that +would indicate that the respondent will not receive appropriate supervision; (c) Respondent has +resolved all disciplinary issues with the Board, and has complied with all terms and conditions of +any sanctions imposed by the Board (other than reinstatement by the Commission); and (d) +Respondent acknowledges his responsibility, as long as Respondent appears or practices before +the Commission as an independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all requirements relating to registration, +inspections, concurring partner reviews and quality control standards. +D. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + +E. Respondent shall, within 10 days of the entry of this Order, pay a civil penalty in +the amount of $75,000 to the United States Treasury. If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be made in one of the following +ways: (1) 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 +Laird Daniels as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to John T. Dugan, Associate +Regional Director, Boston Regional Office, Securities and Exchange Commission, 33 Arch Street, +Boston, MA 02110. + By the Commission. + + + Jill M. Peterson + Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3549.txt b/raw/aaer/2014/AAER-3549.txt new file mode 100644 index 0000000000000000000000000000000000000000..535945507a1105df3aeef79fcc0cdcef66634816 --- /dev/null +++ b/raw/aaer/2014/AAER-3549.txt @@ -0,0 +1,1396 @@ + + + + + + + + + + + + + + + + SEC.gov | Laird Daniels, CPA + + + + + + + + !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\/515381","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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CVS Caremark Corp. , Civil Action No. 14-177-ML (D.R.I., April 8, 2014) + + SEC Charges CVS with Misleading Investors and Committing Accounting Violations + + + The Securities and Exchange Commission today charged CVS Caremark Corp. with misleading investors about significant financial setbacks and using improper accounting that artificially boosted its financial performance. + + CVS has agreed to pay $20 million to settle the charges. + + According to the SEC's complaint filed in federal court in Rhode Island, CVS has two business segments as a pharmacy benefits manager and a retail chain of drug stores. In offering documents for a $1.5 billion bond offering in 2009, CVS fraudulently omitted that it had recently lost significant Medicare Part D and contract revenues in the pharmacy benefits segment. Investors were therefore misled about the expected future financial results for that line of business. When CVS eventually revealed the full extent of the setbacks on Nov. 5, 2009, its stock price fell 20 percent in one day. CVS further misled investors on an earnings call that same day by maintaining there was a slight improvement in its "retention rate," which is a key metric of retained business often used to compare pharmacy benefits management companies. But CVS omitted the fact that it had manipulated how it calculated the rate and concealed the full extent of its lost business. + + The SEC's complaint further alleges that CVS made improper accounting adjustments that overstated the financial results for its retail pharmacy line of business. During the same 2009 timeframe, CVS altered the accounting treatment for its acquisition of another drug store chain - Longs Drugs - and failed to disclose the adjustments in its quarterly report filed on November 5. CVS improperly reduced the value of $189 million of personal property in the Longs stores down to $0, and then reversed $49 million of depreciation that had been taken on those assets since the acquisition. The undisclosed depreciation reversal increased the third-quarter earnings and enabled CVS to exceed analysts' expectations at a time when it was otherwise announcing significant bad news about earnings projections in its pharmacy benefits line of business. + + The SEC alleges that the improper accounting adjustments were orchestrated by Laird Daniels, who was the retail controller at CVS and is charged with accounting violations in a related SEC administrative proceeding. According to the SEC's order against Daniels, proper accounting would have treated the asset write-down as a current period expense, and the third quarter earnings per share for CVS would have been reduced by as much as 17 percent. As Daniels described in an e-mail, the dramatic change in accounting turned the acquisition of Longs Drugs from a "bad guy" to a "good guy" in terms of purported profitability for CVS. + + Daniels has agreed to settle the administrative case against him by paying a $75,000 penalty and being barred for at least one year from practicing as an accountant on behalf of any publicly traded company or other entity regulated by the SEC. Without admitting or denying the allegations, Daniels agreed to the entry of a cease-and-desist order finding that he willfully violated Sections 17(a)(2) and (3) of the Securities Act of 1933 and Rule 13b2-1 under the Securities Exchange Act of 1934. The order finds that Daniels willfully aided, abetted, and caused violations by CVS of the reporting, books and records, and internal control provisions of the federal securities laws. See 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, and Imposing Remedial Sanctions and a Cease-and-Desist Order, Administrative Proceeding File No. 3-15825, Securities Act Release No. 9573 , Exchange Act Release No. 71896, Accounting and Audit Enforcement Release No. 3548 (April 8, 2014). + + The SEC's complaint charges CVS with violations of Section 10(b) of the Exchange Act and Rule 10b-5, and Section 17(a) of the Securities Act. CVS also is charged with violations of the reporting, books and records, and internal control provisions of the federal securities laws. In addition to the $20 million penalty, CVS consented to the entry of a final judgment permanently enjoining the company from violating various anti-fraud, books and records, and internal control provisions of the securities laws. CVS neither admitted nor denied the allegations. The settlement is subject to court approval. + + The SEC's investigation was conducted by Marc Jones, Frank Huntington, Ruth Anne Heselbarth, Amy Gwiazda, and Kevin Currid of the Boston Regional Office. The SEC appreciates the assistance of the Financial Industry Regulatory Authority (FINRA). + + + + + + + SEC Complaints: 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/2014/AAER-3550.txt b/raw/aaer/2014/AAER-3550.txt new file mode 100644 index 0000000000000000000000000000000000000000..eddc2b9d1940f449d5ae0bc31510ac4f3bffe100 --- /dev/null +++ b/raw/aaer/2014/AAER-3550.txt @@ -0,0 +1,103 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 71951 / April 15, 2014 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3550 / April 15, 2014 +ADMINISTRATIVE PROCEEDING +File No. 3-13737 + +In the Matter of +Scott T. Veech, 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 January 6, 2010, Scott T. Veech, CPA (“Veech”) 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 Veech pursuant to Rule 102(e)(3)(i) of the +Commission's Rules of Practice. +1 This order is issued in response to Veech’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 Veech participated in a fraudulent scheme which resulted in +Merge Healthcare Inc. (“Merge”) filing materially false and misleading financial statements in the +company’s annual report on Form 10-K for the fiscal years ended December 31, 2002, December 31, +2003 and December 31, 2004, and in the company’s quarterly reports on Form 10-Q for the first +three quarters of fiscal year 2005. While serving as Merge’s Chief Financial Officer, Veech engaged +in improper accounting practices that materially increased the company’s annual and quarterly +revenue in a material departure from generally accepted accounting principles. These practices +included, among other things, causing Merge to recognize revenue improperly on transactions in +which Merge promised specified future software enhancements to customers. As a result, Veech +violated Section 17(a) of the Securities Act of 1933 and Sections 10(b) and 13(b)(5) of the +Securities Exchange Act (“Exchange Act”) and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 +thereunder, and he aided and abetted 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. + +1 See Accounting and Auditing Enforcement Release No. 3096 dated January 6, 2010. Veech was permitted, +pursuant to the order, to apply for reinstatement after three years upon making certain showings. + + 2 + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review of financial statements of a public company to be filed with the Commission, Veech +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. Veech 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, Veech’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 Veech, it appears that he has complied with the terms of the January 6, 2010 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 +Veech, 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 +Scott T. Veech, 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 + +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 affor ded a +hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated +by the Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3551.pdf b/raw/aaer/2014/AAER-3551.pdf new file mode 100644 index 0000000000000000000000000000000000000000..aaa2532e475b78ab3e5861d3028fbfb47fca46bf Binary files /dev/null and b/raw/aaer/2014/AAER-3551.pdf differ diff --git a/raw/aaer/2014/AAER-3551.txt b/raw/aaer/2014/AAER-3551.txt new file mode 100644 index 0000000000000000000000000000000000000000..ef57d50c1ac85587e6703aa85ca29892c6ebcce2 --- /dev/null +++ b/raw/aaer/2014/AAER-3551.txt @@ -0,0 +1,104 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72005 / April 23, 2014 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3551 / April 23, 2014 +ADMINISTRATIVE PROCEEDING +File No. 3-14044 + +In the Matter of +Anthony J. Price, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT + +On September 13, 2010, Anthony J. Price, CPA (“Price”) was denied the privilege of +appearing or practicing as an accountant before the Commission as a result of settled public +administrative proceedings instituted by the Commission against Price 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.1 This order is issued in response to Price’s application for +reinstatement to appear and practice before the Commission as an accountant. + +Price was found to have engaged in improper professional conduct with respect to his +role on KMJ Corbin & Company LLP’s (“KMJ”) audits and reviews of Home Solutions of +America, Inc.’s financial statements for the year ended December 31, 2004 through the quarter +ended June 30, 2007. The Commission found that, during the relevant period, Price’s actions +during the engagements were unreasonable and failed to conform to applicable professional +standards. Price failed to (i) obtain sufficient competent evidential matter regarding bonuses, +revenues, and cost of revenues with respect to KMJ’s 2004, 2005, and 2006 audit engagements; +(ii) comply with PCAOB Auditing Standard No. 3, Audit Documentation; (iii) adequately plan +the audit and properly supervise assistants in connection with the 2006 engagement; and (iv) +conduct reviews of interim financial information in accordance with PCAOB standards and +rules. + + + +1 See Accounting and Auditing Enforcement Release No. 3185 dated September 13, 2010. Price was permitted, +pursuant to the order, to apply for reinstatement after two years upon making certain showings. +Price has met all of the conditions set forth in the original order and, in his capacity as an +independent accountant, has stated that he will comply with all requirements of the Commission +and the Public Company Accounting Oversight Board, including, but not limited to all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. In his capacity as a preparer or reviewer, or as a person responsible for the +preparation or review, of financial statements of a public company to be filed with the +Commission, Price 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. + +Price is currently subject to probation under the California Board of Accountancy that is +scheduled to end in March 2016. Failure to abide by the terms of his probation could result in the +revocation of Price’s CPA license pending notice and an opportunity to be heard by the +California Board of Accountancy. Price has attested that he will notify the Commission if he is +found to have violated the terms of the probation. He also has attested that he understands that +the revocation of his CPA license could result in the revocation of his reinstatement to appear +and practice before the Commission as an accountant. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + + On the basis of the information supplied, representations made, and undertakings agreed +to by Price, it appears that he has complied with the terms of the September 13, 2010 order +denying him the privilege of appearing or practicing before the Commission as an accountant, +that no information has come to the attention of the Commission relating to his character, +integrity, professional conduct or qualifications to practice before the Commission that would be +a basis for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of +Practice, and that Price, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, and that Price, by undertaking to comply +with all requirements of the Commission and the Public Company Accounting Oversight Board, +including, but not limited to, all requirements relating to registration, inspections, concurring +partner reviews and quality control standards, in his practice before the Commission as an +independent accountant has shown good cause for reinstatement. Therefore, it is accordingly, + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this section may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a +hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated +by the Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +Anthony J. Price, CPA is hereby reinstated to appear and practice 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-3552.txt b/raw/aaer/2014/AAER-3552.txt new file mode 100644 index 0000000000000000000000000000000000000000..e378facc9a0f47ee2bd7ef7a107a03343a59e440 --- /dev/null +++ b/raw/aaer/2014/AAER-3552.txt @@ -0,0 +1,284 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72134 / May 9, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3552 / May 9, 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 DENYING THE +DIVISION'S MOTION TO STRIKE +THE NOTICE OF WITHDRAWAL +OF APPEARANCE AND SETTING +A BRIEFING SCHEDULE + + +These administrative proceedings were instituted pursuant to Rule 102(e)(1)(iii) of our +Rules of Practice.1 They center on the alleged willful refusal of respondents, all accounting +firms located in the People's Republic of China, 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 (Dodd- +Frank Act).2 On January 22, 2014, the law judge issued an initial decision. That decision denied +the privilege of practicing or appearing before the Commission to four of the five respondents for +a period of six months.3 It censured the remaining respondent, Dahua CPA, Ltd. (Dahua).4 +On February 12, 2014, the Division filed a petition for review and sought review of, +among other things, "that portion of the Initial Decision that would exclude Dahua from a +practice bar." On February 21, DLA Piper LLP (DLA), which had previously entered an +appearance on behalf of Dahua and defended it in the proceedings before the law judge, filed a +Notice of Withdrawal of Appearance that purported to be effective February 26. The notice did + +1 17 C.F.R. § 201.102(e)(1)(iii). +2 15 U.S.C. § 7216(b)(1). +3 The petition for review and the motion for leave to adduce additional evidence filed by +these four respondents will be addressed by separate order. +4 Dahua was formerly affiliated with BDO International Limited and did business as BDO +China Dahua CPA Co., Ltd. +2 + +not provide a reason for the purported withdrawal and did not identify substitute counsel. The +Division filed an opposition to the notice and moved to strike it. DLA filed a response stating in +essence that the scope of its agreed-upon engagement with Dahua was limited to the hearing +before the law judge only and that it has been discharged as counsel. Attached to the response is +a declaration by Zhang Yan, who is described as Dahua's "international liaison," reciting the +same facts. +On March 20, Dahua filed, "[p]ursuant to Rule of Practice 102(d)(2)," a notice of +appearance "by and through its representative partner Zhang Yan, 11/F B Block Union Square +5022 Binhe Road Shenzhen, China 518033, telephone no. +86 755 82966044, facsimile no. +86 +755 82900965, email yan_zhang@dahua-cpa.com." Dahua unqualifiedly represented that it +would "accept documents in English," "communicate with the Commission in English," and +"abide by the previously agreed terms of the . . . Stipulated Protective Order" and "all other +orders concerning confidential treatment of documents." +5 +DISCUSSION +We have determined to deny the Division's motion to strike DLA's notice of withdrawal. +A. The requirements of Rule of Practice 102(d)(4) +The Division argues that the Commission should strike the February 21 notice of +withdrawal under Rule of Practice 102(d)(4) because DLA has not established good cause +insofar as withdrawal would have an adverse effect on the orderly adjudication of this matter. +DLA responds that Rule 102(d)(4) does not require withdrawing counsel to offer a reason for +withdrawal and that Commission action is unnecessary to make its withdrawal effective. +In our view, a notice of withdrawal that complies with the technical requirements of Rule +102(d)(4) generally is self-effectuating; no additional showing of good cause need be made. +That rule provides, among other things, that "[a]ny person seeking to withdraw his or her +appearance in a representative capacity shall file a notice of withdrawal with the Commission +. . . . The notice shall be filed at least five days before the proposed effective date of the +withdrawal." +6 We reject the Division's contention that italicized language of the rule—i.e., +"seeking" and "proposed"—implicitly confers upon us the discretion to strike (or otherwise to +reject) a notice of withdrawal whenever we deem appropriate. As a countervailing textual + +5 The document management system footer of Dahua's March 20 notice of appearance has +some similarities in formatting to that of DLA's February 21 notice of withdrawal (and filings by +DLA in other proceedings). We do not draw any further conclusions, but we note that the +nondisclosure of attorney participation in the preparation of a filing might raise serious concerns. +Among other things, it could permit lawyers to evade the certifications required by Rule 153, 17 +C.F.R. § 201.153. See, e.g., Duran v. Carris, 238 F.3d 1268, 1273-74 (10th Cir. 2001) (per +curiam); Ellis v. Maine, 448 F.2d 1325, 1328 (1st Cir. 1971). +6 17 C.F.R. § 201.102(d)(4) (emphasis added). +3 + +matter, the rule's consistent use of the word "notice" (as opposed to "motion") is a strong +indication that a notice of withdrawal neither seeks nor requires Commission approval.7 +Furthermore, we specifically revised Rule 102(d)(4) in 2004 to remove the prior requirement that +counsel file a motion to withdraw. Our commentary accompanying the revisions makes clear +that the need for Commission action to make withdrawal effective was "eliminate[d]" and that +"only" notice was required.8 For these reasons, we conclude a notice of withdrawal properly +filed and served in accordance with Rule 102(d)(4) is effective without a showing of good cause. +This conclusion does not, however, dispose of the Division's motion to strike. Standing +alone, the February 21 notice was deficient because it did not formally apprise an individual +authorized to act for Dahua of DLA's intent to withdraw its appearance on Dahua's behalf. +Nonetheless, as we also shall explain, under the circumstances of this case—and relying on +Dahua's representations as set forth in its March 20 notice of appearance—we find it unnecessary +to grant the Division's motion to strike and, accordingly, have determined to deny it. +B. DLA's notice of withdrawal was deficient because it was not properly served +on Dahua +The February 21 notice of withdrawal does not comply with Rule 102(d)(4) because it +does not reflect that it was served on anyone at Dahua, let alone someone with authority to +appear for Dahua under Rule 102(b). Rule 102(d)(4) requires that a notice of withdrawal "be +served on the parties." +9 This requirement ensures "timely notice to both the Commission and the +parties of the withdrawal."10 The "parties" include "any person named as a respondent," +necessarily embracing the respondent for which counsel entered an appearance.11 In other +words, we require that an attorney who wishes to withdraw his or her appearance serve the notice +of withdrawal on the attorney's own client—here, Dahua. + +7 See, e.g., United States v. Harris, 491 F.3d 440, 444 (D.C. Cir. 2007) (contrasting a +"notice" with a "motion," which "means '[a]n application made to a court or judge'"). +8 Adopting Release, Exchange Act Release No. 49412, 2004 WL 503739, at *8 (Mar. 12, +2004), 69 Fed. Reg. 13166, 13169 (Mar. 19, 2004); see also Proposed Rule, Exchange Act +Release No. 48832, 2003 WL 22827684, at *8 (Nov. 23, 2003), 68 Fed. Reg. 68186, 68189 +(Dec. 5, 2003) (explaining that the filing of a notice of withdrawal "does not require agency +action but informs the agency and parties of counsel's withdrawal"). +9 17 C.F.R. § 201.102(d)(4). +10 Proposed Rule, 2003 WL 22827684, at *8, 68 Fed. Reg. at 68189. +11 Rule 101(a)(8), 17 C.F.R. § 201.101(a)(8) (emphasis added). By assumption, counsel +filing the notice of withdrawal desires to discontinue representing the respondent; in this context, +it would be an empty gesture if counsel seeking to withdraw merely notified itself. +4 + +When the respondent is an artificial entity (such as Dahua), it has no physical form and +can act only through its individual agents.12 A responsible individual at the client must be +formally apprised that the attorney no longer intends to act in a representative capacity. +Necessarily, the individual so notified must be someone who is authorized by our Rules of +Practice to step in and act for the client in the proceeding: It should be plain that the lawyer +could not, for example, simply inform a parking lot attendant at the corporation of the +withdrawal. Our requirement runs in tandem with an attorney's professional responsibilities, +which require that a withdrawing lawyer provide reasonable notice to the client so that the client +can look after its own interests.13 A partnership can be represented in our proceedings—and +therefore can protect its interests in that proceeding—only through an attorney or a "member."14 +The February 21 notice did not on its face comply with Rule 102(d)(4)'s service requirement and +so was deficient under that rule.15 +The present situation brings into sharp relief why adherence to this service requirement +protects the integrity of our administrative proceedings and promotes their just and orderly +determination. The Division's petition for review, filed more than a week before the February 21 +notice of withdrawal, explicitly seeks to increase the discipline imposed on Dahua. It argues that +the Commission should enter an order barring Dahua from serving as a principal auditor and +issuing audit opinions and barring Dahua from playing a 50% or greater role in the preparation or +furnishing of an audit report filed with the Commission. Additionally, we might on our own +initiative raise and determine any issues found to be material in the course of our review.16 +Furthermore, portions of the record—e.g., material containing commercially sensitive, +proprietary information or sensitive inter-governmental communications—have been designated +"OUTSIDE COUNSEL'S EYES ONLY," and so cannot, by the terms of the stipulated protective + +12 See, e.g., Daimler AG v. Bauman, 134 S. Ct. 746, 759 n.13 (2014); Bus. Guides, Inc. v. +Chromatic Commc'ns, 498 U.S. 533, 548 (1991). +13 E.g., D.C. R. Prof'l Conduct R. 1.16(d) ("In connection with any termination of +representation, a lawyer shall take timely steps to the extent reasonably practicable to protect a +client's interests, such as giving reasonable notice to the client . . . ."); N.Y. Code Prof'l +Responsibility DR 2-110(A)(2) ("A lawyer shall not withdraw from employment until the lawyer +has taken steps to the extent reasonably practicable to avoid foreseeable prejudice to the rights of +the client, including giving due notice to the client . . . ."). +14 Rule 102(b), 17 C.F.R. § 201.102(b). +15 We note also that the February 21 notice identified the respondent merely as "Dahua +CPA, Ltd., 12th Floor, 7th Building, No. 16 Xi Si Huan Zhong Road, HaiDan District, Beijing, +China 100039 (attn.: Gaolei Li, Executive Assistant to Managing Partner, tel. +86 10 5835 0046, +ligaolei@dahuacpfi.com)." It is not apparent that Li, whose title is given as an "Executive +Assistant to Managing Partner," would be authorized to appear on behalf of Dahua. +16 Rule 411(d), 17 C.F.R. § 201.411(d). +5 + +order, be reviewed directly by any respondent.17 The same would be true of any briefs filed in +the proceeding that cite or reference such material. And of course, we expect even unrepresented +parties to comply with our rules, to file all required papers, and to comply with all orders: +"Parties, including those appearing pro se, are obligated to familiarize themselves with the Rules +of Practice."18 Failure to make a required filing may result in the imposition of sanctions, which +may include the entry of a default, the making of an adverse finding as to particular matters, or +the determination of the proceeding on the basis of the other side's evidence or briefing.19 +These circumstances illustrate why we have an interest in being assured that when an +attorney seeks to withdraw, he or she has properly informed someone authorized to act for the +client that the client thereafter must represent itself or obtain substitute counsel.20 Indeed, our +Rules of Practice anticipate that when an attorney does withdraw, the respondent immediately +will "keep current" its notice of appearance to designate a new individual authorized to represent +the entity under Rule 102(b).21 We insist that parties "keep the information contained in the + +17 It is undisputed that the stipulated protective order continues to bind DLA and Dahua. +The Commission retains jurisdiction to ensure that obligations thereunder are, and will continue +to be, appropriately discharged. See Rule 102(e)(1)(ii), 17 C.F.R. § 201.102(e)(1)(ii); D.C. R. +Prof'l Conduct R. 3.4(c). +18 Adopting Release, Rules of Practice, Exchange Act Release No. 35833, 1995 WL +368865, at *36 (June 9, 1995), 60 Fed. Reg. 32738, 32754 (June 23, 1995). +19 Rule 180(c) & cmt. (c), 17 C.F.R. § 201.180(c). +20 Cf. D.C. R. Prof'l Conduct R. 1.16(b) (providing that a lawyer ordinarily may withdraw +only if doing so "can be accomplished without material adverse effect" on the client's interests). +Nothing herein should be understood as receding from our oft-stated views that the "Commission +does not have a general obligation to ensure the competence or suitability of . . . representation," +Kevin Hall, CPA, Exchange Act Release No. 61162, 2009 WL 4809215, at *21 (Dec. 14, 2009), +and that respondents do not have a statutory or constitutional right to appointment of counsel in +our administrative proceedings, Demitrios Julius Shiva, Exchange Act Release No. 38389, 1997 +WL 112328, at *3 n.14 (Mar. 12, 1997). We may choose in appropriate circumstances to +exercise our authority to require compliance with our rules and to protect the integrity of our +processes, but we do not thereby assume the responsibility in every case to superintend the +relationship between respondents and their attorneys. See, e.g., Tamenut v. Mukasey, 521 F.3d +1000, 1005 (8th Cir. 2008) (en banc) (explaining "the mere fact that the [the agency] has +acknowledged the existence of its authority to [act] sua sponte in what it deems to be +'exceptional situations' is not sufficient to establish" when "the [agency] is required to [act] on its +own motion") (emphasis in original). +21 Rule 102(d)(2), 17 C.F.R. § 201.102(d)(2) (requiring parties to "file with the +Commission" and "keep current" contact information). +6 + +notice . . . up-to-date" to ensure the "expeditious service of orders as well as other efforts to +contact a party."22 +C. It is unnecessary to grant the Division's motion to strike +Although the February 21 notice of withdrawal was by itself deficient, as supplemented +by Yan's declaration attached to DLA's response and Dahua's March 20 notice of appearance, the +record now shows that Dahua has been fully apprised of DLA's withdrawal and has chosen to +represent itself. Dahua eventually did a file a notice of appearance by and through a responsible +"representative partner" with current contact information. Relying on that fact—as well as +accepting Dahua's representations in its March 20 notice—we deny the Division's motion to +strike DLA's notice of withdrawal. We direct that Dahua be served by email as well as by mail +to ensure that it expeditiously receives orders, decisions, and other papers. +* * * +By separate order, we granted the Division's petition for review of the law judge's initial +decision; in that order, we also determined, on our own initiative, to review what sanctions, if +any, are appropriate in this matter.23 Accordingly, IT IS ORDERED, pursuant to Rule 450(a), +that the Division and Dahua shall file briefs as follows:24 + +Opening brief: The Division shall file an opening brief, not to +exceed 5,000 words, by June 23, 2014. The brief shall be limited +to the scope of remedies imposed on Dahua. + +Response brief: Dahua shall file a response brief, not to exceed +5,000 words, by August 7, 2014. The brief shall be limited to +responding to the Division's opening brief. + +Because Dahua did not file a petition for review or a cross-petition for review, it is not +entitled to challenge any of the findings or conclusions made by the law judge.25 As provided by +Rule 450(a), no briefs in addition to those specified in this schedule may be filed without leave + +22 Adopting Release, 1995 WL 368865, at *21, 60 Fed. Reg. at 32747; id. at *28, 60 Fed. +Reg. at 32750 ("The notice [of appearance] will provide an address of record where the party can +be served with subsequent orders."). +23 That order is being issued concurrently with this one. +24 17 C.F.R. § 201.450(a). +25 Rule 410(b), 17 C.F.R. § 201.410(b); Jacob Wonsover, Exchange Act Release No. 41123, +1999 WL 100935, at *11 & n.63 (Mar. 1, 1999); cf. El Paso Natural Gas Co. v. Neztsosie, 526 +U.S. 473, 479 (1999) (explaining the "firmly entrenched rule" that, "[a]bsent a cross-appeal, an +appellee . . . may not attack the decree with a view either to enlarging his own rights thereunder +or of lessening the rights of his adversary") (quotation marks omitted). +7 + +of the Commission.26 Pursuant to Rule 180(c), failure by the Division to file a brief in support of +the petition may result in dismissal of this review proceeding.27 Failure by Dahua to file a +response brief may result in determination of the proceeding as to Dahua on the basis of only the +opening brief and the Commission's consideration of the record or such other sanction as the +Commission finds appropriate under Rule 180(c). +28 + +We remind the parties that two versions of each document containing information subject +to the stipulated protective order must be filed: (1) a complete version of the document marked +"CONFIDENTIAL" for filing under seal and (2) a redacted version of the same document for the +public file. + +By the Commission. + + + Lynn M. Powalski + Deputy Secretary + +26 Attention also is called to Rules 150-153, 17 C.F.R. §§ 201.150-153, with respect to form +and service, and Rule 450(b) and (c), 17 C.F.R. §§ 201.450(b), 201.450(c), with respect to +content and length limitations (except as modified in this order). Requests for extensions of time +to file briefs or for additional words are disfavored. +27 17 C.F.R. § 201.180(c). +28 Id.; see also Casco Indem. Co. v. R.I. Interlocal Risk Mgmt. Trust, 113 F.3d 2, 3-4 (1st +Cir. 1997); United States v. Everett, 700 F.2d 900, 902-03 n.5 (3d Cir. 1983). \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3553.txt b/raw/aaer/2014/AAER-3553.txt new file mode 100644 index 0000000000000000000000000000000000000000..cde540f91050dba35dfa557d2a23adb44ff85492 --- /dev/null +++ b/raw/aaer/2014/AAER-3553.txt @@ -0,0 +1,299 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72140 / May 9, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3553 / May 9, 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 +ADDUCE ADDITIONAL +EVIDENCE AND GRANTING THE +PETITIONS FOR REVIEW + + +These administrative proceedings, instituted pursuant to Rule of Practice 102(e)(1)(iii), +center on 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 (Dodd-Frank +Act).1 Four of the five respondents, Ernst & Young Hua Ming LLP (E&Y), KPMG Huazhen +(Special General Partnership) (KPMG), Deloitte Touche Tohmatsu Certified Public Accountants +Ltd. (DTTC), and PricewaterhouseCoopers Zhong Tian CPAs Limited (PwC), have petitioned +for review of the initial decision issued by the law judge on January 22, 2014.2 The Division of +Enforcement (Division) has filed a petition for review as to the scope of the remedies imposed by +the initial decision. In addition, the same four respondents also filed a motion for leave to +adduce additional evidence. The Division opposes this motion and, in the alternative, seeks +leave to adduce its own additional evidence. We have determined to grant the motions to adduce +additional evidence and the petitions for review. + +1 15 U.S.C. § 7216(b)(1); 17 C.F.R. § 201.102(e)(1)(iii). +2 BDO China Dahua CPA Co., Initial Decision Release No. 553, 2014 WL 242879 (Jan. +22, 2014). The remaining respondent, BDO China Dahua CPA Co., Ltd., did not file a petition +for review. Its counsel, DLA Piper LLP, filed a notice of withdrawal of appearance, which the +Division has moved to strike. These matters will be addressed by a separate order, which is +being issued concurrently with this one. +2 + +BACKGROUND +A. The orders instituting proceedings +We issued the orders instituting proceedings in May 2012 and December 2012 and +consolidated them for hearing.3 The OIPs alleged that each respondent is a foreign public +accounting firm located in China and, within China, supervised and regulated by, inter alia, the +China Securities Regulatory Commission (CSRC). Respondents performed audit work for ten +clients—DTTC Client A and Clients A through I—based in China. The Division had or has +ongoing fraud investigations concerning those clients, each of which is a U.S. issuer whose +securities were registered with the Commission. +According to the OIPs, at various times between March 2011 and April 2012, the +Division served requests for audit work papers pertaining to those clients on respondents through +respondents' designated U.S. agents. These requests were made pursuant to Section 106(b) of +the Sarbanes-Oxley Act, which provides that a foreign accounting firm that, among other things, +"issues an audit report, performs audit work, or conducts interim reviews" is required to "produce +the audit work papers . . . and all other documents of the firm related to any such audit work or +interim review to the Commission . . . , upon request of the Commission."4 The OIPs alleged +that each respondent, after receiving the Commission's requests, informed the staff that it would +not produce the documents on the ground that it interpreted Chinese law as preventing firms +from giving audit work papers directly to U.S. regulators. As of the issuance of the OIPs, the +Commission did not have possession of any of the requested work papers. +The OIPs alleged that respondents violated Section 106(e), which provides that a "willful +refusal" of an accounting firm to "comply, in whole or in part, with any request by the +Commission . . . shall be deemed a violation" of the Sarbanes-Oxley Act.5 The Division sought +to impose remedies under Rule of Practice 102, which provides 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 by the Commission" to have "willfully violated . . . any +provision of the Federal securities laws."6 + +3 Deloitte Touche Tohmatsu Certified Pub. Accountants Ltd., Exchange Act Release No. +66948, 2012 WL 1612081 (May 9, 2012); BDO China Dahua CPA Co., Exchange Act Release +No. 68335, 2012 WL 5994345 (Dec. 3, 2012). +4 15 U.S.C. § 7216(b)(1). Unless otherwise specified, all references to statutory sections +will be to the Sarbanes-Oxley Act, as amended by Section 929J of the Dodd-Frank Act. +5 Id. § 7216(e). A violation of the Sarbanes-Oxley Act is "treated for all purposes in the +same manner as a violation" of the Securities Exchange Act of 1934. Id. § 7202(b)(1). +6 17 C.F.R. § 201.102. +3 + +B. The law judge's initial decision +Before the law judge, respondents argued that they did not "willfully refuse" to comply +with the Commission's requests and that they acted in good faith. They claimed that they were +willing to produce the requested work papers, but that Chinese law prevented them from doing +so directly. They argued that they had offered to provide the CSRC with the documents and +believed that the Commission would be able to obtain them after discussions with the CSRC. +After hearing testimony, the law judge issued an initial decision finding that respondents had +willfully violated Section 106 and imposing remedies pursuant to Rule 102(e). +In large part, the law judge credited respondents' assertion that their refusal to produce +the work papers was "driven by their concerns over potentially draconian Chinese law."7 But he +concluded that, as a matter of law, the motive for respondents' refusal was immaterial to whether +they had "willfully refused" to comply with the Commission's requests within the meaning of +Section 106(e).8 According to the initial decision, "'willful refusal to comply' means 'choosing +not to act after receiving notice that action was requested,' without regard to good faith."9 +Next, the initial decision rejected respondents' reliance on Section 106(f), which provides +that "the staff of the Commission . . . may allow a foreign public accounting firm . . . to meet +production obligations . . . through alternate means, such as through foreign counterparts of the +Commission."10 Respondents argued that the Commission had tried to obtain the work papers +for certain clients through the CSRC, and therefore could not sanction them for refusing to +directly produce the work papers. The law judge disagreed. He concluded that Section 106 +authorized the Commission to pursue "multiple possible avenues for obtaining documents" and +that "[n]othing compels the Commission to use one avenue rather than another."11 +Turning to the issue of remedies, the initial decision denied, for a period of six months, +the privilege of practicing or appearing before the Commission to the four appealing +respondents; it also censured respondent Dahua. The law judge determined, among other things, +that remedial measures were warranted on the ground that "future violations [were] virtually +certain because Respondents consider themselves unable to produce audit work papers directly to +the Commission even under any future Sarbanes-Oxley 106 request."12 +Finally, the law judge denied respondents' post-hearing motion to supplement the record +with exhibits showing, in respondents' view, that the Commission can feasibly obtain work + +7 BDO China Dahua CPA Co., 2014 WL 242879, at *80. +8 Id. at *70. +9 Id. at *64. +10 15 U.S.C. § 7216(f). +11 BDO China Dahua CPA Co., 2014 WL 242879, at *76. +12 Id. at *78. +4 + +papers through the CSRC. According to respondents, several sets of work papers have already +been turned over to the Commission and substantial progress has been made with respect to the +remainder. The law judge stated that the evidence, which respondents sought to add after the +close of the record, was "potentially exculpatory."13 But he found that there was "no good cause +to reopen the record" because the "probative value" of the evidence was "unclear" and because +he could not "evaluate the relevance and weight of such evidence without hearing from live +witnesses."14 He believed that the "better approach" was for respondents "to petition the +Commission to adduce additional evidence" when the matter was appealed.15 +DISCUSSION +We have determined to grant respondents' motion for leave to adduce additional +evidence, the Division's cross-motion in the alternative for leave to adduce other additional +evidence, and the petitions for review. +A. The motion and cross-motion for leave to adduce additional evidence +Respondents seek leave to adduce the exhibits that the law judge declined to admit, as +well as several other documents reflecting subsequent production activity through the CSRC +("Respondents' Additional Evidence").16 They argue that the evidence proves that their +production obligations as to many of the requested work papers have already "been satisfied +under Section 106(f)." They also argue that it demonstrates that the "CSRC is an alternative +means of production," which both vindicates respondents' good faith and makes the Section 106 +requests unenforceable. Respondents further contend that their additional evidence "undermines +the sanction proposed by the Initial Decision" by showing that the Commission will be able to +obtain work papers through the CSRC in the future. +The Division opposes respondents' motion on the ground that Respondents' Additional +Evidence is not, in the Division's view, material. According to the Division, that evidence +merely "support[s] legal theories that the Initial Decision and other [law judge] rulings properly +rejected." It argues that the evidence has "no bearing" on whether respondents violated Section +106(e) or the remedial measures to be imposed under Rule 102 because the "Initial Decision +rejected all of respondents' legal arguments that could conceivably make [Respondents'] +Additional Evidence relevant." Finally, and in the alternative, the Division cross-moves for + +13 Id. at *83. +14 Id. +15 Id. +16 Respondents' Additional Evidence consists of proposed Exhibits 654 through 677. +5 + +leave to adduce its own evidence (the "Division's Additional Evidence") that provides context as +to the extent, completeness, and timeliness of the productions through the CSRC.17 +We have determined to grant respondents' motion and the Division's cross-motion. Rule +of Practice 452 permits a party to submit additional evidence "at any time prior to issuance of a +decision by the Commission" as long as the party can "show with particularity" (1) that such +additional evidence is material" and (2) "that there were reasonable grounds for failure to adduce +such evidence previously."18 Each of these elements is satisfied here. +We find that the materiality element of Rule 452 is satisfied at this juncture of the +proceedings. We appreciate that the parties fundamentally disagree as the correct construction of +Section 106 and as to the inferences that should be drawn from the proffered evidence. At +bottom, the Division's opposition is premised on the immateriality of the evidence in light of the +Division's own reading of Section 106. In other words, the Division argues that the evidence +could not possibly make a difference under its theory of the case, which prevailed before the law +judge. We are unwilling to deny respondents' motion on this basis, as doing so would be +tantamount to summarily affirming the initial decision.19 Instead, we will defer assessment of +the probative value that should ultimately be afforded the additional evidence until we have +received the benefit of full briefing and argument, reviewed the record in its entirety, and +resolved the merits of the petitions for review.20 Like any other ruling on admissibility, our +ruling in this regard is by nature subject to revision until issuance of a final decision.21 +It is undisputed that Rule 452's timeliness element is satisfied, and we so find. The +developments relating to productions through the CSRC did not take place until after the close of + +17 The Division's Additional Evidence consists of proposed Exhibits 359 through 375. +Respondents do not oppose the cross-motion to adduce the Division's Additional Evidence. +18 17 C.F.R. § 201.452. +19 Cf. Rule 411(e)(2), 17 C.F.R. § 201.411(e)(2) ("The Commission may grant summary +affirmance if it finds that no issue raised in the initial decision warrants consideration by the +Commission of further oral or written argument."). +20 Put another way, we will take into consideration the additional evidence, but we do not in +so doing commit ourselves to giving it any particular—or, indeed, any—weight in exculpation or +mitigation. See generally Morris v. Sec'y, Dep't of Corr., 677 F.3d 1117, 1131 (11th Cir. 2012); +Time Warner Entm't Co., L.P. v. FCC, 56 F.3d 151, 175 (D.C. Cir. 1995). +21 optionsXpress, Inc., Exchange Act Release No. 70698, 2013 WL 5635987, at *3 & n.12 +(Oct. 16, 2013). As respondents correctly recognize, the "Commission can resolve the exact +legal import" of the additional evidence "in the course of [the] appeal." +6 + +the hearing and the evidence, which reflects those developments, was unavailable earlier.22 We +find that there are "reasonable grounds for failure to adduce" the evidence earlier. +For the above reasons, we have determined that the requirements of Rule 452 are +satisfied as to Respondents' Additional Evidence and the Division's Additional Evidence. +Accordingly, it is ORDERED that respondents' motion to adduce additional evidence and the +Division's cross-motion to adduce additional evidence are GRANTED. Respondents' Additional +Evidence and the Division's Additional Evidence are hereby received into the record. + B. The petitions for review +We turn next to the parties' petitions for review. Upon due consideration, and pursuant to +Rule of Practice 411, the petitions for review of the law judge's initial decision are GRANTED.23 +Pursuant to Rule of Practice 411(d), the Commission also will determine what sanctions, if any, +are appropriate in this matter.24 + +We designate respondents as the side that will file the opening brief.25 Accordingly, IT +IS ORDERED, pursuant to Rule of Practice 450(a), that briefs shall be filed as follows:26 + +Respondents' opening brief: E&Y, KMPG, DTTC, and PwC shall +file a single consolidated brief, not to exceed 28,000 words, by +June 23, 2014. + +Division's principal and response brief: The Division shall file a +brief, not to exceed 28,000 words, by August 7, 2014. This brief +must address the issues presented by the Division's petition for +review and respond to respondents' opening brief. + + + + + +22 E.g., Citizens Capital Corp., Exchange Act Release No. 67313, 2012 WL 2499350, at *8 +(June 29, 2012); Vladlen Larry Vindman, Exchange Act Release No. 53654, 2006 WL 985308, +at *9 n.51 (Apr. 14, 2006). +23 17 C.F.R. § 201.411. +24 17 C.F.R. § 201.411(d). +25 Adopting Release, Rules of Practice, Exchange Act Release No. 35833, 1995 WL +368865, at *91 (June 9, 1995), 60 Fed. Reg. 32738, 32778 (June 23, 1995). +26 17 C.F.R. § 201.450(a). +7 + +Respondents' response and reply brief: E&Y, KMPG, DTTC, and +PwC shall file a single consolidated brief, not to exceed 16,000 +words, by August 27, 2014. + +Division's reply brief: The Division may file a reply brief, not to +exceed 2,000 words, by September 8, 2014. This brief must be +limited to the issues presented by the Division's petition for review. + +By separate order, the Commission shall provide for briefing on the Division's petition +for review insofar as it seeks to challenge the scope of remedies imposed on Dahua.27 As +provided by Rule of Practice 450(a), no briefs in addition to those specified in this schedule may +be filed without leave of the Commission.28 Pursuant to Rule of Practice 180(c), failure to file a +brief in support of the petition may result in dismissal of this review proceeding.29 + +It is further ORDERED that the parties shall confer and prepare an appendix that +reproduces without argument or commentary the foreign law materials in the record upon which +they rely (including any applicable orders, regulations, directives, or letters), along with +translations of any document in a foreign language.30 The materials shall be set out in +chronological order by date of issuance or promulgation and must be consecutively paginated to +facilitate citation to the appendix in the parties' briefs. The appendix must contain a table of +contents describing each item included, the original location of that item in the record, and the +page of the appendix on which it begins. Respondents shall file and serve the appendix at the +same time that they file and serve their opening brief. + +Finally, it is ORDERED that the Stipulated Protective Order entered by the law judge on +May 9, 2013, as modified by the Joint Stipulation and Amendment to Stipulated Protective Order +entered July 29, 2013, shall remain in effect. Two versions of each document containing +information subject to the protective order must be filed: (1) a complete version of the document +marked "CONFIDENTIAL" for filing under seal and (2) a redacted version of the same +document for the public file. The Commission reserves the authority to reach a different + +27 See supra note 2. +28 Attention also is called to Rules of Practice 150-153, 17 C.F.R. §§ 201.150-153, with +respect to form and service, and Rule of Practice 450(b) and (c), 17 C.F.R. §§ 201.450(b), +201.450(c), with respect to content and length limitations (except as modified in this order). +Requests for extensions of time to file briefs or for additional words are disfavored. +29 17 C.F.R. § 201.180(c). +30 Where an agreed translation is unavailable, each party shall submit its own preferred +version along with any applicable translator's certificate. See, e.g., Pittway Corp. v. United +States, 88 F.3d 501, 503 n.1 (7th Cir. 1996). +8 + +conclusion regarding the confidentiality of the information covered by the May 9 and July 29 +orders at any time before it finally determines the issues raised in this proceeding.31 + +By the Commission. + + + Lynn M. Powalski + Deputy Secretary + + + +31 See, e.g., Kevin Hall, Exchange Act Release No. 60346, 2009 WL 2149222, at *2 (July +20, 2009). \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3554.pdf b/raw/aaer/2014/AAER-3554.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5bfda60f7e12e8954aefa905e1eda4f47557ed41 Binary files /dev/null and b/raw/aaer/2014/AAER-3554.pdf differ diff --git a/raw/aaer/2014/AAER-3554.txt b/raw/aaer/2014/AAER-3554.txt new file mode 100644 index 0000000000000000000000000000000000000000..ddb485942fc4a132a62d5c16de72c0bc0cce3833 --- /dev/null +++ b/raw/aaer/2014/AAER-3554.txt @@ -0,0 +1,315 @@ +UNITED STATES OF AMERICA +Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72198 / May 20, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3554 / May 20, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15876 + + +In the Matter of + +JAMES T. ADAMS, CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- +AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND +21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND +RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND- +DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate +that public administrative and cease-and-desist proceedings be, and hereby are, instituted +against James T. Adams, CPA (“Respondent” or “Adams”), 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. + +1 Section 4C(a)(2) provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +to have engaged in unethical or improper professional conduct. + +2 Rule 102(e)(1)(ii) provides, in relevant 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 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 +3 that: + +A. SUMMARY + +This matter involves issues of auditor independence and improper professional +conduct arising from the repeated acceptance of tens of thousands of dollars in casino +markers by James T. Adams, CPA in 2009 from a casino gaming issuer (“Casino Gaming +Issuer”). At the time, Adams was the Chief Risk Officer of Deloitte LLP and a partner of +Deloitte & Touche LLP (“D&T”). The Casino Gaming Issuer was an attest client of +D&T, and from January 20, 2009 until January 13, 2010, Adams served as the advisory +partner on D&T’s audit engagements for that issuer. During the audit and professional +engagement period for D&T’s audit of the Casino Gaming Issuer’s financial statements +for its fiscal year ended December 31, 2009, Adams sought and received casino markers +from a casino of the Casino Gaming Issuer. The transactions by which Adams received +the casino markers were prohibited “loans” under Rule 2-01(c)(1)(ii) of Regulation S-X. +These loans impaired D&T’s independence with regard to its audit client. Through his +actions, Adams caused D&T to violate Rule 2-02(b)(1) of Regulation S-X and caused the +Casino Gaming Issuer to violate Section 13(a) of the Exchange Act and Rule 13a-1 +promulgated thereunder. + +B. RESPONDENT + + Adams was the Chief Risk Officer of Deloitte LLP (“Deloitte”) from September +2005 through May 29, 2010. Additionally, Adams was a partner of D&T, a Deloitte +subsidiary, from June 1985 through May 29, 2010. Adams worked for Deloitte and/or +D&T and their predecessor entities from June 1974 until he retired in May 2010. Adams, + +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 +age 62, resides in California. He obtained a license as a Certified Public Accountant +(“CPA”) in Georgia in November 1974 and in California in September 2002. At the time +of his actions discussed herein, Adams was a licensed CPA in the States of Georgia and +California. His licenses are currently inactive. + + C. RELEVANT ENTITIES + + 1. Deloitte is a Delaware limited liability partnership. It is the U.S. member +firm of Deloitte Touche Tohmatsu Limited, a U.K. private company limited by guarantee. +Deloitte has four main subsidiaries – D&T, Deloitte Tax LLP, Deloitte Consulting LLP, +and Deloitte Financial Advisory Services LLP – that provide audit and enterprise risk +services, tax, consulting, and financial advisory services, respectively. Deloitte does not +provide client services; services are performed by the subsidiaries. + +2. D&T is a Delaware limited liability partnership. It is a subsidiary of +Deloitte that provides audit and other attest services and enterprise risk services to clients. +D&T is registered with the Public Company Accounting Oversight Board (“PCAOB”). At +all relevant times, D&T provided auditing and other services to a variety of casino +entertainment and hospitality companies, including companies whose securities are +registered with the Commission and trade on the U.S. markets. + +3. Casino Gaming Issuer is incorporated in Delaware and is a casino +entertainment and hospitality provider. At all times relevant to these proceedings, Casino +Gaming Issuer was an attest client of D&T. At the time of Adams’ conduct described +herein, the common stock of the Casino Gaming Issuer was registered with the +Commission pursuant to Section 12(g) of the Exchange Act, and the issuer filed periodic +reports with the Commission pursuant to Section 13 of the Exchange Act. + +D. FACTS + +1. From January 20, 2009 until January 13, 2010, Adams served as the +advisory partner on D&T’s attest engagements of Casino Gaming Issuer. He worked on +the firm’s audits of the issuer’s financial statements for its fiscal years ended December 31, +2008 and December 31, 2009. An advisory partner is a senior partner who is part of the +audit engagement team. As the advisory partner on the Casino Gaming Issuer audit +engagements, Adams primarily served as a liaison between D&T and the issuer’s +management and audit committee. + +2. Adams had regular contact with Casino Gaming Issuer’s management and +the audit committee of its board of directors. Adams was invited to, and attended, certain +of the issuer’s audit committee meetings and participated in audit committee conference +calls and the review of audit committee materials. + +3. While Adams was serving as the advisory partner on D&T’s 2009 Casino +Gaming Issuer audit, he sought and received casino markers from a casino operated by the +issuer. He visited the casino at least five times during this period and signed a number of + 4 +casino “markers.” A casino marker is an instrument utilized by a casino customer to +receive gaming chips drawn against the customer’s line of credit at the casino. Adams had +opened a line of credit with the casino on June 9, 2004 and increased that line of credit +from $100,000 to $110,000 on December 16, 2009. + +4. Adams drew down his line of credit by using markers at the Casino +Gaming Issuer’s casino while he was the advisory partner for D&T’s Casino Gaming +Issuer 2009 audit engagement. Specifically, on July 29, 2009, Adams drew markers, +$85,000 of which remained outstanding for a period of 43 days. On September 15, 2009, +he drew markers, $3,000 of which remained outstanding for a period of 13 days and +$70,000 of which remained outstanding for a period of 27 days. On October 13, 2009, +Adams drew markers, $110,000 of which remained outstanding for a period of 38 days. +On December 8, 2009, he drew markers, $100,000 of which remained outstanding for +seven days. On December 16, 2009, Adams drew markers, $110,000 of which remained +outstanding. + +5. On January 13, 2010, D&T removed Adams from the Casino Gaming +Issuer 2009 audit engagement, for reasons that were not based on his use of casino +markers. Adams subsequently defaulted on the $110,000 of outstanding markers that he +drew on December 16, 2009. + +6. Adams concealed from D&T the fact that he had drawn casino markers +from Casino Gaming Issuer and in fact lied to a D&T partner when he was asked +generally if he had casino markers from attest clients of the firm. Accordingly, at the +time that Adams retired, D&T was not aware of his casino markers from Casino Gaming +Issuer. + + 7. On March 9, 2010, Casino Gaming Issuer filed its annual Report on Form +10-K for its fiscal year ended December 31, 2009. The annual report included a D&T +audit report that stated that its audit of the financial statements of Casino Gaming Issuer +had been conducted in accordance with the standards of the PCAOB. Because of Adams’ +conduct described above, that statement was incorrect. + + 8. Adams retired from D&T on May 29, 2010. + +E. LEGAL ANALYSIS + +Basic Principles + 1. “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). + + 2. 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 + 5 +accountant is not, capable of exercising objective and impartial judgment on all issues +encompassed within the accountant’s engagement.” Rule 2-01(b) of Regulation S-X. + +3. “In considering this standard, the Commission looks in the first instance to +whether a relationship or the provision of a service: creates a mutual or conflicting +interest between the accountant and the audit client . . . .” Preliminary Note to Rule 2-01 +of Regulation S-X, ¶ 2. + +4. Rule 2-01(c) of Regulation S-X sets forth a “non-exclusive specification +of circumstances inconsistent with” the general standard. Among the listed +circumstances is “[a]ny loan . . . to or from an audit client.” Rule 2-01(c)(1)(ii)(A) of +Regulation S-X. + +Violations + +5. As a result of the conduct described above, Adams caused D&T to violate +Rule 2-02(b)(1) of Regulation S-X, which requires that an accountant’s report state +whether the audit was conducted 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. Adams knew or should have +known that his conduct would cause the firm to violate the Rule. + +6. As a result of the conduct described above, Adams caused Casino Gaming +Issuer to violate Section 13(a) of the Exchange Act and Rule 13a-1 promulgated +thereunder, which require that financial statements included in annual reports filed with +the Commission be audited by an independent accountant. Adams knew or should have +known that his conduct would cause the issuer to violate those provisions. + +7. As a result of the conduct described above, Adams engaged in improper +professional conduct, as defined by Exchange Act 4C(a)(2) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. + +F. FINDINGS + + Based on the conduct described above, Adams caused a violation of Rule 2- +02(b)(1) of Regulation S-X by D&T, caused violations of Exchange Act Section 13(a) +and Exchange Act Rule 13a-1 by Casino Gaming Issuer, and engaged in improper +professional conduct within the meaning of Exchange Act Section 4C(a)(2) and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent Adams’ Offer. + 6 + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Adams shall cease and desist from committing or causing any violations and +any future violations of Rule 2-02(b)(1) of Regulation S-X and Section 13(a) of the +Exchange Act and Rule 13a-1 promulgated thereunder. + +B. Adams is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. After two years from the date of this Order, Respondent may request +that the Commission consider 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 is +associated, is registered with the PCAOB in accordance +with the Sarbanes-Oxley Act of 2002, and such registration +continues to be effective; + + (b) Respondent, or the registered public accounting firm with +which he is associated, has been inspected by the 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 the Respondent will +not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the +PCAOB, and has complied with all terms and conditions of +any sanctions imposed by the PCAOB (other than +reinstatement by the Commission); and + + (d) Respondent acknowledges his responsibility, as long as +Respondent appears or practices before the Commission as +an independent accountant, to comply with all requirements + 7 +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 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. + + + + Jill M. Peterson + Assistant Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3555.pdf b/raw/aaer/2014/AAER-3555.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e5c4617496c4875983cc494da3b251ef72d73409 Binary files /dev/null and b/raw/aaer/2014/AAER-3555.pdf differ diff --git a/raw/aaer/2014/AAER-3556.pdf b/raw/aaer/2014/AAER-3556.pdf new file mode 100644 index 0000000000000000000000000000000000000000..568f8d355e7628dfb96bf6da80f9f4254a6f2f9c Binary files /dev/null and b/raw/aaer/2014/AAER-3556.pdf differ diff --git a/raw/aaer/2014/AAER-3556.txt b/raw/aaer/2014/AAER-3556.txt new file mode 100644 index 0000000000000000000000000000000000000000..be956b3b442a17ebb8a6d6d270c62e270e950c52 --- /dev/null +++ b/raw/aaer/2014/AAER-3556.txt @@ -0,0 +1,82 @@ + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72296 / June 2, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3556 / June 2, 2014 + +ADMINISTRATIVE PROCEEDING +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 : + : + : EXTENSION ORDER + : + + + + On May 29, 2014, Respondents Ernst & Young Hua Ming LLP, KPMG Huazhen +(Special General Partnership), Deloitte Touche Tohmatsu Certified Public Accountants, +Ltd., PricewaterhouseCoopers Zhong Tian CPAs Limited (collectively the “Big Four +Respondents”), and the Division of Enforcement (“Division”), jointly requested a 90-day +extension to the briefing schedules set by the Commission by orders dated May 9, 2014. +1 +The Division represents that Respondent BDO China Dahua CPA Co. Ltd. (“Dahua”) +agrees with the proposed extension. + + In support of their motion, the Division and the Big Four Respondents state that +the 90-day extension would facilitate the parties’ continued settlement efforts and + +1 Order Granting Leave to Adduce Additional Evidence and Granting the Petition for Review, Exchange +Act Release No. 72140, 2014 WL 1871078, at *5 (May 9, 2014); Order Denying the Division’s Motion to +Strike the Notice of Withdrawal of Appearance and Setting a Briefing Schedule , Exchange Act Release No. +72134, 2014 WL 1871077, at * 4 (May 9, 2014). +2 + +because continuing these talks while briefing the appeal would present challenges, given +the breadth, complexity, and sensitivity of the issues involved. The Division further +states that although settlement discussions to date have not included Dahua, the +resolution of some or all of the proceedings with respect to the Big Four Respondents +could affect issues regarding remedies that would be addressed by the Dahua-related +briefing. + + Extensions of time are disfavored. It appears appropriate, however, to grant the +requested extension. Therefore, + + It is ORDERED that the briefing schedule is extended as follows: + +September 19, 2014: Big Four Respondents’ consolidated opening brief; the +Division’s opening brief (as to remedies imposed on Dahua). + +November 4, 2014: Division’s principal brief and response to Big Four +Respondents’ opening brief; Dahua’s response brief to the Division’s opening +brief (as to remedies imposed by Dahua). + +November 25, 2014: Big Four Respondents’ single consolidated response and +reply brief. + +December 11, 2014: Division’s reply brief (as to the Division’s Petition for +review). + + For the Commission, by its Secretary, pursuant to delegated authority. + + + + + Lynn M. Powalski +Deputy Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3557.txt b/raw/aaer/2014/AAER-3557.txt new file mode 100644 index 0000000000000000000000000000000000000000..8fc981b9d8e9a54a938fd456b042d460b473d901 --- /dev/null +++ b/raw/aaer/2014/AAER-3557.txt @@ -0,0 +1,101 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72363 / June 11, 2014 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3557 / June 11, 2014 +ADMINISTRATIVE PROCEEDING +File No. 3-12692 + +In the Matter of +Richard R. Hylland, 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 July 16, 2007, Richard R. Hylland, CPA (“Hylland”) 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 Hylland pursuant to Rule 102(e)(3)(i) of the +Commission's Rules of Practice. +1 This order is issued in response to Hylland’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 Hylland had been permanently enjoined by a United States +District Court from future violations of Section 17(a) of the Securities Act of 1933, and Sections +10(b) and 13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 10b-5 +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-11 and 13a-13 thereunder. In its +complaint in the injunctive action, the Commission alleged, among other things, that during +2002, Hylland, in his role as president, chief operating officer and member of the board of +directors of NorthWestern Corporation (“NorthWestern”), misled investors about the operating +results and financial condition of NorthWestern and its operating segments. The Commission’s +Complaint further alleged that Respondent’s false and misleading statements facilitated more +than $800 million in securities offerings by NorthWestern in September and October 2002, +including an $87.5 million equity offering that raised badly needed operating capital for the +company. + +1 See Accounting and Auditing Enforcement Release No. 2638 dated July 16, 2007. Hylland was permitted, +pursuant to the order, to apply for reinstatement after five years upon making certain showings. + + 2 + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Hylland +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. Hylland 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, Hylland’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 Hylland, it appears that he has complied with the terms of the July 16, 2007 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 +Hylland, 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 +Richard R. Hylland, 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 + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this section may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a +hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated +by the Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3558.pdf b/raw/aaer/2014/AAER-3558.pdf new file mode 100644 index 0000000000000000000000000000000000000000..0fa669bc4254ed8a24f388fc80fb642b626e22b3 Binary files /dev/null and b/raw/aaer/2014/AAER-3558.pdf differ diff --git a/raw/aaer/2014/AAER-3559.pdf b/raw/aaer/2014/AAER-3559.pdf new file mode 100644 index 0000000000000000000000000000000000000000..3abb411c1e723fe0f7954e1d91db5d37152c8585 Binary files /dev/null and b/raw/aaer/2014/AAER-3559.pdf differ diff --git a/raw/aaer/2014/AAER-3559.txt b/raw/aaer/2014/AAER-3559.txt new file mode 100644 index 0000000000000000000000000000000000000000..cf153606f2c537a14c86f285df8ea158bf95e049 --- /dev/null +++ b/raw/aaer/2014/AAER-3559.txt @@ -0,0 +1,407 @@ +-1- + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 9605 / June 25, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72470 / June 25, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3559 / June 25, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15945 + + +In the Matter of + +THOMAS A. NEELY, JR., + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDING PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that a +cease-and-desist proceeding 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 Thomas A. Neely, Jr. (“Respondent” or “Neely”). + +II. + +After an investigation, the Division of Enforcement alleges that: + +SUMMARY + + This proceeding arises from the intentional misconduct of the Respondent while employed +by Regions Bank and its parent holding corporation, Regions Financial Corporation (“Regions”). +During the quarter ended March 31, 2009, in accordance with Regions’ policies and procedures, +personnel within Regions Bank’s Special Asset Department (“SAD”) who reported up to the +Respondent, initiated the procedures to place approximately $168 million of certain commercial +loans (the “Loans”) into non-accrual status. In March 2009, the Respondent, arbitrarily and +without supporting documentation, took intentional steps to keep the Loans in accrual status. The +deliberate misclassification under its policies prevented Regions from appropriately measuring +impairment in accordance with Generally Accepted Accounting Principles (“GAAP”). Such +-2- +deliberate misconduct by the Respondent to evade existing policies and procedures constituted a +fraudulent scheme that rendered Regions’ financial statements for the quarter ended March 31, +2009 materially misstated and not in conformity GAAP, and caused a failure by Regions to +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +the Loans were recorded as necessary to permit the preparation of financial statements in +conformity with GAAP. + + A. RESPONDENT + +1. Thomas A. Neely, Jr., 53, was formerly an Executive Vice President for Regions’ +Risk Management Credit Division, where he reported to Michael J. Willoughby. Neely also +oversaw Regions’ Risk Analytics Group and together with Jeffrey C. Kuehr functionally +controlled Regions’ SAD. Neely’s employment with Regions terminated on November 30, +2010. + + B. OTHER RELEVANT PERSONS AND ENTITY + +2. Jeffrey C. Kuehr, 50, was formerly an Executive Vice President and the head of +Regions’ SAD. During the relevant period, Kuehr reported to Willoughby who at the time was +Regions’ Chief Credit Officer (“CCO”). Kuehr’s employment with Regions terminated on +December 29, 2010. + +3. Michael J. Willoughby, 68, was formerly a Senior Executive Vice President and +Regions’ CCO. As CCO, Willoughby directly reported to Regions’ Chief Risk Officer. +Willoughby’s employment with Regions terminated on November 30, 2010. + +4. Regions Financial Corporation is a Delaware financial holding corporation +headquartered in Birmingham, Alabama. Regions conducts its banking operations through its +subsidiary Regions Bank, which is a member of the Federal Reserve System. Regions’ common +stock is registered with the Commission pursuant to Section 12(b) of the Securities Act and trades +on the New York Stock Exchange under the symbol “RF.” As of December 31, 2013, Regions had +approximately $117 billion in assets. + +C. REGIONS’ TRACKING OF NON-ACCRUAL LOANS + +5. Throughout the relevant time-period, including the quarter ended March 31, 2009, +Region’s tracked and recorded its non-performing loans (“NPLs”) as part of both internal +performance metrics and its regular financial reporting. NPLs at Regions primarily consisted of +loans in a non-accrual status.1 + +6. Regions’ policies and procedures required that loans be placed on non-accrual +status when it was determined that payment of all contractual principal and interest was in doubt, +or the loan was past due 90 days or more as to principal and interest, unless the loan was well- +secured and in the process of collection. When a loan was placed in non-accrual status, +uncollected interest that had accrued during the current year would be reversed, reducing Regions’ +interest income. In addition, placing a loan on non-accrual status served as a trigger for Regions to + +1 GAAP does not provide guidance regarding placing loans on a non-accrual status. +-3- +consider whether that specific loan was impaired and thus how to determine an allowance for loan +and lease losses in accordance with GAAP. + +7. Regions’ policies and procedures provided that the decision to place a loan in non- +accrual status was to be made by Relationship Managers (“RMs”) within SAD. RMs were +responsible for reviewing loan file details, monitoring payments and communicating with +borrowers. Under Regions’ policies and procedures, RMs had the greatest degree of knowledge +within SAD of the relevant loan status and a borrower’s ability to make payments of principal and +interest. + +8. Regions’ policies and procedures required that when RMs initiated an action to +place a loan on non-accrual status, they would submit a supporting form to their regional manager +that showed their conclusion and justified how they determined a loan should be placed in non- +accrual status. Regions’ policies and procedures then provided for the regional manager to conduct +a detailed review of the loan with the responsible RM, after which the approval was granted by the +regional manager. + +9. Once approval for non-accrual classification was granted by the regional manager, +Regions’ policies and procedures specified that any subsequent exception to classifying the loan in +non-accrual status was required to be fully documented and justified on an approved +“Recommendation to Continue Accrual Status” form and a signed “Risk Rating Change” form. + +10. Once the RM and the regional manager concluded that a loan should be classified +in non-accrual status, it was then listed by SAD managers in the Asset Quality Forecast report +(“AQF”). The AQF identified which loans had been approved by the RM and regional manager +for being placed on non-accrual status, and it forecasted charge-offs and nonperforming assets for +the quarter. + +11. The AQF was a principal forecasting tool of SAD that was prepared under the +direction of the Respondent. The AQF was discussed weekly at meetings regularly conducted and +attended by the Respondent. Neely and Willoughby also regularly utilized the AQF in +presentations to Regions’ Executive Council, which consisted of, among others, Regions’ Chief +Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), in discussing current trends in +NPLs. + +12. The SAD, under the control of Kuehr and Neely, had authority over the preparation, +content, and dissemination of the AQF. Once a loan recommended for non-accrual status by the +RMs and regional managers was included on the AQF, the responsible RMs would complete +information required for a processing list and submit it to Regions’ Risk Analytics Group. The +processing list was designed as an electronic record documenting the specific actions for individual +loans to be formally taken by Regions and reflected in Regions’ accounting systems. Neely +maintained final authority over the processing list. Following Neely’s approval, his subordinates +would submit the processing list for the identified loans to be recorded as non-accrual in Regions’ +accounting systems. + +-4- +D. NEELY’S INTENTIONAL MISCLASSIFICATION OF THE LOANS AND +EVASION OF REGIONS’ POLICIES AND PROCEDURES DURING THE +QUARTER ENDED MARCH 31, 2009 + +13. As of the beginning of March 2009, Regions’ AQF identified NPLs of +approximately $1.6 billion. Neely had discussed with Kuehr and Willoughby the then current +AQF and NPLs. The AQF and related NPLs tracking for the quarter were made available to +Regions’ CEO and CFO. + +14. On or about March 13, 2009, Kuehr, Neely and Willoughby were informed by a +subordinate that an error had resulted in an underreporting of NPLs by an amount approximating +$200 million, or 13% as reported in the AQF data made available to Regions’ CEO and CFO. + +15. In a March 17, 2009 email to Willoughby and Kuehr, Neely recommended that a +$6.8 commercial million loan be recorded as an accruing loan despite being recommended for non- +accrual status by the assigned RM and regional manager. Based on Neely’s recommendation, this +loan was not placed on the AQF or a processing list and was improperly classified by Regions as +being in accrual status as of March 31, 2009. The failure to document the justification for this +action was contrary to Regions’ policies and procedures. + +16. On or about March 18, 2009, Neely and Willoughby instructed subordinates to +take specific actions to remove from the AQF approximately $150 million of commercial loans +that had been recommended by the assigned RMs and regional managers, in accordance with +Regions’ policies and procedures, as being classified as non-accrual. Neely and Willoughby +issued such instructions to their subordinates without any documentation or justification +supporting the removal of these loans from the AQF. The failure to provide justification or +documentation violated Regions’ policies and procedures. As a result, Regions improperly +classified $168 million of the Loans as being in accrual status. Had Regions classified the +relevant loans on non-accrual status in accordance with its policies, it would have prompted a +determination that the identified loans were impaired in accordance with GAAP. That +determination would have resulted in Regions recording a higher allowance for loan and lease +losses. + +17. On or about March 23, 2009, Willoughby and Neely attended a meeting at which +they knowingly provided understated NPL data for the quarter to certain senior executives, +including Regions’ CFO. + +18. In accordance with Regions’ policies and procedures, the Loans were required to +have been classified in non-accrual status at the quarter ended March 31, 2009. Had Regions +classified the relevant loans on non-accrual status in accordance with its policies, it would have +prompted a determination that the Loans were impaired in accordance with Statement of Financial +Accounting Standard No. 114, Accounting by Creditors for Impairment of a Loan (“SFAS No. +114”).2 + +2 See SFAS No. 114, which states that “a loan is impaired when, based on current information and events, it is +probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan +agreement” and it requires lenders to measure impairment based on the present value of expected cash flows or an +observable fair value of the collateral (i.e., an appraisal) if the loan is collateral dependent. +-5- +19. In taking the undocumented and unjustified steps above, Neely intentionally +circumvented Regions’ policies and procedures regarding the classification of loans into non- +accrual status. Neely’s intentional scheme directly resulted in the improper classification of the +Loans pursuant to Regions’ policies, and further prevented Regions’ from appropriately +determining those Loans were impaired in accordance with GAAP at the quarter ended March 31, +2009. + +E. INTENTIONAL MISCLASSIFICATION OF LOANS HELD FOR SALE + +20. As part of his responsibilities at Regions, Neely had final approval to accept bids +for loan sales. On or about March 16, 2009, Neely contacted a third-party in an effort to sell a +$24.7 million commercial loan (the “Shopped Loan”), which was one of the Loans. A potential +buyer immediately responded to Neely’s solicitation, offering to buy the Shopped Loan for +between 35 and 50 cents-on-the-dollar. Neely responded to the buyer that the offer was not +sufficient. Neely responded to the potential buyer that Regions was looking for a price closer to +65 to 70 cents-on-the-dollar for the Shopped Loan, and asked the potential buyer to reconsider +the recent offer to Regions. + +21. On or about March 20, 2009, the potential buyer indicated that Neely’s requested +sale price for the Shopped Loan was too high. + +22. On or about April 6, 2009, the potential buyer submitted an additional offer to +purchase the Shopped Loan for 58.5% of the loan value. + +23. On or about June 23, 2009, Regions, at Neely’s direction, reclassified the +Shopped Loan from loans held for investment to the “Loans Held for Sale” category with a +related write-down to fair value. +3 + +24. On or about September 2, 2009, the Shopped Loan was sold to a new buyer for +60% of its loan value. + +25. In accordance with both GAAP and Regions’ policies and procedures, the Shopped +Loan was required to have been reclassified to “Loans Held for Sale,” with a corresponding charge +to earnings, prior to the close of the quarter ended March 31, 2009 because a decision to sell the +loan had been made prior to the quarter end. + +E. IMPACT OF NEELY’S INTENTIONAL MISCONDUCT ON REGIONS’ +FINANCIAL STATEMENTS + +26. Regions’ system of internal accounting controls was insufficient to provide +reasonable assurances that the Loans were recorded as necessary to permit preparation of +financial statements in conformity with GAAP. + + +3 See AICPA Statement of Position 01-6, Accounting by Certain Entities (Including Entities With Trade +Receivables) That Lend to or Finance the Activities of Others which states that once a decision has been made to +sell loans not previously classified as “held for sale,” such loans should be transferred into the “held -for-sale” +account and reported at the lower of cost or fair value. +-6- +27. Neely intentionally circumvented Regions’ existing internal accounting controls +through his recording and reporting of the Loans in a manner that was not in accordance with +Regions’ policies and procedures. + +28. Neely’s intentional misconduct resulted in Regions’ failing to make and keep +books, records, and accounts, in reasonable detail, which accurately and fairly reflected the Loans. +Further, Regions’ accounts were falsified through the intentional misconduct of the Respondents. + +29. The books, records and accounts reflecting the Loans were incorporated into +Regions’ consolidated financial statements for the quarter ended March 31, 2009. As a result of +failing to properly account for the Loans in accordance with GAAP, for the quarter ended March +31, 2009, Regions’ income before income taxes was overstated by $16 million, its net income +applicable to common shareholders was overstated by approximately $11 million, and its earnings +per common share was overstated by approximately $.02 per share. + +30. Had the Shopped Loan been properly written down to fair value in conformity +with GAAP and Regions’ policies and procedures, Regions’ net income available to common +shareholders would have been reduced an additional approximately $2.9 million beyond the +approximate $11 million overstatement attributable to the Loans. + +31. The above misstatements were included in Regions’ April 21, 2009 press release +included in its Form 8-K dated April 21, 2009 and filed with the Commission on April 21, 2009, in +its exhibits to its Form 8-K dated May 20, 2009 and filed with the Commission on May 20, 2009, +in its March 31, 2009 Form 10-Q filed May 11, 2009, and two subsequent amendments to its +March 31, 2009 Form 10-Q filed on May 13, 2009 and June 9, 2009, in a Form S-4 filed on May +20, 2009 and in three subsequent amendments to this registration statement on May 22, 2009, June +4, 2009, and June 9, 2009, and in a Form S-8 filed on August 28, 2009 (collectively, the “Public +Filings”). + +32. The Public Filings did not include other information as was necessary to ensure that +the statements made in the Public Filings were not, under the circumstances, materially misleading. + +33. In connection with Regions’ financial reporting for the quarter ended March 31, +2009, Neely executed a sub-certification provided to Regions’ Controller and Chief Accounting +Officer. Neely’s knowingly made false statements and/or misleading omissions in the sub- +certification when he averred that the was “not aware of … [a]ny significant deficiencies in the … +internal control over financial reporting … [or] [a]ny fraud, whether or not material.” Neely knew +that the sub-certification would be relied on as part of the financial reporting process for the +quarter. + + F. CONDUCT FOLLOWING THE QUARTER ENDED MARCH 31, 2009 + +34. On or about May 14, 2009, Neely instructed a subordinate to change the name of an +internal SAD document to falsely reflect that RMs, and not Neely as in fact occurred, had +recommended that the Loans remain in accrual status at March 31, 2009. Neely took additional +actions to conceal his prior conduct regarding the Loans from personnel at Regions as well as +Regions Bank’s regulators. +-7- + + G. VIOLATIONS + +35. As a result of Neely’s intentional scheme to misclassify the Loans as in accrual +status and to prevent the Shopped Loan from being classified in “Loans Held for Sale” as of the +quarter ended March 31, 2009, Neely violated Section 17(a) of the Securities Act, which prohibits +fraudulent conduct in the offer or sale of securities, and Exchange Act Section 10(b) and Rule 10b- +5 thereunder, which prohibit fraudulent conduct in connection with the purchase or sale of +securities. + +36. As a result of the conduct described above, Neely acted through Regions to make +material misrepresentations in the Public Filings, and as a result, Neely violated Sections 20(b) and +10(b) of the Exchange Act, and Rule 10b-5 thereunder. + +37. As a result of the conduct described above, Neely aided and abetted and caused +Regions’ violations of Section 17(a) of the Securities Act and Section 10(b) and Rule 10b-5 +thereunder of the Exchange Act. + +38. As a result of the conduct described above, Neely caused Regions to violate Section +13(a) of the Exchange Act and Rules 13a-11, 13a-13 and 12b-20 thereunder because its financial +statements for the quarter ended March 31, 2009 included in current and quarterly reports, failed to +record the Loans and the Shopped Loan in conformity with GAAP. + +39. As a result of the conduct described above, Neely caused Regions to violate Section +13(b)(2)(A) of the Exchange Act because it did not keep books, records or accounts that +accurately reflected the Loans and the Shopped Loan. + +40. As a result of the conduct described above, Neely caused Regions to violate Section +13(b)(2)(B) of the Exchange Act because it failed to maintain a system of internal accounting +controls sufficient to provide reasonable assurances that the Loans and the Shopped Loan were +recorded as necessary to permit preparation of its financial statements in accordance with GAAP. + +41. As a result of the conduct described above, Neely violated Section 13(b)(5) of the +Exchange Act when he knowingly circumvented and knowingly falsified Regions’ books, records, +and accounts related to the Loans and the Shopped Loan. + +42. As a result of the conduct described above, Neely violated Rule 13b2-1 of the +Exchange Act by directly or indirectly falsifying or causing to be falsified Regions’ books, +records and accounts relating to the Loans and the Shopped Loan which were subject to Section +13(b)(2)(A) of the Exchange Act. + +43. As a result of the conduct described above, Neely violated Rule 13b2-2 of the +Exchange Act when he directly or indirectly made or caused to be made materially false or +misleading statements, or omitted to state material facts necessary in order to make statements +made, in light of the circumstances under which such statements were made, not misleading to +accountants in connection with the preparation or filing of documents and reports which were +required to be filed with the Commission. +-8- + +III. + +In view of the allegations made by the Division of Enforcement, the Commission deems it +appropriate that a cease-and-desist proceeding be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondent an opportunity to establish any defenses to such allegations; + +B. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the +Exchange Act Respondent should be ordered to cease and desist from committing or causing +violations of and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder, including committing or causing any such violations +directly or indirectly through or by means of any other person, as prohibited by Section 20(b) of +the Exchange 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, 13b2-1, and 13b2-2 thereunder, whether Respondent should be +ordered to pay a civil penalty pursuant to Section 8A(g) of the Securities Act and Section 21B(a) of +the Exchange Act, and whether pursuant to Section 21C(f) of the Exchange Act, Respondent should +be 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. + +IV. + +IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions +set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days +from service of this Order at a time and place to be fixed, and before an Administrative Law Judge +to be designated by further order as provided by Rule 110 of the Commission's Rules of Practice, 17 +C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission's Rules of Practice, 17 C.F.R. § 201.220. + +If Respondent fails to file the directed answer, or fails to appear at a hearing after being duly +notified, the Respondent may be deemed in default and the proceedings may be determined against +him upon consideration of this Order, the allegations of which may be deemed to be true as +provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's Rules of Practice, 17 C.F.R. +§§ 201.155(a), 201.220(f), 201.221(f) and 201.310. + +This Order shall be served forthwith upon Respondent personally or by certified mail. + +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial +decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of +the Commission’s Rules of Practice. + + +-9- +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. + + + + Jill M. Peterson + Assistant Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3560.pdf b/raw/aaer/2014/AAER-3560.pdf new file mode 100644 index 0000000000000000000000000000000000000000..92ca26ad7440b2cc6e0c3860227d86032a5c67be Binary files /dev/null and b/raw/aaer/2014/AAER-3560.pdf differ diff --git a/raw/aaer/2014/AAER-3560.txt b/raw/aaer/2014/AAER-3560.txt new file mode 100644 index 0000000000000000000000000000000000000000..18932b9b46ef9ad0b42eb59ede5538589cc12a86 --- /dev/null +++ b/raw/aaer/2014/AAER-3560.txt @@ -0,0 +1,463 @@ +-1- + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 9606 / June 25, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72471 / June 25, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3560 / June 25, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15946 + + +In the Matter of + +JEFFREY C. KUEHR AND +MICHAEL J. WILLOUGHBY, + +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, CEASE-AND- +DESIST ORDERS, AND PENALTIES + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”), and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against Jeffrey C. Kuehr (“Kuehr”) and Michael J. Willoughby (“Willoughby) (collectively, +the “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease- +And-Desist Proceedings Pursuant To Section 8A of the Securities Act of 1933 and Section 21C +of the Securities Exchange Act Of 1934, Making Findings and Imposing Remedial Sanctions, +Cease-And-Desist Orders, and Penalties, as set forth below. + +III. +-2- + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +SUMMARY + + This proceeding arises from the misconduct of the Respondents and Thomas A. Neely, Jr., +(“Neely”) while employed by Regions Bank and its parent holding corporation, Regions Financial +Corporation (“Regions”). During the quarter ended March 31, 2009, in accordance with Regions’ +policies and procedures, personnel within Regions Bank’s Special Asset Department (“SAD”) who +reported up to the Respondents, initiated the procedures to place approximately $168 million of +certain commercial loans (the “Loans”) into non-accrual status. In March 2009, the Respondents +and Neely, arbitrarily and without supporting documentation, took steps to keep the Loans in +accrual status. Such steps by the Respondents and Neely to evade existing policies and procedures +constituted a fraudulent scheme, prevented Regions from appropriately measuring impairment in +accordance with Generally Accepted Accounting Principles (“GAAP”), rendered Regions’ +financial statements for the quarter ended March 31, 2009 materially misstated and not prepared in +conformity with GAAP, and evidenced a failure by Regions to maintain a system of internal +accounting controls sufficient to provide reasonable assurances that the Loans were recorded as +necessary to permit the preparation of financial statements in conformity with GAAP. + +RESPONDENTS + +1. Jeffrey C. Kuehr, 50, was formerly an Executive Vice President and the head of +Regions’ SAD. During the relevant period, Kuehr reported to Willoughby who at the time was +Regions’ Chief Credit Officer (“CCO”). Kuehr’s employment with Regions concluded on +December 29, 2010. + +2. Michael J. Willoughby, 68, was formerly a Senior Executive Vice President and +Regions’ CCO. As CCO, Willoughby directly reported to Regions’ Chief Risk Officer. +Willoughby’s employment with Regions concluded on November 30, 2010. + +RELATED PERSON AND ENTITY + +3. Thomas A. Neely, Jr., 53, was formerly an Executive Vice President for Regions’ +Risk Management Credit Division where he reported to Willoughby. Neely also oversaw +Regions’ Risk Analytics Group and together with Kuehr functionally controlled Regions’ SAD. +Neely’s employment with Regions concluded on November 30, 2010. + +4. Regions Financial Corporation is a Delaware financial holding corporation +headquartered in Birmingham, Alabama. Regions conducts its banking operations through its +subsidiary Regions Bank, which is a member of the Federal Reserve System. Regions’ common +stock is registered with the Commission pursuant to Section 12(b) of the Securities Act and trades +on the New York Stock Exchange under the symbol “RF.” As of December 31, 2013, Regions had +approximately $117 billion in assets. + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. +-3- + +FACTS + +Regions’ Tracking of Non-Accrual Loans + +5. Throughout the relevant time-period, including the quarter ended March 31, 2009, +Region’s tracked and recorded its non-performing loans (“NPLs”) as part of both internal +performance metrics and its regular financial reporting. NPLs at Regions primarily consisted of +loans in a non-accrual status. 2 + +6. Regions’ policies and procedures required that loans be placed on non-accrual +status when it was determined that payment of all contractual principal and interest was in doubt, +or the loan was past due 90 days or more as to principal and interest, unless the loan was well- +secured and in the process of collection. When a loan was placed in non-accrual status, +uncollected interest accrued during the current year would be reversed and reduce Regions’ interest +income. In addition, placing a loan on non-accrual status served as a trigger for Regions to +consider whether the specific loan was impaired and thus how to determine an allowance for loan +and lease losses in accordance with GAAP. + +7. Regions’ policies and procedures provided that the decision to place a loan in non- +accrual status was to be made by Relationship Managers (“RMs”) within SAD. RMs were +responsible for reviewing loan file details, monitoring payments and communicating with +borrowers. Under Regions’ policies and procedures, RMs had the greatest degree of knowledge +within SAD of the relevant loan status and a borrower’s ability to make payments of principal and +interest. + +8. Regions’ policies and procedures required that when RMs initiated an action to +place a loan on non-accrual status, they would submit a supporting form to their regional manager +that showed their conclusion and justified how they determined a loan should be placed in non- +accrual status. Regions’ policies and procedures then provided for the regional manager to conduct +a detailed review of the loan with the responsible RM, after which the approval was granted by the +regional manager. + +9. Once approval for non-accrual classification was granted by the regional manager, +Regions’ policies and procedures specified that any subsequent exception to classifying the loan in +non-accrual status was required to be fully documented and justified on an approved +“Recommendation to Continue Accrual Status” form. + +10. Once the RM and the regional manager recommended that a loan should be +classified in non-accrual status, it was then listed by SAD managers in the Asset Quality Forecast +report (“AQF”). The AQF identified which loans had been recommended by the RM and regional +manager for being placed on non-accrual status, and it forecasted charge-offs and nonperforming +assets for the quarter. + + +2 GAAP does not provide guidance regarding placing loans on a non-accrual status. +-4- +11. The AQF was a principal forecasting tool of SAD that was prepared under the +direction of the Respondents and Neely. The AQF was discussed weekly at meetings regularly +conducted and attended by the Respondents. Neely and Willoughby also regularly utilized the +AQF in presentations to Regions’ Executive Council, which consisted of, among others, Regions’ +Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), in discussing current +trends in NPLs. + +12. The SAD, under the control of the Respondents and Neely, had authority over the +preparation, content, and dissemination of the AQF. Once a loan recommended for non-accrual +status by the RMs and regional managers was included on the AQF, the responsible RMs would +complete information required for a processing list and submit it to Regions’ Risk Analytics +Group. The processing list was designed as an electronic record documenting the specific actions +for individual loans to be formally taken by Regions and reflected in Regions’ accounting systems. +Neely maintained final authority over the processing list. Following Neely’s approval, his +subordinates would submit the processing list for the identified loans to be recorded as non-accrual +in Regions’ accounting systems. + +Respondents’ Misclassification of Loans and Evasion +of Regions’ Policies and Procedures during the Quarter Ended March 31, 2009 + +13. As of the beginning of March 2009, Regions’ AQF identified NPLs of +approximately $1.6 billion. Kuehr, Neely and Willoughby had discussed between themselves +the then current AQF and NPLs. The AQF and related NPLs tracking for the quarter were made +available to Regions’ CEO and CFO. + +14. On or about March 13, 2009, Kuehr, Neely and Willoughby were informed by a +subordinate that an error had resulted in an underreporting of NPLs by an amount approximating +$200 million, or 13% as reported in the AQF data made available to Regions’ CEO and CFO. + +15. On or about March 17, 2009, Willoughby was actively tracking and calculating +how NPLs could be decreased by approximately $200 million so as to more closely approach the +previously identified NPL target. + +16. On or about March 17, 2009, Neely suggested to Willoughby and Kuehr that a $6.8 +commercial million loan be recorded as an accruing loan despite being recommended for non- +accrual status by the assigned RM and regional manager. This loan was prevented by Neely, +without objection from Willoughby and Kuehr, from being placed on the AQF or a processing list +and was classified by Regions as being in accrual status as of March 31, 2009. Contrary to +Regions’ policies and procedures, Respondents prevented the subject loan from being classified as +non-accrual without any documentation or justification. + +17. On or about March 18, 2009, Neely and Willoughby instructed subordinates to +take specific actions to remove from the AQF approximately $150 million of commercial loans +that had been recommended by the assigned RMs and regional managers, in accordance with +Regions’ policies and procedures, as being classified as non-accrual. Neely and Willoughby +issued such instructions to their subordinates without any documentation or justification +supporting the removal of these loans from the AQF, in direct contravention of Regions’ policies +-5- +and procedures. Kuehr, then head of SAD, thereafter was made aware of and did not object to +this action by Neely and Willoughby. The ultimate effect of these instructions was the improper +classification of the Loans, representing approximately $168 million, as being in accrual status. +Had Regions classified the relevant loans on non-accrual status in accordance with its policies, it +would have prompted a determination that the identified loans were impaired in accordance with +GAAP. That determination would have resulted in Regions recording a higher allowance for loan +and lease losses. + +18. On or about March 23, 2009, Willoughby and Neely attended a meeting at which +they provided false information regarding NPLs for the quarter to certain senior executives, +including Regions’ CFO. + +19. In taking the undocumented and unjustified steps above, Respondents and Neely +collectively circumvented Regions’ policies and procedures regarding the classification of loans +into non-accrual status. Respondents and Neely’s scheme directly resulted in the improper +classification of the Loans pursuant to Regions’ policies, and further prevented Regions from +appropriately determining those Loans were impaired in accordance with GAAP at the quarter +ended March 31, 2009. + +20. In accordance with Regions’ policies and procedures, the Loans were required to +have been classified in non-accrual status at the quarter ended March 31, 2009. Had Regions +classified the Loans on non-accrual status with its policies, it would have prompted a determination +that the Loans were impaired in accordance with Statement of Financial Accounting Standard No. +114, Accounting by Creditors for Impairment of a Loan (“SFAS No. 114”). +3 + +Impact of Respondents’ Misconduct on Regions’ Financial Statements + +21. Respondents circumvented Regions’ internal accounting controls through their +recording and reporting of the Loans in a manner that was not in accordance with Regions’ +policies and procedures. As a result, Regions failed to maintain a system of internal accounting +controls sufficient to provide reasonable assurances that the Loans were recorded as necessary to +permit preparation of financial statements in conformity with GAAP. + +22. Respondents’ misconduct resulted in Regions’ failing to make and keep books, +records, and accounts, in reasonable detail, which accurately and fairly reflected the Loans. +Further, Regions’ accounts were falsified through the misconduct of the Respondents. + +23. The books, records and accounts reflecting the Loans were incorporated into +Regions’ consolidated financial statements for the quarter ended March 31, 2009. As a result of +failing to properly account for the Loans in accordance with GAAP, for the quarter ended March +31, 2009, Regions’ income before income taxes was overstated by $16 million, its net income + +3 See SFAS No. 114, which states that “a loan is impaired when, based on current information and events, it is +probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan +agreement” and it requires lenders to measure impairment based on the present value of expected cash flows or an +observable fair value of the collateral (i.e., an appraisal) if the loan is collateral dependent. +-6- +applicable to common shareholders was overstated by approximately $11 million, and its earnings +per common share was overstated by approximately $.02 per share. + +24. The above misstatements were included in Regions’ April 21, 2009 press release +included in its Form 8-K dated April 21, 2009 and filed with the Commission on April 21, 2009, in +its exhibits to its Form 8-K dated May 20, 2009 and filed with the Commission on May 20, 2009, +in its March 31, 2009 Form 10-Q filed May 11, 2009, and two subsequent amendments to its +March 31, 2009 Form 10-Q filed on May 13, 2009 and June 9, 2009, in a Form S-4 filed on May +20, 2009 and in three subsequent amendments to this registration statement on May 22, 2009, June +4, 2009, and June 9, 2009, and in a Form S-8 filed on August 28, 2009 (collectively, the “Public +Filings”). + +25. The Public Filings did not include other information as was necessary to ensure that +the statements made in the Public Filings were not, under the circumstances, materially misleading. + +26. The Respondents, through false statements and/or misleading omissions in sub- +certification letters they signed in April 2009 in connection with the preparation of the reports on +Form 10-Q above, misled Regions’ Controller and Chief Accounting Officer and its Director of +Internal Audit, both accountants, regarding Regions’ books, records, accounts, and internal controls. + +VIOLATIONS + +27. Section 17(a) of the Securities Act prohibits any person, in the offer or sale of any +security, from using the means and instrumentalities of interstate commerce and of the mails, +directly or indirectly, to: (a) employ any device, scheme, or artifice to defraud; (b) 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 (c) engage in any transaction, practice, or course of business +which operates or would operate as a fraud or deceit upon the purchaser. + +28. Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit fraudulent +conduct in connection with the purchase or sale of securities. + +29. Section 20(b) of the Exchange Act makes it unlawful for any person, directly or +indirectly, to do any act or thing which it would be unlawful for such person to do under the +Exchange Act or any rule or regulation thereunder through or by means of any other person. + +30. Section 13(a) of the Exchange Act and Rules 13a-11, 13a-13 and 12b-20 +thereunder, requires every issuer of a security registered pursuant to Section 12 of the Exchange +Act to file with the Commission information, documents, and current and quarterly reports as the +Commission may require, and mandate that current and periodic reports contain such further +material information as may be necessary to make the required statements not misleading. + +31. 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. + +-7- +32. Section 13(b)(2)(B) of the Exchange Act 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. + +33. Section 13(b)(5) of the Exchange Act prohibits any person from knowingly +circumventing or knowingly failing to implement a system of internal accounting controls, and from +knowingly falsifying any book, record, or account, required under Section 13(b)(2) of the Exchange +Act. + +34. Rule 13b2-1 of the Exchange Act prohibits any person from directly or indirectly +falsifying or causing to be falsified any book, record or account subject to Section 13(b)(2)(A) of +the Exchange Act. + +35. Rule 13b2-2 of the Exchange Act prohibits, among other things, officers of +issuers from directly or indirectly making or causing to be made a materially false or misleading +statement, or omitting 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 quarterly review or the preparation or filing of any document +or report required to be filed with the Commission. + +36. As a result of the Respondents’ scheme to misclassify the Loans as in accrual status +as of the quarter ended March 31, 2009, the Respondents violated Section 17(a) of the Securities +Act, which prohibits fraudulent conduct in the offer or sale of securities, and Exchange Act Section +10(b) and Rule 10b-5 thereunder, which prohibits fraudulent conduct in connection with the +purchase or sale of securities. + +37. As a result of the conduct described above, the Respondents acted through Regions +to make material misrepresentations in the Public Filings, and as a result, violated Sections 20(b) +and 10(b) of the Exchange Act, and Rule 10b-5 thereunder. + +38. As a result of the conduct described above, the Respondents caused Regions to +violate Section 13(a) of the Exchange Act and Rules 13a-11, 13a-13 and 12b-20 thereunder +because its financial statements for the quarter ended March 31, 2009, included in current and +quarterly reports, failed to record the Loans in conformity with GAAP. + +39. As a result of the conduct described above, the Respondents caused Regions to +violate Section 13(b)(2)(A) of the Exchange Act because it did not keep books, records or +accounts that accurately reflected the Loans. + +40. As a result of the conduct described above, the Respondents caused Regions to +violate Section 13(b)(2)(B) of the Exchange Act because it failed to maintain a system of internal +accounting controls sufficient to provide reasonable assurances that the Loans were recorded as +necessary to permit preparation of its financial statements in accordance with GAAP. + +41. As a result of the conduct described above, the Respondents violated Section +13(b)(5) of the Exchange Act when they knowingly circumvented Regions’ system of internal +-8- +accounting controls and knowingly falsified Regions’ books, records, and accounts related to the +Loans. + +42. As a result of the conduct described above, the Respondents violated Rule 13b2-1 +of the Exchange Act by directly or indirectly falsifying or causing to be falsified Regions’ books, +records and accounts relating to the Loans, which were subject to Section 13(b)(2)(A) of the +Exchange Act. + +43. As a result of the conduct described above, the Respondents violated Rule 13b2-2 +of the Exchange Act when they directly or indirectly made or caused to be made materially false +or misleading statements, or omitted to state material facts necessary in order to make statements +made, in light of the circumstances under which such statements were made, not misleading to +accountants in connection with the preparation or filing of documents and reports which were +required to be filed with the Commission. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in each Respondents’ Offers. + +Accordingly, it is hereby ORDERED that: + +A. Respondent Kuehr 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, including +committing or causing any such violations directly or indirectly through or by means of any other +person, as prohibited by Section 20(b) of the Exchange Act, and cease and desist from committing +or causing any violations and any future violations of Section 17(a) of the Securities Act and +Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 12b-20, 13a- +11, 13a-13, 13b2-1, and 13b2-2 thereunder. + +B. Respondent Kuehr be, and hereby is prohibited for a period of five (5) years from +entry of this Order, from acting as an officer or director of any issuer that has a class of securities +registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to +Section 15(d) of the Exchange Act. + +C. Respondent Kuehr shall pay a civil money penalty in the amount of $70,000 to the +Securities and Exchange Commission. Payment shall be made in the following installments: +$5,833.37 is due on the first of the month following entry of this Order, followed by eleven (11) +additional payments of $5,833.33 due on the first of each consecutive following month, +constituting twelve (12) payments totaling $70,000. Payment of the entire remaining balance may +be made at any point in time on or before it would otherwise be due under the terms of this Order. +If any payment is not made by the date the payment is required by this Order, the entire +outstanding balance, 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: + +-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 +Jeffrey C. Kuehr 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 Aaron W. Lipson, Division of +Enforcement, Securities and Exchange Commission, 950 East Paces Ferry Road, N.E., Atlanta, +GA 30326-1382. + +D. Respondent Willoughby 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, +including committing or causing any such violations directly or indirectly through or by means of +any other person, as prohibited by Section 20(b) of the Exchange Act, and cease and desist from +committing or causing any violations and any future violations of Section 17(a) 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, 13b2-1, and 13b2-2 thereunder. + +E. Respondent Willoughby be, and hereby is prohibited for a period of five (5) years +from entry of this Order, from acting as an officer or director of any issuer that has a class of +securities registered pursuant to Section 12 of the Exchange Act or that is required to file reports +pursuant to Section 15(d) of the Exchange Act. + +F. Respondent Willoughby shall pay a civil money penalty in the amount of $70,000 +to the Securities and Exchange Commission. Payment shall be made in the following installments: +$5,833.37 is due on the first of the month following entry of this Order, followed by eleven (11) +additional payments of $5,833.33 due on the first of each consecutive following month, +constituting twelve (12) payments totaling $70,000. Payment of the entire remaining balance may +be made at any point in time on or before it would otherwise be due under the terms of this Order. +If any payment is not made by the date the payment is required by this Order, the entire +outstanding balance, 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; +-10- +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + Payments by check or money order must be accompanied by a cover letter identifying +Michael J. Willoughby 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 Aaron W. Lipson, +Division of Enforcement, Securities and Exchange Commission, 950 East Paces Ferry Road, N.E., +Atlanta, GA 30326-1382. + + + By the Commission. + + + + Jill M. Peterson + Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3561.pdf b/raw/aaer/2014/AAER-3561.pdf new file mode 100644 index 0000000000000000000000000000000000000000..80af63fdc01797136dce894b6dbd163e3dedba2e Binary files /dev/null and b/raw/aaer/2014/AAER-3561.pdf differ diff --git a/raw/aaer/2014/AAER-3561.txt b/raw/aaer/2014/AAER-3561.txt new file mode 100644 index 0000000000000000000000000000000000000000..e2e38efb7520291b9cbf2d310f9f33ad2e745835 --- /dev/null +++ b/raw/aaer/2014/AAER-3561.txt @@ -0,0 +1,151 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72494 / June 27, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3561 / June 27, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15951 + + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + CHRIS CHOI, 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 Chris +Choi (“Respondent” or “Choi”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice. +1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting 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. Choi, age 45, is and has been a certified public accountant licensed to +practice in the State of California. He held several finance-related positions at Nvidia Corporation +(“Nvidia”) from 2005 until his resignation in May 2012. + + 2. Nvidia was, at all relevant times, a Delaware corporation headquartered in +Santa Clara, California, that developed and sold graphics processors used in various computing +devices. At all relevant times, Nvidia’s common stock was registered with the Commission +pursuant to Section 12(b) of the Securities Exchange Act of 1934 (“Exchange Act”), and was traded +on the NASDAQ National Market. + + 3. On April 23, 2014, the Commission filed a complaint against Choi in the +United States District Court for the Southern District of New York in SEC v. Choi + (Civil Action +No. 14-2879-SAS). On June 3, 2014, the court entered an order permanently enjoining Choi, by +consent, from future violations of Section 17(a) of the Securities Act of 1933 and Section 10(b) of +the Exchange Act and Rule 10b-5 thereunder. Choi was also ordered to pay a $30,000.00 civil +money penalty and was barred for five years from acting as an officer or director of any issuer that +has a class of securities registered pursuant to Section 12 of the Exchange Act or that is required to +file reports pursuant to Section 15(d) of the Exchange Act. + +4. The Commission’s complaint alleges, among other things, that Choi – +while working as an employee of Nvidia in 2009 and 2010 – obtained material nonpublic +information about Nvidia’s financial results and relayed that information to his friend Hyung +Lim (“Lim”). By disclosing that information to Lim, Choi breached a fiduciary duty or +obligation arising from a similar relationship of trust and confidence. The complaint further +alleges that, in return for payment, Lim relayed Choi’s information to Danny Kuo (“Kuo”), an +analyst at Whittier Trust Company (“Whittier Trust”). Utilizing that information, funds +managed by Whittier Trust reaped gains and avoided losses of about $295,000 by trading Nvidia +securities in advance of Nvidia’s quarterly earnings announcements on May 7, 2009, November +5, 2009, and November 11, 2010. Kuo also provided Choi’s information to analysts at +Diamondback Capital Management LLC, Level Global Investors LP, and Sigma Capital +Management LLC, who used this information to generate profits and avoid losses of about $16.2 +million for hedge funds managed by these three firms. + + 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 Choi’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Choi 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 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 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 his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of + 4 +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. + + + + Jill M. Peterson + Assistant Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3562.txt b/raw/aaer/2014/AAER-3562.txt new file mode 100644 index 0000000000000000000000000000000000000000..060f4fc2f247d2531cacd2fd47dd3acc00cb4ba7 --- /dev/null +++ b/raw/aaer/2014/AAER-3562.txt @@ -0,0 +1,545 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 9608 / July 1, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72503 / July 1, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3562 / July 1, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15952 + +____________________________________ + + +In the Matter of + +EFP ROTENBERG, LLP + +and + +NICHOLAS R. BOTTINI, CPA, + +Respondents. +: +: +: +: +: +: +: +: +: +: +: +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTION 8A OF THE SECURITIES +ACT OF 1933, SECTIONS 21C AND 4C +OF THE SECURITIES EXCHANGE ACT +OF 1934, AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS, +AND A CEASE-AND-DESIST ORDER +____________________________________ : + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Section 8A of the Securities Act of 1933 (“Securities Act”), Sections 21C and 4C(a)(2)1 of the +Securities Exchange Act of 1934 (“Exchange Act”), and Rule 102(e)(1)(ii) of the Commission’s + +1 Section 4C(a)(2) provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +to have engaged in . . . improper professional conduct. +2 + +Rules of Practice2 against EFP Rotenberg, LLP (“Rotenberg”) and Nicholas R. Bottini +(“Bottini”) (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 themselves and over 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 8A of +the Securities Act of 1933, Sections 21C and 4C(a)(2) of the Securities Exchange Act of 1934, +and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, Making Findings, and Imposing +Remedial Sanctions, and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +A. SUMMARY + +1. This matter concerns improper professional conduct by EFP Rotenberg, LLP and +Nicholas R. Bottini (collectively, “Respondents”) in connection with the audit of the financial +statements of Universal Travel Group (“UTG”) for the year ending December 31, 2010 (the +“UTG Audit”), and their violation of the document retention requirements of Rule 2-06 under +Regulation S-X [17 C.F.R. § 210.2-06]. + +B. RESPONDENTS + +2. EFP Rotenberg, LLP is a public accounting firm, registered with the Public +Company Accounting Oversight Board (“PCAOB”) and headquartered in Rochester, New York. +Rotenberg became UTG’s auditor on April 28, 2011. + +3. Nicholas R. Bottini, CPA, 52 years old, was a partner of EFP Rotenberg, LLP and +led the firm’s China practice, which performed multiple audits of China-based issuers. He was +the engagement partner for the UTG Audit. As such, Bottini exercised final authority on all + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it in any way to any person who is found . . . to have engaged in . . . +improper professional conduct. +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. +3 + +significant decisions relating to the UTG Audit. Bottini is a Certified Public Accountant, +licensed in New York, Pennsylvania and California, and he is a resident of Tustin, California. + +C. RELEVANT ENTITY + +4. Universal Travel Group is a Nevada corporation headquartered in Shenzhen, the +People’s Republic of China (“PRC”). UTG’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act and was listed on the New York +Stock Exchange (“NYSE”) until it voluntarily delisted in April 2012. In September 2013, the +Commission filed a settled injunctive action against UTG and its former chief executive officer +and chief financial officer, alleging antifraud, reporting, books and records, and internal controls +violations. The Commission also revoked the registration of UTG’s securities pursuant to +Section 12(j) of the Exchange Act. + +D. FACTS + +5. UTG became a public company in the U.S. in 2006 through a reverse merger with +a Nevada shell company. All of its operations are in the PRC. It claims to sell airline tickets, +hotel rooms, and packaged tours by telephone, in person, and over the Internet. Between 2007 +and 2010, UTG announced the acquisition or creation of ten PRC operating companies and +consistently reported growing revenues and profits. + +Analysts Accuse UTG of Fraud + +6. UTG changed auditors on September 1, 2010, and on September 15, an Australian +advisory firm published a report on the Internet that described UTG’s English language booking +systems as dysfunctional, its web traffic as very low compared to its competitors, and certain +financial statement balances as suspicious. UTG disputed the report, but its recently appointed +auditor resigned shortly thereafter and UTG hired a new auditor. +7. In March 2011, a U.S. research firm published a report which doubted “the +authenticity of [UTG’s] revenue and net income,” and accused UTG of “lying about the amount +of cash on its balance sheet.” The research firm analyzed certain UTG financial statement +balances and also found items that were suspicious. For example, in 2009, UTG reported +spending very little on advertising and marketing compared to its PRC competitors, but UTG +claimed to sell equivalent numbers of airline tickets and hotel bookings; this suggested to the +research firm that “[UTG’s] financial statements are fabricated.” The research firm claimed +further to have viewed the financial filings of certain UTG subsidiaries that were provided to the +PRC government, and found that the revenues, income, and assets reported in these PRC filings +were far lower (less than 1%) than the corresponding figures reported in UTG’s Commission +filings. + + +4 + +The Predecessor Auditor Resigns + +8. The public accounting firm that preceded Rotenberg as UTG’s auditor (the +“Predecessor Auditor”) obtained evidence during its field work for the 2010 UTG audit +indicating that UTG had tampered with the third party confirmation process. In testing accounts +receivables, revenues and trade deposits, the Predecessor Auditor sent out over 500 third party +confirmation requests, using addresses supplied by UTG. All were returned with no exceptions, +a very unlikely 100% response rate, and an examination of the confirmation replies revealed +certain similarities, suggesting they were prepared by the same person. The Predecessor Auditor +attempted unsuccessfully to match customer addresses to directories and web sites, and in one +instance it attempted an in-person visit to a purported hotel customer in Shenzhen, but the +address provided by UTG turned out to be a public restroom. + +9. The Predecessor Auditor also made telephone calls to a sampling of customers and +deposit holders, using numbers supplied by UTG. In many cases the customers told the +Predecessor Auditor that they never received any confirmation or never confirmed any balance +due; further, when provided with a copy of the returned confirmation, customers stated that the +corporate stamps and handwritten marks did not look familiar. At the same time, in testing +UTG’s substantial cash tour revenues, in many cases UTG was unable to supply requested +backup documents such as invoices or receipts, and in some cases documents provided by UTG +appeared to be newly-created or otherwise suspicious. + + 10. In light of the issues it encountered, the Predecessor Auditor advised UTG’s audit +committee that it needed to obtain explanations from UTG management and to conduct +additional procedures, such as obtaining original supporting documents from UTG’s files while +in the presence of audit staff. UTG’s audit committee did not agree to the additional procedures +and on April 9, 2011, the Predecessor Auditor resigned. On April 14, 2011, UTG filed a Form 8- +K with the Commission reporting that the Predecessor Auditor had resigned, citing scope +limitations and a loss of confidence in UTG’s directors and audit committee. The Form 8-K also +reported that prior to its resignation, the Predecessor Auditor encountered issues during the audit +related to the authenticity of confirmations and the lack of evidence of certain contracts and +related cash payments. In the wake of the Predecessor Auditor’s resignation, the NYSE +suspended trading in UTG stock. + +11. In the Form 8-K filed on April 14, 2011 reporting the Predecessor Auditor’s +resignation, UTG reported that its audit committee had approved the appointment of Rotenberg +as new auditor as of April 12, 2011, and that Rotenberg agreed to the appointment subject to +UTG clearing its client acceptance procedures. On April 29, 2011, UTG filed a Form 8-K with +the Commission stating that it had cleared Rotenberg’s client acceptance procedures. On June 8, +2011, UTG filed its Form 10-K for the year ending December 31, 2010, which included +Rotenberg’s unqualified audit opinion as to UTG’s financial statements. + + +5 + +E. AUDIT DEFICIENCIES + +Failure to Establish Adequate Client Acceptance Policies + +12. An accounting firm should establish policies and procedures 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. PCAOB +Quality Control Standard § 20.14.4 Rotenberg did not have adequate policies and procedures as +to client acceptance at the time it approved UTG as a client, which allowed the final acceptance +of the UTG engagement without attempting to make any inquiries of the Predecessor Auditor. + +Failure to Inquire of the Predecessor Auditor + +13. Inquiry of the predecessor auditor is a necessary procedure and such +communications should be evaluated before the auditor accepts an engagement. AU § 315.03 +and 07. Predecessor auditor includes an auditor who did not complete an audit and has resigned. +AU § 315.02. The successor auditor should make specific and reasonable inquiries of the +predecessor auditor regarding matters that include, among others, information that might bear on +the integrity of management and on disagreements with management. AU § 315.09. Despite the +multiple issues raised by the Predecessor Auditor in UTG’s Form 8-K filed on April 14, 2011, +including the Predecessor Auditor’s assertion that they “had lost confidence in the Board of +Directors’ and the Audit Committee’s commitment to sound corporate governance and reliable +financial reporting”, Bottini made no attempt to communicate with UTG’s predecessor auditor +prior to accepting UTG as a client. Respondents obtained copies of all confirmation replies and +certain other documents from a Hong Kong firm which had assisted the Predecessor Auditor, +thereby giving them more reason to know of possible tampering with the confirmation process +referenced in the Form 8-K. But Bottini did not request that UTG authorize the Predecessor +Auditor to allow Respondents to review the Predecessor Auditor’s work papers, which included +relevant information learned by the Predecessor Auditor through its procedures relating to +customer address checks, telephone calls to customers, and tour revenue backup documentation +requests. + +Failure to Adequately Plan the Audit +14. PCAOB Standards require that audits be adequately planned. AU §§ 150.02 and +311.01. Additionally, 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 § 110.02. Respondents failed to meet these standards. + +Failure to Obtain a Sufficient Understanding of UTG’s Internal Controls +15. Auditors should obtain an understanding of the client’s internal controls sufficient +to plan the audit. AU § 319.02. Additionally, as part of the understanding of internal control +sufficient to plan the audit, the auditor should evaluate whether entity programs and controls that + +4 All references to PCAOB standards are to standards in effect at the time of the conduct described. +6 + +address identified risks of material misstatement due to fraud have been suitably designed and +placed in operation. AU § 316.44. A sufficient understanding is obtained by performing +procedures to understand the design of controls relevant to an audit of financial statements and +determining whether they have been placed in operation. AU § 319.25. Respondents obtained +flow charts and memoranda which purported to illustrate specific controls at UTG’s subsidiaries, +but the documents were in Chinese and largely incomprehensible English translations. Bottini +was unable to decipher the flowcharts and memoranda and therefore Respondents did not obtain +a sufficient understanding of the design of UTG’s purported internal controls or their operational +status. Thus, in planning the audit, Respondents did not learn of and could not take into account +UTG’s inadequate controls over cash and its inadequate cash documentation practices, as alleged +in the Commission’s complaint against UTG. +Failure to Adequately Extend or Revise Procedures to Address Indications of Fraud + +16. The auditor's responses to address specifically identified risks of material +misstatement due to fraud may include changing the nature, timing, and extent of auditing +procedures. AU § 316.52. In planning the UTG audit, Bottini received several indications of +possible fraud, including the resignation of the Predecessor Auditor, the critical analyst reports, +and contemporaneous government and media reports that local banking personnel in the PRC +had colluded with public company audit clients by providing U.S. accounting firms with false +cash confirmations and false monthly bank statements. + +17. Despite the Predecessor Auditor’s concerns with the authenticity of confirmations +and a loss of confidence in confirmation procedures carried out under circumstances which the +Predecessor Auditor believed to be suspicious, Bottini planned accounts receivable procedures +that called for confirmation by mail or delivery service – the same procedures used by the +Predecessor Auditor. Other than speaking with UTG management, Bottini made no plans to +investigate the anomalous accounts receivable confirmation replies to the Predecessor Auditor +and, in fact, performed accounts receivable testing on a population that was smaller than that of +the Predecessor Auditor. + +18. As to the critical analyst reports, Bottini made no plans to determine whether the +report concerning UTG’s financial filings with the PRC government was true and, if it was, why +the filings differed substantially from UTG’s Commission filings. As to unusual financial +statement assertions highlighted by analyst reports, such as marketing costs, the work papers +state that such assertions would be “addressed through analytic procedures.” However, they +provide no explanation as to how additional analytic procedures would explain the anomalous +financial results highlighted by the analysts and, in fact, the analytic procedures undertaken were +not designed to address the concerns highlighted by the analyst reports as they merely sought to +explain differences between current and historical balances of the same UTG accounts. + +19. As to reports that PRC banks had provided false cash confirmations and monthly +statements, Bottini made no changes to planned cash procedures which called for confirmations +by mail or by client-arranged visits to local bank branches. + +7 + +Failure to Obtain Sufficient Competent Evidence, Exercise Due Professional Care, Exhibit +Heightened Professional Skepticism, and Control the Confirmation Process +20. Auditors are required to obtain sufficient competent evidential matter to afford a +reasonable basis for an opinion regarding the financial statements under audit. AU §§150.02 and +326.01. The evidential matter obtained should be sufficient for the auditor to form conclusions +concerning the validity of the individual assertions embodied in the components of financial +statements, and evidential matter obtained from independent sources outside an entity provides +greater assurance of reliability than that secured solely within the entity. AU § 326.13 and .21. +In planning and performing an audit, auditors should exercise due professional care. AU §§ +150.02 and 230.01. In situations involving higher risk of fraud, auditors may need to exercise +heightened professional skepticism. In re Gregory M. Dearlove, CPA, Exch. Act Rel. No. 57244 +(Jan. 31, 2008) at p. 8. In conducting confirmations with third parties, the auditor should +exercise appropriate professional skepticism and maintain control over the process. This means +establishing direct communication with the intended recipient. AU § 330.15 and .28. +Respondents failed to meet these standards. + 21. As of December 31, 2010, UTG claimed total assets of $140 million, including +cash and a bank certificate of deposit totaling $59.3 million and accounts receivable of $38.7 +million. As to cash, Respondents attempted and were unable to confirm with a PRC bank one- +third of the cash assets, despite the fact that they had designated cash as a significant risk and a +fraud risk when planning their audit of UTG. Additionally, for over half of the cash assets, +Respondents obtained confirmations only after UTG arranged visits to local branches of PRC +banks, even though Bottini understood that this procedure was subject to collusion based on +reports by other accounting firms. Thus, the quantity of evidence obtained as to cash was not +sufficient and the quality of the evidence was lacking. +22. As to UTG’s accounts receivable, Bottini sought confirmation of accounts owing +a total of only 20% of UTG’s total year-end accounts receivable balance, despite the high risk in +the account as highlighted by the concerns of the Predecessor Auditor. For the replies that were +received, the quality of the replies was poor. Most of the replies contained only a customer +stamp, did not affirmatively state agreement with the balance due, and did not supply any of the +information sought by the request (such as the name, title and telephone number of responding +party). Given the circumstances, including the circumstances described in paragraph 13 herein, +the quantity and quality of the audit evidence obtained did not satisfy the third standard of field +work of AU § 150. Moreover, Bottini allowed UTG to arrange for pickup and delivery of the +confirmations, thus failing to establish direct communication with the intended recipients of the +confirmations, as required by AU § 330, and giving UTG the opportunity to tamper with the +process. + +Failure to Adequately Document Accounts Receivable and Retain Documentation +23. The auditor must document the procedures performed and evidence obtained such +that an experienced auditor can understand the nature, timing, extent, and results of the +procedures performed, evidence obtained, and conclusions reached. PCAOB Auditing Standard +No. 3.6. Under Rule 2-06 of Regulation S-X, auditors must retain for seven years work papers +8 + +and other documents created, sent or received in connection with an audit that contain +conclusions, opinions, analyses or financial data related to the audit. After scanning the returned +accounts receivable confirmations into Rotenberg’s computer system, the UTG Audit team then +discarded the originals. In certain cases, the most important part of the scanned document – the +customer stamp – was illegible. As a result, Respondents did not adequately retain +documentation because an auditor could not determine the nature of the evidence obtained by +reviewing the scanned copies in the work papers. + +F. LEGAL STANDARDS + +24. As a result of the conduct described above, Respondents engaged in improper +professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. 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 in any way to any person who is found by the +Commission to have engaged in improper professional conduct. Under Section 4C(b) of the +Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules of Practice, improper +professional conduct includes negligent conduct in the form 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. Section 8A of the Securities +Act and Section 21C of the Exchange Act provide that if the Commission finds that any person +has violated any provision of these titles or any rule thereunder, the Commission may order such +person to cease and desist from committing or causing such violations. + +25. Rotenberg’s and Bottini’s failure to abide by PCAOB standards in the UTG +Audit, as described above, involved repeated instances of unreasonable conduct. + +26. Rule 2-06 under Regulation S-X provides that for a period of seven years after an +accountant concludes an audit or review of an issuer’s financial statements, the accountant shall +retain records relevant to the audit or review, including work papers and other documents that +form the basis of the audit or review, and memoranda, correspondence, communications, other +documents and records (including electronic records), which: + +A. Are created, sent or received in connection with the audit or review, and +B. Contain conclusions, opinions, analyses, or financial data related to the +audit or review. + + 27. The rule requires that such documents shall be retained whether they support the +auditor’s final conclusions regarding the audit or review, or contain information or data, relating +to a significant matter, that is inconsistent with the auditor’s final conclusions regarding that +matter or the audit or review. Nevertheless, in certain instances, Respondents failed to retain +legible accounts receivable confirmation replies received from UTG customers that contained +conclusions, opinions, and financial data relating to significant revenues and balance sheet +assertions. + +9 + +G. FINDINGS + +28. Based on the foregoing, the Commission finds that Respondents Rotenberg and +Bottini 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. + +29. Based on the foregoing, the Commission finds that Respondents Rotenberg and +Bottini violated Rule 2-06 under Regulation S-X [17 C.F.R. § 210.2-06]. + +H. REMEDIAL EFFORTS + + 30. In determining to accept the Offers, the Commission considered the remedial +efforts undertaken by Respondent Rotenberg, including its adoption of new client acceptance +policies and procedures. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Bottini’s and Respondent Rotenberg’s Offers. + + Accordingly, pursuant to Section 8A of the Securities Act, Sections 21C and 4C(a)(2) of +the Exchange Act, and Rule 102(e) of the Commission’s Rules of Practice, it is hereby +ORDERED, effectively immediately, that: + + A. Respondent Bottini and Respondent Rotenberg cease and desist from committing +or causing any violations and any future violations of Rule 2-06 under Regulation S-X [17 +C.F.R. § 210.2-06]; + + B. Respondent Rotenberg is censured; + +C. Respondent Rotenberg shall not issue any audit report, accept any audit +engagement, or play a substantial role in the preparation or furnishing of any audit report for any +issuer or registrant, U.S. or foreign, that files with the Commission and (i) has headquarters or +principal executive offices located in the PRC, or (ii) has a subsidiary or component in the PRC +the assets, revenues, or expenses of which constitute 20% or more of the consolidated assets, +revenues, or expenses (terms as defined by PCAOB Rules and Notes to PCAOB Rules) of the +registrant or issuer. For purposes of determining 20% or more of the consolidated assets, +revenues, or expenses, this determination should be made at the end of the issuer’s or registrant’s +most recently completed fiscal year. + +D. Respondent Rotenberg shall, within 30 days of the entry of this Order, pay a civil +money penalty in the amount of $50,000 to the United States Treasury. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. Section 3717. Payment must be +made in one of the following ways: + + +10 + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand delivered +or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying EFP +Rotenberg, LLP as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to: Stephen L. Cohen, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +NE, Washington, DC 20549-5553. + +E. Respondent Bottini shall, within thirty days of the entry of this Order, pay a civil +money penalty in the amount of $25,000 to the United States Treasury. If timely payment is not +made, interest shall accrue pursuant to 31 U.S.C. Section 3717. Payment must be made in one of +the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand delivered +or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Bottini +as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +11 + +cover letter and check or money order must be sent to: Stephen L. Cohen, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549- +5553. + + F. Respondent Bottini is denied the privilege of appearing or practicing before the +Commission as an accountant. + + G. After two years from the date of this order, Respondent Bottini 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 Bottini’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) Bottini, 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) Bottini, 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 Bottini’s or the firm’s quality control system that would indicate that +the Bottini will not receive appropriate supervision; + + (c) Bottini 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) Bottini acknowledges his responsibility, as long as Bottini 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. + + H. The Commission will consider an application by Respondent Bottini 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 +12 + +consideration of, in addition to the matters referenced above, any other matters relating to +Bottini’s character, integrity, professional conduct, or qualifications to appear or practice before +the Commission. + + + By the Commission. + + + +Jill M. Peterson + Assistant Secretary + + + + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3563.txt b/raw/aaer/2014/AAER-3563.txt new file mode 100644 index 0000000000000000000000000000000000000000..8652cbfaa90128c1cba0abf16c2407d74f66badf --- /dev/null +++ b/raw/aaer/2014/AAER-3563.txt @@ -0,0 +1,157 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72516 / July 2, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3563 / July 2, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15956 + + +In the Matter of + +W. MARK MILLER, CPA + +Respondent. + + +ORDER INSTITUTING ADMINISTRATIVE +PROCEEDINGS PURSUANT TO SECTION +15(b) OF THE SECURITIES EXCHANGE +ACT OF 1934 AND ORDER OF SUSPENSION +PURSUANT TO RULE 102(e)(2) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) against W. Mark Miller +(“Respondent” or “Miller”) and also deems it appropriate to issue an order of forthwith suspension +of Miller pursuant to Rule 102(e)(2) of the Commission’s Rules of Practice [17 C.F.R. § +201.102(e)(2)].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 consents to the Commission’s +jurisdiction over him and the subject matter of these proceedings and to the entry of this Order + +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 +Instituting Administrative Proceedings Pursuant to Section 15(b) of the Securities Exchange Act of +1934 and Order of Suspension pursuant to Rule 102(e)(2) 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. W. Mark Miller (“Miller”), age 60 is a resident of Plano, Texas. Miller was +a Texas-licensed Certified Public Accountant (“CPA”) until his license was revoked on December +31, 1990 for nonpayment of fees. Miller has never held any securities licenses and is not registered +with the Commission in any capacity. In October 2007, Miller became CFO of Provident +Royalties, LLC (“Provident”) and President in September 2008. + + 2. On July 1, 2009, a complaint was filed against Provident in connection with +an offering fraud in which Respondent was involved. Respondent played a role in the fraud +alleged in SEC v. Provident Royalties, LLC, et al., Civil Action Number 3:09CV1238-L, in the +United States District Court for the Northern District of Texas, but Respondent was not named as a +defendant in that action. + + 3. The Commission’s complaint alleged that, from at least June 2006 until +January 2009, in connection with a series of preferred stock and limited partnership interests, +Provident misappropriated investor funds, falsely stated to investors the use of their invested funds, +failed to disclose the role of an unnamed principal, failed to disclose the unnamed principal’s +interest (through various entities he controlled) in some properties, and otherwise engaged in a +variety of conduct that operated as a fraud and deceit on investors. As CFO and president of +Provident, Respondent handled and misappropriated investor funds, solicited securities +transactions by participating in sales presentations and conference calls, and helped to negotiate +and structure specific securities transactions. While performing these functions with Provident +Asset Management, LLC, Respondent was neither a registered broker-dealer or otherwise acting as +an associated person of a registered broker-dealer. + + 4. On February 12, 2013, Miller pleaded guilty to one count of misprision of a +felony in violation of Title 18 United States Code, Section 4 before the United States District Court +for the Eastern District of Texas, in United States v. W. Mark Miller, Crim. Information No. +4:12CR00166-003. On July 16, 2013, a judgment in the criminal case was entered against Miller. +He was sentenced to a prison term of six (6) months followed by one year of supervised release +and ordered to make restitution in the amount of $2,300,000. Restitution has been paid. + + 5. The count of the criminal information to which Miller pleaded guilty +alleged, among other things, that from about January 1, 2009 through February 3, 2009, Miller +knew of Provident defrauding investors and obtaining money and property by means of materially +false and misleading statements in connection with the fraudulent sale of limited partnership + + 3 +interests and preferred stock underlying the Commission’s complaint described in Paragraph 2 +above. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Miller’s Offer. + +Accordingly, it is hereby ORDERED pursuant to Section 15(b)(6) of the Exchange Act that +Respondent Miller be, and hereby is: + +barred from association with any broker, dealer, investment adviser, municipal securities +dealer, municipal advisor, transfer agent, or nationally recognized statistical rating +organization; barred from participating in any offering of a penny stock, including; acting as +a promoter, finder, consultant, agent or other person who engages in activities with a broker, +dealer or issuer for purposes of the issuance or trading in any penny stock, or inducing or +attempting to induce the purchase or sale of any penny stock. + +Any reapplication for association by the Respondent will be subject to the applicable laws +and regulations governing the reentry process, and reentry may be conditioned upon a number of +factors, including, but not limited to, the satisfaction of any or all of the following: (a) any +disgorgement ordered against the Respondent, whether or not the Commission has fully or partially +waived payment of such disgorgement; (b) any arbitration award related to the conduct that served +as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a +customer, whether or not related to the conduct that served as the basis for the Commission order; +and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct +that served as the basis for the Commission order. + +In view of the foregoing, the Commission also finds that Respondent Miller has been +convicted of misprision of a felony, which is a misdemeanor involving moral turpitude within the +meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + +Accordingly, it is ORDERED, that Respondent Miller is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + + + 4 +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. + + + + + Jill M. Peterson + Assistant Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3564.txt b/raw/aaer/2014/AAER-3564.txt new file mode 100644 index 0000000000000000000000000000000000000000..15c833f18c60f4c16af64054aa5c074df40a0aa2 --- /dev/null +++ b/raw/aaer/2014/AAER-3564.txt @@ -0,0 +1,1373 @@ + + + + + + + + + + + + + + + + SEC.gov | Mark A. Jackson and James J. Ruehlen + + + + + + + + !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\/515726","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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Jackson and James J. Ruehlen + + + + + + + + + + + + Mark A. Jackson and James J. Ruehlen + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23038 / July 7, 2014 + Accounting and Auditing Enforcement Release No. 3564 / July 7, 2014 + + Securities and Exchange Commission v. Mark A. Jackson and James J. Ruehlen , Civil Action No. 4:12-cv-00563 (S.D. Tex. Filed Feb. 24, 2012) + + SEC Settles Pending Civil Action Against Noble Executives Mark A. Jackson and James J. Ruehlen + + + The Securities and Exchange Commission announced today that former Noble CEO Mark A. Jackson and former Director and Division Manager of Noble's Nigeria subsidiary James J. Ruehlen, who remains an executive at the company, have agreed to settle the SEC's pending civil actions against them. The case had been set for a jury trial before the Honorable Keith P. Ellison, United States District Judge, on July 9, 2014 in Houston, Texas. The Court entered a final judgment in the matter on July 3, 2014. + + To settle the SEC's action against him, Jackson consented to the entry of a final judgment enjoining him from violating Section 13(b)(2)(A) of the Exchange Act as a control person pursuant to Section 20(a) of the Exchange Act. Ruehlen agreed to the entry of a final judgment enjoining him from aiding and abetting any violation of Section 13(b)(2)(A) of the Exchange Act. + + The SEC filed its complaint in February 2012 and alleged that Jackson and Ruehlen authorized the payment of bribes to customs officials to process false paperwork purporting to show the export and re-import of oil rigs, when in fact the rigs never moved. The SEC alleged that the scheme was designed to save Noble Corporation from losing business and incurring significant costs associated with exporting rigs from Nigeria and then re-importing them under new permits. At the same time it filed its action against Jackson and Ruehlen, the SEC also filed settled charges against Thomas F. O'Rourke, who was a former controller and head of internal audit at Noble. The SEC alleged that O'Rourke helped approve the bribe payments and allowed the bribes to be booked improperly as legitimate operating expenses for the company. + + In a separate civil action filed in 2010, the SEC charged Noble Corporation with FCPA violations as part of an SEC Enforcement Division sweep of the oil services industry . The company cooperated with civil and criminal investigators and agreed to pay more than $8 million in settlement. + + For further information see: + + http://www.sec.gov/litigation/litreleases/2012/lr22290.htm + http://www.sec.gov/news/press/2010/2010-214.htm + + + 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-3565.pdf b/raw/aaer/2014/AAER-3565.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ccf9911d57fcc75ccb236a26ae668b2abe28ff6c Binary files /dev/null and b/raw/aaer/2014/AAER-3565.pdf differ diff --git a/raw/aaer/2014/AAER-3565.txt b/raw/aaer/2014/AAER-3565.txt new file mode 100644 index 0000000000000000000000000000000000000000..73b2d9a99995b57b5d57b663d7c0cb11724de23c --- /dev/null +++ b/raw/aaer/2014/AAER-3565.txt @@ -0,0 +1,644 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72557 / July 8, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3565 / July 8, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15965 + + + +In the Matter of + +CHILD, VAN WAGONER & +BRADSHAW, PLLC, RUSSELL +E. ANDERSON, CPA, and +MARTY VAN WAGONER, +CPA, + +Respondents. + + + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT +TO SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted against +Child, Van Wagoner & Bradshaw, PLLC (“CVB”), Russell E. Anderson, CPA (“Anderson”), +and Marty Van Wagoner, CPA (“Van Wagoner”) (collectively “Respondents”), pursuant to +Sections 4C +1 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 . . . +(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 +102(e)(1)(ii) of the Commission’s Rules of Practice and also against CVB and Anderson +pursuant to Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +II. + + After an investigation, the Division of Enforcement alleges: + +SUMMARY + +1. Between March 2010 and June 2011, CVB, an accounting firm based in Salt Lake +City, Utah, and Anderson and Van Wagoner, two of its partners, served as the independent +auditors of Yuhe International, Inc. (“Yuhe”), a China-based company whose stock was +previously registered with the Commission and traded on Nasdaq. These proceedings arise from +Respondents’ failures to comply with Public Company Accounting Oversight Board (“PCAOB”) +Auditing Standards (“PCAOB Standards”) in their 2009 and 2010 audits of Yuhe. Among other +failures, CVB and Anderson failed to: (a) properly plan the audits and supervise assistants; (b) +properly assess audit risk and materiality; (c) properly consider fraud and illegal acts; and (d) act +with due professional care. In his role as engagement quality review partner, Van Wagoner failed +to act with due professional care because he was aware, or should have been aware, of audit +deficiencies but did not address them. Additionally, by virtue of his failure to comply with +professional standards during Yuhe’s 2010 audit, Van Wagoner also violated the engagement +quality review standard set forth in AS 7. + + 2. The Respondents’ failures in the 2009 audit arose principally because CVB and +Anderson effectively performed no audit work of their own and instead relied on the audit work +papers of Yuhe’s prior auditor which had begun the 2009 audit, but then abruptly resigned without +completing it. Even though neither CVB nor Anderson planned, performed, or supervised the prior +firm’s audit work, they took that firm’s work papers, performed at best a cursory review of them, +and then issued an audit report containing an unqualified opinion on Yuhe’s financial statements— +all within only approximately three weeks of accepting the Yuhe engagement. + + 3. CVB and Anderson also performed a deficient audit of Yuhe’s 2010 financial +statements. During planning for the 2010 audit, CVB and Anderson assessed Yuhe as lacking +effective internal controls such that no controls reliance could be utilized in performing the audit. +Specifically, they documented within CVB’s planning work papers that “the auditor is concerned +about the risk of material misstatement” due to Yuhe’s “inability to perform proper procedures +necessary to produce a reliable financial statement.” They also noted that Yuhe personnel +appeared to lack the experience and ability to create financial statements using accounting +principles generally accepted in the United States (“US GAAP”). Yet, despite this assessment, +CVB and Anderson failed to implement auditing procedures that addressed the risks identified. + +2 Rule 102(e)(1)(ii) and (iii) provide, in pertinent part, that: (ii) “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;” and (iii) “to have willfully violated, …any provision of the Federal +securities laws or the rules and regulations thereunder.” + + 3 +They performed an audit based upon the basic audit procedures within their prescribed checklists +without modification, failed to extend procedures to address the known risk of material +misstatement, and relied heavily on management representations. They also failed to provide +meaningful direction and supervision to the foreign audit staff CVB hired to perform fieldwork in +China (hereafter, “Foreign Audit Staff”). Despite these deficiencies, and without the application of +due professional care in his role as engagement quality reviewer, Van Wagoner provided his +concurrence on the issuance of the audit report. + +RESPONDENTS + +4. Child, Van Wagoner & Bradshaw, PLLC, located during the pertinent period in +Salt Lake City, Utah, is a Utah professional limited liability company and public accounting firm +formerly registered with the PCAOB. CVB acted as Yuhe’s independent auditor initially from +March 12, 2008 to December 7, 2009, and then again from March 9, 2010 to June 17, 2011. +CVB performed public company audits3 of, and issued audit reports containing unqualified +opinions on, the financial statements of Yuhe for Yuhe’s fiscal years ending December 31, 2008, +December 31, 2009, and December 31, 2010. CVB resigned as Yuhe’s independent auditor on +June 17, 2011, following public disclosure by Yuhe that a purported business acquisition by +Yuhe had, in fact, never occurred. During the time of its Yuhe audits, CVB had four audit +partners and two non-audit partners. CVB ceased to do public company audits as of August 1, +2012. CVB is no longer registered with the PCAOB, but remains “active” and in “good +standing” in the records of the State of Utah Division of Corporations and Commercial Code. + +5. Russell E. Anderson, age 53, is a Certified Public Accountant (“CPA”) licensed to +practice in Utah. Anderson served as CVB’s engagement partner for the 2008, 2009, and 2010 +Yuhe audits and was responsible for making all significant decisions regarding the engagements. +During 2009 and 2010, Anderson was also CVB’s “quality control partner.” He is a resident of +West Valley City, Utah. + +6. Marty Van Wagoner, age 52, is a CPA licensed to practice in Utah. Van Wagoner +served as CVB’s engagement quality review partner for the 2008, 2009 and 2010 audits of Yuhe. +He is a resident of Eagle Mountain, Utah. + +RELEVANT ENTITY + +7. Yuhe International, Inc. is a Nevada corporation whose principal offices are located +in Weifang, Shandong Province, People’s Republic of China.4 Yuhe sells day-old chicken +broilers, i.e., chickens that are bred and raised for meat production, and claims to be the largest + +3 A public company audit is defined as an engagement to audit the financial statements of an “issuer” as that term is +defined in Section 3(a)(8) of the Exchange Act. + +4 On October 18, 2013, the Commission filed a civil injunctive action against Yuhe and its Chief Executive Officer +(“CEO”), alleging violations of the antifraud provisions of the Securities Act of 1933 and the Exchange Act, as well +as the books and records, internal controls, and reporting provisions of the Exchange Act. SEC v. Yuhe Int’l, Inc. +and Gao Zhentao, Civil Action No. 1:13-CV-01598-RCL (D.D.C., filed Oct. 18, 2013). + 4 +supplier of day-old broilers in China. All of Yuhe’s operations are carried out in China. Its +common stock was registered with the Commission pursuant to Section 12(b) of the Exchange Act, +and was traded on the Nasdaq Capital Market. On October 20, 2010, Yuhe completed a registered +public offering in the United States of more than four million shares of its common stock at a price +of $7 per share, raising approximately $27 million. On July 21, 2011, Nasdaq suspended trading +of Yuhe’s common stock, and, on December 16, 2011, Nasdaq filed a Form 25 with the +Commission to delist the common stock, which is now quoted on OTC Link. Yuhe’s fiscal year +ends on December 31. + +FACTS + +Background + +8. CVB audited Yuhe’s financial statements for its fiscal year ending December 31, +2008, and issued an audit report containing an unqualified opinion. In order to perform field work +in China for this audit, CVB contracted with accounting personnel in a Shanghai, China +independently owned member firm of an international public accounting network firm (hereafter, +“Shanghai Office”). In conducting Yuhe’s 2008 audit, CVB did not place any reliance on Yuhe’s +internal controls due to CVB’s assessment that Yuhe’s internal controls were ineffective. As a +result, CVB conducted a fully substantive audit and did not reduce any substantive testing in its +audit procedures based upon assessment or testing of internal controls. + +9. CVB continued its engagement as Yuhe’s auditor for Yuhe’s 2009 fiscal year, and +conducted interim reviews of Yuhe’s financial statements for that fiscal year’s first, second, and +third quarters. However, in late 2009 during Yuhe’s fourth fiscal quarter, the Shanghai Office was +acquired by another international public accounting firm (hereafter, the “Acquiring Firm”). + +10. Following this acquisition, on December 7, 2009, the Audit Committee of Yuhe’s +Board of Directors appointed the Acquiring Firm as Yuhe’s independent auditor. Under the +engagement agreement, the Acquiring Firm was to perform the 2009 year-end audit and opine on +the 2009 financial statements. Thereafter, from December 2009 through February 2010, the +individuals who were formerly the Shanghai Office personnel working on Yuhe’s audits, but now +employees of the Acquiring Firm, planned and executed the Yuhe audit under the Acquiring +Firm’s supervision and in accordance with the Acquiring Firm’s audit approach. + +11. During its audit procedures and fieldwork, the Acquiring Firm identified in Yuhe’s +books and records, as of February 2010, ongoing related party transactions which Yuhe had earlier +asserted in a public filing would be discontinued by December 31, 2009. In the prior year, Yuhe’s +management had concluded that the related party transactions constituted violations of Section 402 +of the Sarbanes-Oxley Act of 2002 and that a material weakness existed over the lack of review +and approval of related party loans, due to Yuhe’s management permitting these transactions +without Board of Director approval. On March 5, 2010, the Acquiring Firm resigned from the +engagement, and Yuhe’s Form 8-K filing cited the prohibited related party loan, the material +weakness over the review and approval of such loans, and a material weakness related to Yuhe’s +inability to properly close its books as the reasons for the Acquiring Firm’s resignation. At the + 5 +time of its resignation, the Acquiring Firm’s audit field work for the 2009 audit of Yuhe was +incomplete. + +12. Yuhe’s due date for filing its 2009 Form 10-K with the Commission was March 31, +2010, less than a month after the Acquiring Firm’s resignation. With such a short time period +before its filing deadline, Yuhe approached CVB to return as its independent auditor and complete +the 2009 audit. Respondents accepted Yuhe’s request and, on March 9, 2010, CVB re-engaged as +Yuhe’s independent auditor. Only twenty-one days later, on March 30, 2010, Anderson, with Van +Wagoner’s concurrence, issued CVB’s audit report containing an unqualified opinion on Yuhe’s +financial statements for the 2009 fiscal year. + +CVB and Anderson’s 2009 Audit of Yuhe + +13. Auditing standards require an auditor to adequately plan and perform an audit and +properly supervise assistants. AU § 311.01.5 Audit planning involves developing an overall +strategy for the expected conduct and scope of the audit. The nature, extent, and timing of +planning vary with the size and complexity of the entity, experience with the entity, and knowledge +of the entity’s business. In planning the audit, the auditor should consider, among other matters, +the entity’s business, accounting policies and procedures, and planned assessed level of control +risk. AU § 311.03. Supervision involves directing the efforts of assistants who are involved in +accomplishing the objectives of the audit and determining whether those objectives are +accomplished. AU § 311.01, .11-.13. Elements of supervision include, among others, instructing +assistants, keeping informed of significant problems encountered, and reviewing the work +performed. AU § 311.11-.13. + +14. After reengaging as Yuhe’s auditor for the 2009 audit, CVB and Anderson did not +perform their own audit of Yuhe. Instead, CVB and Anderson sought and obtained the audit work +papers of the Acquiring Firm from its incomplete fieldwork for the short period it was Yuhe’s +auditor. Between approximately March 9 and March 30, 2010, CVB’s acting audit manager for +the 2009 Yuhe audit, a senior associate at CVB who was not a CPA, collected and reviewed the +incomplete audit work papers of the Acquiring Firm. The acting audit manager did not request that +any additional audit procedures be performed, and did not provide review notes for additional +clarification or documentation to be added to the substantive audit procedures. In fact, no +additional meaningful substantive audit procedures were performed for the Yuhe audit by CVB or +Anderson or anyone acting at their direction. + +15. As a result of not performing their own audit of Yuhe, neither CVB nor Anderson +participated in the planning, execution, or supervision of any audit procedures performed for +Yuhe’s 2009 audit. Neither CVB nor Anderson formulated a specific audit plan for Yuhe’s 2009 +audit, or conducted formal audit planning meetings. Moreover, neither CVB nor Anderson made +sufficient inquiry into Yuhe’s business, recent developments, accounting policies and procedures, +or control risk. Additionally, CVB and Anderson did not provide direction or guidance to the +accounting staff in China who performed the audit field work. + +5 References to auditing standards in this Order are to PCAOB Standards in effect at the time the audit work was +performed. + 6 + +16. The auditor should consider audit risk and materiality both in (a) planning the audit +and designing auditing procedures and (b) evaluating whether the financial statements taken as a +whole are presented fairly, in all material respects, in conformity with generally accepted +accounting principles. The auditor should consider audit risk and materiality in the first +circumstance to obtain sufficient competent evidential matter on which to properly evaluate the +financial statements in the second circumstance. AU § 312.12. + +17. As a result of not performing their own audit of Yuhe, neither CVB nor Anderson +participated in assessing audit risk or materiality for Yuhe’s 2009 audit. CVB and Anderson +simply accepted the assessment of materiality that the Acquiring Firm had documented without +any consideration of how the amounts were established or if those amounts were appropriate. As +part of the work that CVB and Anderson had done for the quarterly reviews, there was no planning +or assessments documented that correspond to the procedures that were ultimately performed. + +18. The audit approach used by the Acquiring Firm for Yuhe’s 2009 audit differed +significantly from that of CVB and Anderson’s audit approach in the 2008 audit of Yuhe. For the +2009 audit, the Acquiring Firm’s audit approach contemplated an intended reliance on Yuhe’s +internal controls which, if effective, would have allowed the Acquiring Firm to reduce its +substantive testing. However, for the 2008 audit, CVB and Anderson had assessed Yuhe’s internal +control over financial reporting as weak to the point of planning to obtain no audit comfort from +testing them. Further, the testimony of Anderson shows that he and CVB continued to place no +reliance on controls for the 2009 audit. When CVB re-engaged as Yuhe’s auditor, CVB and +Anderson failed to adjust the audit approach used by the Acquiring Firm, or explain in their work +papers why reliance on Yuhe’s internal controls was appropriate. + +19. Auditing standards require an auditor to plan and perform an audit to obtain +reasonable assurance about whether the financial statements are free of material misstatement, +whether caused by error or fraud. AU § 316.01. Among other things, members of the audit team +should discuss the potential for material misstatement due to fraud.. Discussions should include an +exchange of ideas or “brainstorming” among the audit team members, including the auditor with +final responsibility for the audit, about how and where they believe the entity’s financial statements +might be susceptible to material misstatement due to fraud, how management could perpetrate and +conceal fraudulent financial reporting, and how assets of the entity could be misappropriated. AU +§ 316.14. Auditing standards require an auditor to make inquiries of management and others +within the entity to obtain their views about the risks of fraud and how they are addressed. AU +§316.14-.27. + +20. By not planning or performing the 2009 audit of Yuhe, CVB and Anderson did not +seek to obtain reasonable assurance that Yuhe’s financial statements were free of material +misstatement, whether by error or fraud. CVB and Anderson did not consider the risks of material +misstatement due to fraud at Yuhe, did not meet to discuss the susceptibility of Yuhe’s financial +statements to material misstatement due to fraud, and did not inquire of Yuhe management or its +employees about fraud in connection with CVB and Anderson’s issuance of its 2009 audit report. + + 7 +21. AU § 317 notes that audit procedures applied for the purpose of forming an opinion +on the financial statements may bring possible illegal acts to the auditor’s attention. Examples of +these procedures include reading minutes; inquiring of the client’s management and legal counsel +concerning litigation, claims, and assessments; and performing substantive tests of details of +transactions or balances. Auditing standards require an auditor to make inquiries of management +concerning the client’s compliance with laws and regulations, including, where applicable, the +client’s policies relative to the prevention of illegal acts. AU § 317.08. + +22. There is no documentary evidence suggesting any inquiries by CVB or Anderson of +Yuhe’s management concerning Yuhe’s policies related to the prevention of illegal acts and +compliance with laws and regulations. Here, such inquiries would have been appropriate, given (i) +the resignation of the prior auditor; (ii) the continued existence of prohibited loans; (iii) the number +and type of audit adjustments included in the Acquiring Firm’s incomplete audit work papers that +CVB obtained, which indicated a lack of knowledge within Yuhe of financial reporting practices +common to the United States; (iv) the weak or non-existent control environment; and (v) the use of +personal bank accounts for Yuhe payments, which would have indicated higher risk and potentially +triggered additional procedures and inquiries. + +23. Auditing standards also require an auditor to consider the risks surrounding related +party transactions. AU § 334. An auditor should obtain an understanding of management +responsibilities, the relationship of each component to the total entity, the business purpose served +by the various components of the entity, and the controls over management activities. AU § +334.05. After identifying related party transactions, the auditor should apply the procedures he +considers necessary to obtain satisfaction concerning the purpose, nature, and extent of these +transactions and their effect on the financial statements. The procedures should be directed toward +obtaining and evaluating sufficient competent evidential matter and should extend beyond inquiry +of management. AU § 334.09. + +24. CVB and Anderson did not consider the risks surrounding related party transactions +during the 2009 Yuhe audit. Instead, CVB and Anderson relied upon work performed and +assessments made by the Acquiring Firm whose work papers were incomplete. CVB and +Anderson did not inquire of management independently as part of their audit, nor did they hold any +discussions with the Audit Committee concerning related party transactions. + +25. Under auditing standards, the observation of inventories is mandated as a generally +accepted auditing procedure. AU § 331.01. CVB and Anderson did not perform an inventory +observation during the 2009 audit of Yuhe. An inventory observation was done by the Acquiring +Firm. Moreover, when the Acquiring Firm performed the observation, it only performed limited +counts because it placed some reliance on Yuhe’s internal controls relating to inventory. + +26. Auditing standards require auditors to exercise due professional care throughout the +audit. AU § 230. Due professional care requires that the auditor exercise professional skepticism, +which means a questioning mind and a critical assessment of audit evidence. Moreover, gathering +and objectively evaluating audit evidence requires the auditor to consider the competency and +sufficiency of the evidence. Since evidence is gathered and evaluated throughout the audit, + 8 +professional skepticism should be exercised throughout the audit process. By failing to adhere to +the auditing standards set forth above, CVB and Anderson failed to exercise due professional care +during the 2009 Yuhe audit. + +27. Van Wagoner, as engagement quality review partner, also failed to exercise due +professional care in Yuhe’s 2009 audit. Van Wagoner had responsibility for reviewing the audit +work for the 2009 audit. He was aware that CVB and Anderson had not planned, conducted, or +supervised an audit of Yuhe and had instead taken, and were relying upon, the work papers of a +different audit firm. Despite having this knowledge, Van Wagoner concurred in CVB’s issuance +of an audit report containing an unqualified opinion on Yuhe’s financial statements for fiscal year +2009. + +28. Under the third standard of field work, sufficient competent evidential matter is to +be obtained through inspection, observation, inquiries, and confirmations to afford a reasonable +basis for an opinion regarding the financial statements under audit. AU § 326.01. CVB and +Anderson did not contribute or provide supervision in the inspection, observation, inquiry, or +confirmation processes of the 2009 audit of Yuhe—all of which were done by the Acquiring Firm. + +29. Audit documentation is the written record of the basis for the auditor’s conclusions +that provides the support for the auditor’s representations in the auditor’s report. Audit +documentation also is the basis for the review of the quality of the work because it provides the +reviewer with written documentation of the evidence supporting the auditor’s significant +conclusions. Among other things, audit documentation includes records of the planning and +performance of the work, the procedures performed, evidence obtained, and conclusions reached +by the auditor. AS 3, ¶ 2. + +30. CVB and Anderson failed to properly document the 2009 audit. They failed to +document how they accepted and utilized the work of another firm, how they were able to +supervise assistants performing audit procedures before CVB was engaged on the audit, how they +obtained evidence, and how they reached conclusions. + +31. Obtaining representations from management is required for audits performed in +accordance with PCAOB Standards, as outlined in AU § 333. While such representations are part +of the evidence obtained by an independent auditor, they cannot substitute for the application of the +auditing procedures needed to afford a reasonable basis for an opinion regarding the financial +statements under audit. AU § 333.02. In the 2009 audit of Yuhe, CVB and Anderson obtained +written representations without applying auditing procedures which would have been necessary to +form a basis for their opinion. + +CVB and Anderson’s 2010 Audit of Yuhe + +32. Yuhe engaged CVB to conduct an audit of its 2010 financial statements. CVB and +Anderson documented that Yuhe presented a significant risk of material misstatement because +Yuhe lacked the ability to perform the proper procedures necessary to produce reliable financial +statements, and Yuhe personnel lacked the experience and ability to create financial statements in + 9 +accordance with US GAAP, understand Yuhe’s transactions, and account for them properly. +Accordingly, citing a weak controls environment, CVB and Anderson planned their audit assuming +no controls reliance. + +33. For the 2010 audit, CVB increased the planning materiality threshold to over 230% +of the prior year’s number, even though CVB and Anderson continued to believe that they could +not rely on Yuhe’s internal controls and there was not a proportionate increase in net income. +Additionally, CVB and Anderson did not document their rationale for increasing materiality in +2010. + +34. Despite assessing a weak controls environment, CVB and Anderson’s approach to +the audit consisted mostly of a perfunctory completion of checklists and certain substantive testing +procedures, along with a review of those checklists by CVB and Anderson and did not include a +proper consideration of risk and materiality. + +35. For the 2010 Yuhe audit, CVB and Anderson contracted with personnel in China to +perform fieldwork on CVB’s behalf. However, CVB and Anderson did not play a substantive role +in audit supervision and, instead, sent checklists to the Foreign Audit Staff to use without specific +instructions, detailed work plans, or appropriate modifications based on identified risks. CVB and +Anderson failed to provide the Foreign Audit Staff specific guidance on the procedures to be +performed, the audit objectives to be accomplished, or the need to maintain proper audit +documentation in accordance with AU § 311 and AS 3. + +36. CVB’s audit manager gave the work papers created by the Foreign Audit Staff +only a cursory review with no follow up or substantive dialogue as to their content or findings. +Neither CVB nor Anderson questioned the substantive work performed by the Foreign Audit Staff +or provided any review comments or requests for additional procedures. CVB and Anderson failed +to comply with the provisions of AU § 311 as outlined in paragraph 13. + +37. Whenever the auditor has concluded that there is significant risk of material +misstatement of the financial statements, the auditor should consider this conclusion in +determining the nature, timing, or extent of procedures; assigning staff; or requiring appropriate +levels of supervision. The knowledge, skill, and ability of personnel assigned significant +engagement responsibilities should be commensurate with the auditor’s assessment of the level +of risk for the engagement. Ordinarily, higher risk requires more experienced personnel or more +extensive supervision by the auditor with final responsibility for the engagement during both the +planning and the conduct of the engagement. Higher risk may cause the auditor to expand the +extent of procedures applied, apply procedures closer to or as of year end, particularly in critical +audit areas, or modify the nature of procedures to obtain more persuasive evidence. AU § +312.17. + +38. CVB and Anderson documented during the fraud risk discussion concerns about the +risk of material misstatement due to Yuhe’s inability to perform proper procedures necessary to +produce reliable financial statements. Despite CVB and Anderson having assessed Yuhe’s +internal controls as ineffective and its personnel as lacking in experience to produce US GAAP + 10 +financial statements, CVB and Anderson failed to properly consider the risk of material +misstatement and design appropriate audit procedures to address the identified risks. + +39. CVB and Anderson failed to properly consider the possibility of fraud or modify +and extend the audit procedures based on such considerations in 2010. CVB and Anderson also +identified as a risk the use of personal bank accounts to transact company business and the risk of +personal funds being intermingled with business funds. To address the risk identified, CVB and +Anderson assigned two Hong Kong based individuals on the Foreign Audit Staff to perform +procedures to address these risks. However, neither CVB nor Anderson supervised or reviewed +the procedures carried out by these two individuals. AU § 312.17 states that higher risk requires +more experienced personnel or more extensive supervision by the auditor with final +responsibility for the engagement during both the planning and the conduct of the engagement. +AU § 316.01 requires an auditor to plan and perform an audit to obtain reasonable assurance about +whether the financial statements are free of material misstatement, whether caused by error or +fraud. By not properly addressing the risks that were identified, or supervising the staff assigned +to the task, CVB and Anderson failed to properly consider and address the risk associated with +fraud on the financial statements. + +40. Even though CVB and Anderson assessed Yuhe’s internal controls as ineffective and +its personnel as lacking in experience to produce US GAAP financial statements, CVB and +Anderson relied on discussions with management by the Foreign Audit Staff and on evidence +supplied by management throughout their audit as their sole basis for audit evidence in certain +areas. CVB and Anderson’s overreliance on management’s representations, especially in light of +their assessment of management’s abilities, was inappropriate. While such representations from +management are part of the evidential matter the independent auditor obtains, they are not a +substitute for the application of those auditing procedures necessary to afford a reasonable basis for +an opinion regarding the financial statements under audit. AU § 333.02. + +41. In late March 2011, CVB and Anderson completed Yuhe’s 2010 audit and issued +an audit report containing an unqualified opinion on Yuhe’s financial statements for fiscal year +2010. + +42. Under the auditing standard governing engagement quality review which was +effective for Yuhe’s 2010 audit, the engagement quality reviewer should evaluate the significant +judgments made by the engagement team and the related conclusions reached in forming the +overall conclusion on the engagement and in preparing the engagement report. AS 7, ¶ 9. The +engagement quality reviewer should evaluate the significant judgments that relate to engagement +planning, including the consideration of the auditing firm’s recent engagement experience with the +company and risks identified in connection with the firm’s client acceptance and retention process, +the consideration of the company’s business, recent significant activities, and related financial +reporting issues and risks, and the judgments made about materiality and the effect of those +judgments on the engagement strategy. AS 7, ¶ 10. To evaluate such judgments and conclusions, +the engagement quality reviewer should, to the extent necessary to satisfy the requirements, hold +discussions with the engagement partner and other members of the engagement team and review +documentation. AS 7, ¶ 9. In an audit, the firm may grant permission to the client to use the + 11 +engagement report only after the engagement quality reviewer provides concurring approval of +issuance. AS 7, ¶ 13. + +43. Van Wagoner failed to fulfill the requirements of AS 7 for Yuhe’s 2010 audit. +Specifically, the work papers do not evidence any communications between the audit team and +Van Wagoner throughout the year or during the audit process. The emails among team members +show that the vast majority of Van Wagoner’s communications appear perfunctory and lacking in +substantive information or commentary. There is no evidence that he reviewed or evaluated the +audit planning process, the assessment of materiality, or the consideration and assessment of fraud +risks in a manner that would fulfill professional responsibilities. + +Yuhe’s Public Offering and Fraud + +44. On June 2, 2010, Yuhe filed its Form S-3 Registration Statement and Prospectus +with the Commission, which became effective on June 23, 2010. On October 19, 2010, Yuhe filed +its Preliminary Prospectus Supplement, and, on October 20, 2010, it filed its Final Prospectus +Supplement. CVB’s audit report containing an unqualified opinion for 2009 was included in those +filings, as each incorporated Yuhe’s 2009 Form 10-K. From October 20, 2010 to November 2, +2010, Yuhe conducted a public offering, selling 4.14 million newly issued shares of common stock +at a price of $7.00 per share, and receiving net proceeds in excess of $27 million. + +45. On December 31, 2009, and January 4, 2010, Yuhe filed Forms 8-K announcing +that on December 24, 2009, it had entered into an agreement with Waifang Dajiang Corporation to +purchase thirteen breeder farms for an aggregate price of approximately $15.2 million. Prior to the +acquisition, Yuhe owned only fourteen breeder farms, which meant the acquisition would increase +Yuhe’s capacity by 60%. From January 2010 through June 2011, in press releases and filings with +the Commission, Yuhe provided numerous updates concerning the status of the acquired farms. +However, on June 17, 2011, Yuhe hosted a conference call during which Yuhe disclosed for the +first time that the acquisition had never been completed and that the funds had, instead, been +placed in a private account controlled by the CEO. On the same day shortly after the conference +call, CVB resigned as Yuhe’s independent auditor, stating that reliance should no longer be placed +on its previously issued audit report for 2010. + +VIOLATIONS + +Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice + + 46. As a result of the conduct described above, Respondents engaged in improper +professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) provide, in pertinent part, that the Commission may censure or deny, +temporarily or permanently, the privilege of appearing or practicing before the Commission to +any person who is found by the Commission to have engaged in improper professional conduct. +Section 4C(b) and Rule 102(e)(1)(iv) define improper professional conduct with respect to +persons licensed to practice as accountants. + 12 + +47. Under Section 4C(b) and Rule 102(e)(1)(iv)(B), the term “improper professional +conduct” means one of two types of negligent conduct: (1) a single instance of highly +unreasonable conduct in circumstances for which heightened scrutiny is warranted; or (2) +repeated instances of unreasonable conduct that indicate a lack of competence. + +48. Respondents’ failures to abide by PCAOB Standards during the 2009 and 2010 +Yuhe audits constitute repeated instances of unreasonable conduct. Additionally, the actions of +CVB and Anderson during the 2009 Yuhe audit constitute a single instance of highly unreasonable +conduct in circumstances in which heightened scrutiny was warranted. As a result, the +Respondents have demonstrated a lack of competence to practice before the Commission. + +49. As a result of the conduct described above, CVB willfully violated and Anderson +willfully aided and abetted CVB’s violations of Section 10A(a)(1) and (2) of the Exchange Act +and Rule 2-02(b)(1) of Regulation S-X within the meaning of Section 4C(a)(3) of the Exchange +Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. Section 4C(a)(3) of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice provide, in +pertinent part, that the Commission may censure or deny, temporarily or permanently, the +privilege of appearing or practicing before the Commission to any person who is found by the +Commission to have willfully violated, or willfully aided and abetted the violation of, any +provision of the securities laws or the rules and regulations issued thereunder. + +CVB Violated and Anderson Aided, Abetted, and Caused CVB’s Violations of Section 10A(a)(1) +and (2) of the Exchange Act and Rule 2-02(b)(1) of Regulation S-X + +50. Under Section 21C of the Exchange Act, the Commission may enter a cease and +desist order against any person who commits a violation or is or was a “cause” of another’s +primary violation if the person knew or should have known that his act or omission would +contribute to the primary violation. Negligence is sufficient to establish “causing” liability under +Section 21C of the Exchange Act when a person is alleged to have caused a primary violation +that does not require scienter. See KPMG LLP v. SEC, 289 F.3d 109, 112 (D.C. Cir. 2002). + +51. Sections 10A(a)(1) and (2) of the Exchange Act require that each audit of the +financial statements of an issuer by a registered public accounting firm must include, in accordance +with generally accepted auditing standards (“GAAS”), procedures designed to detect illegal acts +and identify related party transactions that are material to the financial statements. “[R]eferences +in Commission rules and staff guidance and in the federal securities laws to GAAS or to specific +standards under GAAS, as they relate to issuers, should be understood to mean the standards of the +PCAOB plus any applicable rules of the Commission.” See SEC Release No. 34-49708 (May 14, +2004). + +52. As a result of the conduct described above, CVB violated Sections 10A(a)(1) and +(2) of the Exchange Act by not designing procedures to detect illegal acts and identify related party +transactions that were material to the financial statements, and Anderson aided, abetted, and/or +caused CVB’s violations of Sections 10A(a)(1) and (2) of the Exchange Act. + 13 + +53. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state +whether the audit was made in accordance with generally accepted auditing standards. “Thus, an +auditor violates Regulation S-X Rule 2-02(b)(1) if it issues a report stating that it had conducted its +audit in accordance with PCAOB Standards when it had not.” See In re Andrew Sims, CPA, Rel. +No.34-59584, AAER No. 2950 (Mar. 17, 2009). + +54. As a result of the conduct described above, CVB violated Rule 2-02(b)(1) of +Regulation S-X by issuing an audit report stating that it had conducted its audit in accordance +with PCAOB Standards when it had not, and Anderson aided, abetted, and/or caused CVB’s +violation of, Rule 2-02(b)(1) of Regulation S-X. + +III. + +In view of the allegations made by the Division of Enforcement, the Commission deems it +necessary and appropriate in the public interest that public administrative and cease-and-desist +proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondents an opportunity to establish any defenses to such allegations; + +B. What, if any, remedial action is appropriate against Respondents CVB, Anderson, +and Van Wagoner pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice; + +C. What, if any, remedial action is appropriate against Respondents CVB and +Anderson pursuant to Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice; + +D. Whether, pursuant to Section 21C of the Exchange Act, Respondents CVB and +Anderson should be ordered to cease and desist from committing or causing violations of and any +future violations of Sections 10A(a)(1) and (2) of the Exchange Act and Rule 2-02(b)(1) of +Regulation S-X. + +E. Whether Respondents CVB and Anderson should be ordered to pay disgorgement, +plus prejudgment interest, and civil penalties pursuant to Sections 21B and 21C of the Exchange +Act. + +IV. + +IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions +set forth in Section III hereof shall be convened 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. + 14 + +IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission’s Rules of Practice, 17 C.F.R. § 201.220. + +If Respondents fail to file the directed answer, or fail to appear at a hearing after being duly +notified, the Respondents may be deemed in default and the proceedings may be determined against +them upon consideration of this Order, the allegations of which may be deemed to be true as +provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of Practice, 17 C.F.R. +§§ 201.155(a), 201.220(f), 201.221(f) and 201.310. + +This Order shall be served forthwith upon Respondents personally or by certified mail. + +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an i nitial +decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of +the Commission’s Rules of Practice. + +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + + By the Commission. + + + Jill M. Peterson + Assistant Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3566.pdf b/raw/aaer/2014/AAER-3566.pdf new file mode 100644 index 0000000000000000000000000000000000000000..bed0a4f4b4b362e498259c4c48c2130528c4b4f5 Binary files /dev/null and b/raw/aaer/2014/AAER-3566.pdf differ diff --git a/raw/aaer/2014/AAER-3567.txt b/raw/aaer/2014/AAER-3567.txt new file mode 100644 index 0000000000000000000000000000000000000000..012b45d3cf265ee82660514a81c8fd8734bd72bb --- /dev/null +++ b/raw/aaer/2014/AAER-3567.txt @@ -0,0 +1,79 @@ + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72637 / July 17, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3567 / July 17, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15977 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +ROBERT C. TROSTEN, 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 Robert C. Trosten, CPA pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice [17 C.F.R. § 200.102(e)(2)].1 + + II. + +The Commission finds that: + +1. Trosten has an inactive certified public accountant license in New York. + +2. On June 12, 2014, a judgment of conviction was entered against Trosten in United +States v. Trosten, S3 05 Cr. 01192 (NRB) in the United States District Court for the Southern + +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 + +District of New York, finding him guilty of one count of conspiracy to commit securities fraud, +one count of securities fraud, one count of wire fraud, one count of bank fraud, and one count of +money laundering. + +3. As a result of this conviction, Trosten was sentenced to imprisonment for a term +of time served. The District Court also ordered Trosten to forfeit assets in an amount up to $2.4 +billion, for which he is jointly and severally liable with certain other defendants. + +III. + +In view of the foregoing, the Commission finds that Trosten 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 Robert C. Trosten, CPA is forthwith suspended from +appearing or practicing before the Commission as an accountant pursuant to Rule 102(e)(2) of +the Commission’s Rules of Practice. + + +By the Commission. + + + +Jill M. Peterson +Assistant Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3568.pdf b/raw/aaer/2014/AAER-3568.pdf new file mode 100644 index 0000000000000000000000000000000000000000..84b422881adfed36880db916ce09db94591a868f Binary files /dev/null and b/raw/aaer/2014/AAER-3568.pdf differ diff --git a/raw/aaer/2014/AAER-3568.txt b/raw/aaer/2014/AAER-3568.txt new file mode 100644 index 0000000000000000000000000000000000000000..96766ddc0f730b28119cd2e01861daa17bec4360 --- /dev/null +++ b/raw/aaer/2014/AAER-3568.txt @@ -0,0 +1,428 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72639 / July 17, 2014 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3568 / July 17, 2014 +Admin. Proc. File No. 3-14171 + + +In the Matter of + +JAMES M. SCHNEIDER, CPA +c/o W. Neil Eggleston +Kirkland & Ellis LLP +655 Fifteenth Street, N.W. +Washington, D.C. 20005 + + + +ORDER DENYING MOTION OR, +IN THE ALTERNATIVE, +APPLICATION FOR +MODIFICATION OF +COMMISSION ORDER IMPOSING +REMEDIAL SANCTIONS + +James M. Schneider is a certified public accountant and the former chief financial officer +of Dell, Inc. Schneider is currently suspended from appearing or practicing before the +Commission as an accountant, with the right to apply for reinstatement after five years, pursuant +to an order imposing remedial sanctions that we issued on December 22, 2010 under our Rule of +Practice 102(e)(3)(i).1 Schneider now asks the Commission to "clarify" that the order "does not +prevent him from serving on the Audit Committee of General Communications, Inc. (GCI), a +Commission registrant." +This is Schneider's second request to clarify our Rule 102(e) suspension order. In his first +request, Schneider asked us to state that the order did not prohibit him "from accepting non- +accountant positions, such as positions on an audit committee or as a non-accountant CFO [chief +financial officer]." We denied that request on July 2, 2013. We explained that to grant such relief + +1 James M. Schneider, CPA, Securities Exchange Act Rel. No. 63600, 2010 WL 5183935, at +*2 (Dec. 22, 2010) (instituting follow-on proceedings pursuant to our Rule of Practice 102(e) +based on Schneider's consent to a permanent injunction, disgorgement, and civil penalties in a +U.S. district court proceeding); 17 C.F.R. § 201.102(e)(3)(i) (providing that the Commission may +suspend from practicing before it any accountant who has been "permanently enjoined by any +court of competent jurisdiction" from violating any provision of the Federal securities laws in an +action brought by the Commission). +2 + +would "exempt entire job titles from our order, regardless of what tasks or responsibilities those +positions entailed."2 In this second request, Schneider narrows the universe of potential jobs to a +specific position (that of GCI audit committee member). But, as explained below, his request +suffers from the same flaw as his first: asking for a declaration that his service on an audit +committee will not constitute "appearing or practicing before the Commission as an accountant" +based on only the title and other broad generalities about the position, rather than the actual +conduct that Schneider might perform when serving in that role.3 +BACKGROUND +The Commission filed a civil law enforcement action on July 22, 2010 against Dell, +Schneider, and certain other Dell executives in the United States District Court for the District of +Columbia, charging them with fraud and various reporting and recordkeeping violations. Among +other things, the Commission alleged that Schneider, while serving as Dell's CFO, had used a +fraudulent accounting scheme to create the false appearance that Dell was consistently meeting +Wall Street earnings targets and reducing its operating expenses.4 Without admitting or denying +the allegations, Schneider consented to a permanent injunction, disgorgement, and civil +penalties.5 Schneider also consented to our instituting administrative follow-on proceedings +against him, pursuant to which Schneider agreed to being "suspended from appearing or +practicing before the Commission as an accountant," with a right to reapply after five years, +under Rule 102(e).6 +When the Commission filed its enforcement action in U.S. district court, Schneider was +serving as a director and audit committee member at three publicly held companies. Schneider +subsequently resigned from two of those companies, but he continued to serve as an audit +committee member at GCI. On August 5, 2011, Commission staff notified GCI and Schneider's +counsel that, by serving on GCI's audit committee, Schneider was violating the terms of the +Commission's Rule 102(e) suspension order. Schneider subsequently resigned from GCI's audit +committee. + +2 James M. Schneider, CPA, Exchange Act Rel. No. 69922, 2013 WL 3327751, at *4 (July 2, +2013). +3 On July 11, 2014, Schneider filed a motion for expedited consideration of his latest motion +for clarification. Because we are hereby denying Schneider's motion for clarification, Schneider's +motion for expedited consideration is moot. +4 Schneider was Dell's chief accounting officer from September 1996 to November 2002 and +was Dell's CFO from March 2000 to January 2007. The alleged misconduct occurred between +2001 and 2006. +5 SEC v. Dell, No. Civ. 1:10-cv-01245 (D.D.C. Oct. 13, 2010) (imposing final judgment as to +Schneider). +6 Schneider, 2010 WL 5183935, at *2. +3 + +A year after Schneider consented to the suspension order, Schneider filed his first request +for clarification, arguing that our order did not preclude him from accepting a position on an +audit committee or as a non-accountant CFO. Approximately three months after we denied that +request, GCI extended an invitation for Schneider to rejoin its audit committee on the condition +that Schneider first obtain an interpretation from the Commission, or a ruling by a court of +competent jurisdiction, that the Rule 102(e) suspension order does not prohibit him from serving +on the company's audit committee. +On October 25, 2013, Schneider informed Commission staff of GCI's offer to serve on its +audit committee and asked Commission staff to approve his acceptance of that position. On +January 29, 2014, the Office of the Chief Accountant ("OCA") wrote to Schneider that OCA +lacked the authority to approve Schneider's acceptance of a particular position. OCA +nevertheless explained that, while it was not in a position to offer legal advice, it remained +"willing to provide guidance with respect to any potential positions" that Schneider may be +offered. To that end, OCA wrote that it had analyzed the functions Schneider said he would be +performing on GCI's audit committee, but concluded that "it is difficult to envision how +performance of many of these activities would be consistent with Mr. Schneider's suspension." +Schneider subsequently filed the present motion for clarification, asking us to state that the Rule +102(e) suspension order does not prevent him from serving on GCI's audit committee.7 +ANALYSIS +We suspended Schneider from appearing or practicing before us as an accountant +pursuant to our authority under Rule 102. As we explained when denying Schneider's first +clarification request, Rule 102 defines "practicing before the Commission" as including but not +limited to "[t]he preparation of any statement, opinion or other paper by any . . . accountant . . . +filed with the Commission in any registration statement, notification, application, report or other +document with the consent of such . . . accountant."8 This definition encompasses persons who +"'participate[d] in the preparation of' financial statements filed with the Commission by, for + +7 As he did in his first motion, Schneider titles his present motion as a request for +"modification" of our order. In his first motion, Schneider expressly represented that, despite the +title of that motion, he was not seeking a modification of our order, only a clarification. See +Schneider, 2013 WL 3327751, at *6 n.50. Schneider does not make a similarly explicit +representation here, but the substance of his motion again does not contain a request for +modification of our order, only a request for clarification. We therefore do not treat his present +motion as a request to modify and thus have not applied our traditional analysis applicable to +such modification requests. See, e.g., Mark S. Parnass, Exchange Act Rel. No. 65261, 2011 WL +4101087, at *2 (Sept. 2, 2011) (setting forth the standard for reviewing requests to lift or modify +administrative bar orders). +8 Schneider, 2013 WL 3327751, at *4 (quoting 17 C.F.R. § 201.102(f)). +4 + +example, 'creat[ing],' 'compil[ing]' or 'edit[ing]' information or data incorporated into those +documents and consenting to their incorporation."9 We explained: +Nothing in this definition discusses, let alone exempts, specific job titles, such as +CFO or audit committee member. This is by design. As we recognized in our +release adopting the 1998 amendments to Rule 102(e), the Commission's limited +resources mean that the Commission and the investing public must "rely heavily +on accountants to assure corporate compliance with federal securities law and +disclosure of accurate and reliable financial information." Accountants play "a +particularly important role . . . in preparing and certifying the accuracy of +financial statements of public companies that are so heavily relied upon by the +public in making investment decisions." This process is impaired if incompetent +or unethical accountants are permitted to participate in the preparation of financial +statements certified and filed with the Commission. . . . These remedial purposes +would be undermined if we were to hold that Schneider could avoid the +prohibition in our Rule 102(e) order by accepting a position based only on that +position's title or on whether non-accountants could accept such a position. +10 +Instead, determining whether serving in a particular role violates our order depends on "a 'fact- +specific inquiry' into the conduct involved when serving in such a position."11 + Because some positions will necessarily "involve duties that increase the likelihood that +Schneider could engage in prohibited conduct, including . . . audit committee member," we +warned Schneider that, "the more a prospective position is associated with the preparation of a +company's financial statements, the more Schneider's acceptance of such a position without prior +approval from the Commission would be done 'at his peril.'" +12 To that end, the Division and OCA +have represented their willingness to provide Schneider with guidance regarding potential +positions, and the Division has further suggested that Schneider might be able to limit his role on +GCI's audit committee in such a way that does not conflict with our Rule 102(e) order. Yet +Schneider has rejected any such limitation as "fanciful." Schneider contends that "[t]he board, +shareholders, and Mr. Schneider's fiduciary duties would not tolerate such a position" and that he +is "frankly shocked that the Staff would suggest it." +13 Instead, Schneider argues that his service + +9 Id. (quoting SEC v. Brown, 878 F. Supp. 2d 109, 127 (D.D.C. 2012)). +10 Id. (citations and footnotes omitted) (citing Robert W. Armstrong, III, Exchange Act Rel. +No. 51920, 2005 WL 1498425, at *11–12 (June 24, 2005) (finding that a controller, who was no +longer a certified public accountant at the time of the alleged misconduct, was appearing or +practicing before the Commission)). +11 Id. (quoting Brown, 878 F. Supp. 2d at 127). +12 Id. at *6 (quoting DiCola v. FDA, 77 F.3d 504, 509 (D.C. Cir. 1996)). +13 Schneider nevertheless proposes some limits to his service on GCI's audit committee by, for +instance, promising that he will not "make specific recommendations as to how certain items +(continued . . .) +5 + +on GCI's audit committee is per se allowable under the Rule 102(e) suspension order. But, as +explained below, such open-ended service on GCI's audit committee could easily lead to +appearing or practicing before us as an accountant and is why we cannot grant Schneider the +declaratory relief that he seeks. +A. Schneider's proposed oversight of GCI's financial reporting could encompass conduct +that violates our Rule 102(e) suspension order. +Schneider argues that his service on GCI's audit committee will fall outside the scope of +our Rule 102(e) suspension order because, he claims, his service will involve "mere oversight +of," rather than actual "participation in," the preparation of GCI's financial statements. But +labeling his proposed service on the committee as "mere oversight" does not mean that his actual +service could not involve appearing or practicing before the Commission as an accountant. In +fact, a court rejected the use of just such a simplistic dichotomy between accounting and non- +accounting functions in SEC v. Prince.14 +In Prince, the Commission filed a district court action alleging that a barred accountant, +Prince, violated a Rule 102(e) bar order by participating in the preparation of a registrant's filings +while serving as a company's "Director of Mergers and Acquisitions."15 In hiring Prince, the +company had created safeguards designed to "ensur[e] that Prince would not be involved with +the accounting department and the accounting data," including the mandate that Prince "was not +allowed to participate in accounting staff meetings and was not allowed to work on preparation +of [the company's] financial statements."16 The court found that, despite these safeguards, Prince +had drafted portions of the company's public filings, prepared financial data that was filed with +the Commission, and made accounting judgments that affected the numbers that went into the +financial statements—conduct the court found fell "well within" the definition of practicing as an +accountant.17 +In holding that Prince had violated our Rule 102(e) bar order, the court rejected Prince's +argument that "practicing accounting" encompassed only accounting department personnel and +executives who have final authority for financial disclosures. The court found that such a + + (. . . continued) +should be recorded" on the company's financial statements. But this promise appears to conflict +with GCI's requirement that its audit committee members evaluate and choose between +alternative accounting treatments and is too vague for us to determine with any certainty that +Schneider's service on GCI's audit committee will not violate our Rule 102(e) suspension order. +See infra notes 29–30 and accompanying text (discussing GCI's audit committee charter). +14 942 F. Supp. 2d 108 (D.D.C. 2013). +15 Id. at 115. +16 Id. at 114–15. +17 Id. at 150. +6 + +"cramped" definition would impermissibly exclude from liability "people who review and decide +on accounting treatments, even if those actions affected the data included in the financial +statement, unless those people have final authority to implement their suggestions."18 The court +explained that "accounting is not a mechanistic, quantitative endeavor, but instead requires many +non-quantitative decisions on which people can reasonably disagree."19 "Because these non- +quantitative decisions may greatly affect what final numbers are included in the financial +statements," the court further reasoned, "those who participate in making those decisions are +'creating' and 'compiling' the relevant information, even if they do not have final authority over +the exact numbers that are included."20 +Schneider attempts to limit Prince's holding by pointing to a footnote from that decision, +which Schneider claims stands for the proposition that a Rule 102(e) suspension "would likely +not apply to 'non-accountant executive officers and directors,' who simply oversee a company's +financial reporting."21 But the footnote to which Schneider cites addressed only an assertion by +Commission staff that "any editorial review" of the financial statements amounted to "practicing +accounting."22 The court observed that this definition of practicing accounting "could arguably +include non-accountant executive officers and directors, who identified typographical errors or +engaged in editorial review of public filings," but concluded that it "need not delve into this +challenging question," because there was substantial evidence in the record to find that the +defendant had practiced accounting under a narrower definition.23 And here, Schneider's +proposed role on GCI's audit committee, as discussed below, potentially involves far more than +the identification of typographical errors in financial statements about which the Prince court +speculated.24 + +18 Id. at 147 (citing Armstrong, 2005 WL 1498425, at *11–12 (finding that an accountant +practiced before the Commission as an accountant by computing figures and providing +information incorporated into public filings despite not having final authority over whether that +information was included in the company's filings)). +19 Id. at 148. +20 Id. +21 Quoting id. at 148 n.25. +22 Id. (emphasis added). +23 Id. +24 Schneider similarly misdescribes a footnote in SEC v. Brown, a related decision written by +the same judge as part of the same case against Prince. (The Brown decision considered Prince's +and another defendant's motions for summary judgment, while the Prince decision reflected the +judge's ultimate findings of facts and conclusions of law following a bench trial.) According to +Schneider, a footnote in Brown states that Rule 102(e)-barred accountants are permitted to +oversee "financial statements and related disclosures," so long as they do so "as a corporate +manager, not as an accountant." Quoting Brown, 878 F. Supp. 2d at 126. But, as in Prince, the +(continued . . .) +7 + +B. Schneider's claim that he will perform only those functions required by our rules does +not foreclose the possibility that his service on GCI's audit committee could still involve +conduct that violates our Rule 102(e) suspension order. +Schneider contends that, because our suspension order does not contain a blanket +prohibition against his serving on an audit committee, he should be able to serve on an audit +committee so long as he performs "only those functions that all public company audit +committees are required to perform by applicable SEC regulations."25 This argument +mischaracterizes both the nature of our rules governing audit committees and how audit +committees actually function. We promulgated our audit committee rules to provide uniform +standards for issuers that would help ensure accurate and reliable financial reporting.26 But we +did so recognizing that "decisions regarding the execution of the audit committee's oversight +responsibilities, as well as decisions regarding the extent of desired involvement by the audit +committee, are best left to the discretion of the audit committee of the individual issuer in +assessing the issuer's individual circumstances." +27 Therefore, while our rules "remove a certain + + (. . . continued) +court's footnote in Brown stated only that the court need not address an argument made by +Commission staff that "those who merely 'review' a financial statement or related disclosure" are +appearing or practicing before the Commission as an accountant because the record was "replete +with genuine issues of material fact . . . as to whether [the defendant] practiced before the +Commission as an accountant." Id. +25 Schneider also notes that NASDAQ rules prohibit audit committee members of its listed +companies, of which GCI is one, from having "participated in the preparation of the financial +statements of the Company or any current subsidiary of the Company." NASDAQ Corporate +Governance Rule 5605(c)(2)(A). But NASDAQ's rules involve their own, distinct regulatory +regime and therefore do not preclude us from concluding that an audit committee member could +be involved in "the preparation of financial statements" for purposes of our Rule 102(e). +26 Standards Relating to Listed Company Audit Committees, Exchange Act Rel. No. 47654, +2003 WL 1833875, at *3 (Apr. 9, 2003) (emphasizing that audit committees "play[] a critical +role in providing oversight over and serving as a check and balance on a company's financial +reporting system"). +27 Id. at *15 (emphasis added); see also Strengthening the Commission's Requirements +Regarding Auditor Independence, Exchange Act Rel. No. 47265, 2003 WL 183801, at *42 (Jan. +28, 2003) (stating that, in adopting Rule 2-07 of Regulation S-X, the Commission was "not +requiring that [certain discussions involving the audit committee concerning accounting policies] +follow a specific form or manner, but we expect, at a minimum, that the discussion of critical +accounting estimates and the selection of initial accounting policies will include the reasons why +estimates or policies meeting the criteria in the Guidance are or are not considered critical and +how current and anticipated future events impact those determinations"). +8 + +amount of individual control over the corporate governance process," they also "provid[e] great +flexibility for implementation."28 + For example, GCI's audit committee charter provides some specifics about how the +company has chosen to implement our rules, but still leaves significant room for interpretation. +Among other things, GCI's charter states that its audit committee "shall review [disagreements +between the company and its auditor] in a timely fashion and provide a written determination +with supporting argument for it, and the determination of the Audit Committee regarding the +Auditor Disagreement shall be final."29 GCI's charter also requires its audit committee to, among +other things, "review and assess" the company's financial reporting and controls and the auditor's +recommendations. What this language means in practice will depend heavily on the types of +issues and disagreements that arise and how the audit committee decides to handle them. But at +the very least, it suggests that, by evaluating and choosing between alternative accounting +treatments and drafting a final determination "with supporting argument" as to that appropriate +accounting treatment, Schneider could engage in the type of non-quantitative decisions that +would violate our Rule 102(e) suspension order.30 + We also note that, as a practical matter, the more difficult or significant the auditing +issue, the more the audit committee is likely to rely on members who have accounting +expertise—such as Schneider, who is a CPA and the former chief accounting officer of Dell. +This is not to predict that Schneider would engage in prohibited conduct while serving on GCI's +audit committee (which is why we have not specifically precluded him from serving in such a +role). But it is why we cannot state with certainty that Schneider would not engage in prohibited +conduct. +31 And although this places some of the onus on Schneider to determine whether he can +safely serve in a particular role, we noted in our July 2013 order that "'it is not unfair to require +that one who deliberately goes perilously close to an area of proscribed conduct shall take the +risk that he may cross the line.'"32 + +28 Standards Relating to Listed Company Audit Committees, 2003 WL 1833875, at *48; see +also id. at *18 ("Given the variety of listed issuers in the U.S. capital markets, we believe audit +committees should be provided with flexibility to develop and utilize procedures appropriate for +their circumstances."). +29 GCI's charter defines "Auditor Disagreements" as disagreements regarding financial +reporting between the company and its independent certified public accountants. +30 Cf. Prince, 942 F. Supp. 2d at 148 (finding that Prince violated a Rule 102(e) bar order and +noting that "non-quantitative decisions may greatly affect what final numbers are included in the +financial statements"). +31 Schneider, 2013 WL 3327751, at *6. +32 Id. (quoting DiCola, 77 F.3d at 508). As further support for his claim that he must be +allowed to serve on an audit committee, Schneider points to what he describes as a lack of +judicial or administrative precedent expressly prohibiting a Rule 102(e)-barred accountant from +(continued . . .) +9 + +C. That non-accountants can serve on GCI's audit committee does not foreclose the +possibility that Schneider's service on the committee could involve conduct that violates +our Rule 102(e) suspension order. +As he did in his first motion for clarification, Schneider insists that he cannot violate our +Rule 102(e) suspension order so long as he serves in a position in which non-accountants can +also serve (which is the case with GCI's audit committee). We rejected this argument in our July +2013 order by explaining that persons without an accounting license "often serve as corporate +officers, and the integrity of the Commission's processes is threatened when they execute +fraudulent schemes by providing falsified financial information just as when licensed +accountants engage in this conduct."33 In fact, our Rule 102(e) suspension order against +Schneider stems from the complaint filed in U.S. district court alleging that he engaged in just +such a fraudulent accounting scheme while serving in a position, CFO, that he himself +recognizes does not require an accounting license. +Schneider now makes the additional argument that, because our suspension order requires +him to be current on his CPA license before we will consider his application to resume practicing +as an accountant, it "make[s] no sense" that he could violate our Rule 102(e) suspension order by +serving in a position in which non-accountants can also serve. We disagree. We promulgated +Rule 102(e) to ensure that accountants, on whom we rely so heavily, "perform their tasks +diligently and with a reasonable degree of competence." +34 One way we can ensure that Schneider +maintains such diligence and competence is to require him to be current with his CPA license +(one of several remedial requirements in our Rule 102(e) suspension order).35 This requirement is + + (. . . continued) +serving on such a committee. But, as we have explained, our Rule 102(e) suspension order does +not prevent Schneider from serving on an audit committee per se. Rather, our order prohibits +Schneider from engaging in certain activities while serving in such a role. Moreover, any lack of +precedent on this narrow issue likely reflects only that few, if any, individuals have sought to +serve in such a role while suspended. A possible reason for this, the Division observes, is that "it +is likely obvious to public companies and most individuals who have been suspended that many +of the activities required of most audit committees are likely prohibited." +33 Id. at *5 (quoting Armstrong, 2005 WL 1498425, at *12); see also supra notes 10–11 and +accompanying text (discussing how the remedial purposes of Rule 102(e) would be undermined +if Schneider could avoid the prohibition in our order by accepting a position based on only the +title or on whether non-accountants could accept such a position). +34 Marrie v. SEC, 374 F.3d 1196, 1200 (D.C. Cir. 2004) (quoting Touche Ross & Co. v. SEC, +609 F.2d 570, 582 (2d Cir. 1979)); see also Amendment to Rule 102(e) of the Commission's +Rules of Practice, 63 Fed. Reg. 57,164, 57,165 (Oct. 26, 1998) (stating that, because of the +Commission's limited resources, it "must rely on the competence and independence of . . . the +accountants who prepare . . . financial statements"). +35 See Schneider, 2010 WL 5183935, at *2–3 (requiring, among other things, that Schneider +resolve all other disciplinary issues with the applicable state boards of accountancy and that his +(continued . . .) +10 + +not intended to define what it means to practice before us as an accountant. Nor, as Schneider +claims, is it meant to serve as "an additional weapon in [our] enforcement arsenal."36 Rather, it +serves only to further the remedial purpose of Rule 102(e) by ensuring that Schneider "is fit to +appear and practice before the Commission."37 +D. Our decision not to grant Schneider's requested relief does not violate his due process +rights. +Schneider also repeats the due process arguments from his previous motion, claiming that +he lacked notice that his service on GCI's audit committee could violate our order and that to +interpret our order as barring such service would represent an "abrupt" regulatory change from +existing precedent. As we explained when first denying these assertions, our Rule 102(e) +suspension order is consistent with well-established precedent and "provides a sufficient standard +by which Schneider can judge his ability to accept a particular position."38 Schneider offers no +new argument in support of his due process claims other than the assertion, which we rejected +above, that not declaring his service on GCI's audit committee to be per se permissible under our +Rule 102(e) suspension order would amount to a categorical bar on all audit committee service.39 + + + (. . . continued) +application for reinstatement "must satisfy the Commission that [Schneider'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"). +36 Quoting Touche Ross, 609 F.2d at 579. +37 Id. (discussing the Commission's intent behind promulgating Rule 2(e), the predecessor to +Rule of Practice 102(e)). +38 Schneider, 2013 WL 3327751, at *6 (citing DiCola, 77 F.3d at 509 (concluding that it was +"fanciful for [a debarred person] to say that he can only 'guess' at the meaning of the debarment +order; he will usually have a pretty good idea whether a position at a firm that is not itself a drug +manufacturer runs afoul of the remedial purpose for which he has been debarred from providing +services to a drug house")). +39 See, e.g., supra notes 31–32 and accompanying text (noting we are not prohibiting +Schneider from serving on GCI's audit committee per se). +11 + +* * * +Accordingly, IT IS ORDERED that James M. Schneider's motion or, in the alternative, +application for modification of the Commission's order imposing remedial sanctions is DENIED. +By the Commission. + + + + Jill M. Peterson + Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3569.txt b/raw/aaer/2014/AAER-3569.txt new file mode 100644 index 0000000000000000000000000000000000000000..58a0c4b2fa0ca60ac1f011263026961447744289 --- /dev/null +++ b/raw/aaer/2014/AAER-3569.txt @@ -0,0 +1,123 @@ + +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72671 / July 24, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3569 / July 24, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15983 + +_______________________________________ + : +In the Matter of : ORDER INSTITUTING + : ADMINISTRATIVE PROCEEDINGS + JOHN (“JACK”) J. EGAN, JR., CPA : PURSUANT TO RULE 102(e) OF THE + : COMMISSION’S RULES OF + : PRACTICE, MAKING FINDINGS, + Respondent. : 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 +John (“Jack”) J. Egan, Jr. (“Respondent” or “Egan”) 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 + +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 t he Federal securities laws or of +the rules and regulations thereunder. + + + + + + +2 +findings herein, except as to the Commission’s jurisdiction over him and the subject matter of +these proceedings, and the findings contained in Section III. C. below, which are admitted, +Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant +to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +A. John (“Jack”) J. Egan, Jr. (“Respondent” or “Egan”), C.P.A. (New York, +inactive), age 64, was Chief Financial Officer, Principal Financial Officer, and Senior Vice +President of Volt Information Sciences, Inc. (“Volt” or “the Company”) from at least 2006 to +August 10, 2011. Effective August 10, 2011, he became Volt’s Senior Vice President of Global +Planning and Budgeting. Volt terminated Egan in February 2012. Egan is currently retired. + +B. Volt is a New York corporation with its principal executive offices located in +New York, New York. Its common stock, previously registered under Section 12(b) of the +Exchange Act, traded on the New York Stock Exchange (symbol VOL) until it was de-listed on +May 9, 2011, for the Company’s failure to file periodic reports with the Commission. Volt now +trades in the Over-the-Counter market (OTC symbol VISI). Volt provides services relating to +staffing, telecommunications, computer systems, and printing through four corresponding +business units. + +C. On July 18, 2014, a final judgment was entered against Egan, permanently +enjoining him from violations of Section 17(a) of the Securities Act of 1933, Sections 10(b) and +13(b)(5) of the Securities Exchange Act of 1934 (“Exchange Act”), and Exchange Act Rules +10b-5(a), 10b-5(b), 10b-5(c),13b2-1, 13b2-2, and 13a-14; and from aiding and abetting +violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Exchange +Act Rules 12b-20, 13a-1, and 13a-11 thereunder, in the civil action entitled Securities and +Exchange Commission v. Jack J. Egan, Jr., C.P.A., Civil Action No. 13-CV-236 (S.D.N.Y.) +(January 10, 2013) . The Court also barred Egan from serving as an officer or director of any +issuer that has a class of securities registered with the Commission or that is required to file +reports with the Commission, and ordered him to pay a $35,000 civil money penalty. + +D. The Commission’s Complaint alleges that for Volt’s fiscal year ended October 28, +2007, Volt’s computer-segment subsidiary recognized fraudulent revenue based on a purported +completion and sale of two of four software modules that constituted the core of a new directory +assistance system for a significant telecommunications customer. The Complaint further alleges +that Egan, a certified public accountant, Volt’s Chief Financial Officer, and Volt’s Principal +Financial Officer, knew or was reckless in not knowing that recognition of the fraudulent +revenue did not comply with Generally Accepted Accounting Principles; and that nevertheless, + + + + + +3 +he signed Volt’s public filings that included the revenue in Volt’s financial statements for the +Company’s fourth-quarter and fiscal year ended October 28, 2007. The Complaint also alleges +that Egan, as Volt’s Principal Financial Officer, certified Volt’s Annual Reports on Forms 10-K +for the Company’s fiscal years ended 2007 and 2008, when he knew or was reckless in not +knowing that the financial statements were materially false and misleading. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanction agreed to in Respondent Egan’s Offer. + +Accordingly, IT IS HEREBY ORDERED, effective immediately, that Egan 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-3570.txt b/raw/aaer/2014/AAER-3570.txt new file mode 100644 index 0000000000000000000000000000000000000000..27c017ce3c54f01ad70b110979f5356927dd34b9 --- /dev/null +++ b/raw/aaer/2014/AAER-3570.txt @@ -0,0 +1,171 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72672 / July 24, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3570 / July 24, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15984 + +_______________________________________ + : +In the Matter of : ORDER INSTITUTING + : ADMINISTRATIVE PROCEEDINGS + DEBRA L. HOBBS, CPA : PURSUANT TO RULE 102(e) OF THE + : COMMISSION’S RULES OF + : PRACTICE, MAKING + Respondent. : 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 +Debra L. Hobbs (“Respondent” or “Hobbs”) 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 + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently +enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the +Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of +the rules and regulations thereunder. + + + + + + +2 +findings herein, except as to the Commission’s jurisdiction over her and the subject matter of +these proceedings, and the findings contained in Section III. C. below, which are admitted, +Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant +to Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +A. Hobbs, age 56, was a certified public accountant licensed to practice in the State +of Virginia, but that license expired in 1988. Hobbs served as Chief Financial Officer of Volt +Delta Resources, LLC (“VDR”), a subsidiary of Volt Information Sciences, Inc. (“Volt” or “the +Company”), from 1996 until April 2008. In April 2008, Hobbs became the Chief Operating +Officer of VDR. Volt terminated Hobbs in February 2012. + +B. Volt is a New York corporation with its principal executive offices located in +New York, New York. Its common stock, previously registered under Section 12(b) of the +Exchange Act, traded on the New York Stock Exchange (symbol VOL) until it was de-listed on +May 9, 2011, for the Company’s failure to file periodic reports with the Commission. Volt now +trades in the Over-the-Counter market (OTC symbol VISI). Volt provides services relating to +staffing, telecommunications, computer systems, and printing through four corresponding +business units. + +C. On January 18, 2013, a final judgment was entered against Hobbs, permanently +enjoining her from violations of Section 10(b) of the Securities Exchange Act of 1934 +(“Exchange Act”), and Exchange Act Rules 10b-5(a), 10b-5(b), 10b-5(c); and from aiding and +abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and +Exchange Act Rules 12b-20, 13a-1, and 13a-11 thereunder, in the civil action entitled Securities +and Exchange Commission v. Volt Information Sciences, Inc. and Debra L. Hobbs, Civil Action +No. 13-CV-237 (S.D.N.Y.) (January 10, 2013). The Court did not impose payment of a civil +penalty based on Hobbs’ agreement to cooperate in a related enforcement proceeding. + +D. The Commission’s Complaint alleges that for Volt’s fiscal year ended October 28, +2007, Volt’s computer-segment subsidiary recognized $7.55 million of revenue that it included +in its financial statements filed with the Commission. The Complaint further alleges that the +recognition of the revenue was improper and caused Volt’s net income for its fourth quarter and +fiscal year ended October 28, 2007, to be overstated materially and falsely. The Complaint +further alleges that Hobbs justified the improper revenue recognition by asserting the existence +of, and the subsidiary’s substantial performance on, a purported $10 million contract of sale with +a customer, even though the purported contract did not lead to any revenue event recognizable +under Generally Accepted Accounting Principles. + + + + + +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 Hobbs’ Offer. + +Accordingly, IT IS HEREBY ORDERED, effective immediately, that: + + A. Hobbs is suspended from appearing or practicing before the Commission as an +accountant. + + B. After 5 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. Such an application must satisfy the Commission that +Respondent’s work in her practice before the Commission will be +reviewed either by the independent audit committee of the public company +for which she works or in some other acceptable manner, as long as she +practices before the Commission in this capacity; and/or + + 2. An independent accountant. Such an application must satisfy the +Commission that: + + (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 +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 + + + + + + +4 + (d) Respondent acknowledges her responsibility, as long as +Respondent appears or practices before the Commission as an +independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring +partner reviews and quality control standards. + +C. The Commission will consider an application by Respondent to resume appearing +or practicing before 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. + + By the Commission. + + + +Jill M. Peterson +Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3571.pdf b/raw/aaer/2014/AAER-3571.pdf new file mode 100644 index 0000000000000000000000000000000000000000..cea54b3011b917121f77ea4bcfb0d6e1d8fd9a07 Binary files /dev/null and b/raw/aaer/2014/AAER-3571.pdf differ diff --git a/raw/aaer/2014/AAER-3571.txt b/raw/aaer/2014/AAER-3571.txt new file mode 100644 index 0000000000000000000000000000000000000000..07e0aeba74d750b6228e71d4f57d6eefdab525b0 --- /dev/null +++ b/raw/aaer/2014/AAER-3571.txt @@ -0,0 +1,326 @@ + + + + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72678 / July 28, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3571 / July 28, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15986 + + +In the Matter of + +SMITH & WESSON HOLDING +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 Smith & Wesson Holding Corporation +(“Smith & Wesson” 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 that1: + +Summary + +1. This matter concerns violations of the anti-bribery, books and records and internal +controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Smith & Wesson. The +violations took place from 2007 through early 2010, when a senior employee and other employees +and representatives of Smith & Wesson made, authorized, and offered to make improper payments +and/or to provide gifts to foreign officials in an attempt to win contracts to sell firearm products to +foreign military and law enforcement departments. During this period, Smith & Wesson’s +international business was in its developing stages and accounted for approximately 10% of the +company’s revenues. Smith & Wesson’s employees and representatives engaged in a systemic +pattern of making, authorizing and offering bribes while seeking to expand the company’s overseas +business. + +2. The bribe payments were inaccurately recorded in Smith & Wesson’s books and +records as legitimate sales commissions or other business expenses. Despite its push to make sales +in new and high risk markets overseas, Smith & Wesson failed to establish an appropriate +compliance program or devise and maintain an adequate system of internal accounting controls, +which allowed the repeated improper offers and payments to continue undetected for years. + + Respondent + +3. Smith & Wesson is a Nevada corporation with its principal place of business in +Springfield, Massachusetts. The company, through its wholly owned subsidiary, Smith & Wesson +Corp., manufactures firearms and markets its products both domestically in the United States and +internationally in multiple countries. Smith & Wesson does not have any international subsidiaries +and conducts its international business directly and through brokering agents. Much of Smith & +Wesson’s international business involves the sale of firearms to foreign law enforcement and +military departments. Smith & Wesson issues and maintains a class of publicly-traded securities +registered pursuant to Section 12(b) of the Exchange Act, which trades on the NASDAQ Stock +Exchange. + +Facts + +4. From 2007 through early 2010, as Smith & Wesson sought to break into +international markets and increase sales, certain of the company’s employees and representatives +engaged in a pervasive practice of making, authorizing and offering improper payments to foreign +government officials as a means of obtaining or retaining international business. Although only + +1 The findings herein are made pursuant to the Respondent’s Offer and are not binding on any other person or entity +in this or any other proceeding. + 3 +one of the contracts was fulfilled before the unlawful activity was identified, company employees +made or authorized the making of improper payments in connection with multiple ongoing or +contemplated international sales. + +5. In 2008, for example, Smith & Wesson retained a third-party agent in Pakistan to +assist the company in obtaining a deal to sell firearms to a Pakistani police department. Even after +the agent notified the company that he would be providing guns valued in excess of $11,000 to +Pakistani police officials in order to obtain the deal, and that he would be making additional cash +payments to the officials, the company authorized the agent to proceed with the deal. Smith & +Wesson’s Vice President of International Sales and its Regional Director of International Sales +authorized the sale of the guns to the agent to be used as improper gifts and authorized payment of +the commissions to the agent, while knowing or consciously disregarding the fact that the agent +would be providing the guns and part of his commissions to Pakistani officials as an inducement +for them to award the tender to the company. Smith & Wesson ultimately sold 548 pistols to the +Pakistani police for $210,980 and profited from the corrupt deal in the amount of $107,852. + +6. In 2009, Smith & Wesson attempted to win a contract to sell firearms to an +Indonesian police department by making improper payments to its third party agent in Indonesia, +who indicated that part of the payment would be provided to the Indonesian police officials under +the guise of legitimate firearm lab testing costs. On several occasions, Smith & Wesson’s third- +party agent indicated that the Indonesian police expected Smith & Wesson to pay them additional +amounts above the actual cost of testing the guns as an inducement to enter the contract. The agent +later notified Smith & Wesson’s Regional Director of International Sales that the price of “testing” +the guns had risen further. Smith & Wesson’s Vice President of International Sales and its +Regional Director of International Sales authorized and made the inflated payment, but a deal was +never consummated. + +7. Similarly, Smith & Wesson made improper payments in 2009 to its third party +agent in Turkey, who indicated that part of the payments would be provided to Turkish officials in +an attempt to secure two deals in Turkey, for the sale of handcuffs to Turkish police and firearms +to the Turkish military. Neither of these interactions resulted in the shipment of products, as Smith +& Wesson was unsuccessful bidding for the first deal, while the latter deal was ultimately +canceled. Similarly, Smith & Wesson authorized improper payments to third party agents who +indicated that parts of these payments would be provided to foreign officials in Nepal and +Bangladesh in unsuccessful attempts to secure sales contracts in those countries. Although these +contemplated deals in Nepal and Bangladesh were never consummated in each case, the company +had obtained or attempted to obtain the contract by using third party agents as a conduit for +improper payments to government officials. + +8. Despite making it a high priority to grow sales in new and high risk markets +overseas, the company failed to design and implement a system of internal controls or an +appropriate FCPA compliance program reasonably designed to address the increased risks of its +new business model. The company did not perform any anti-corruption risk assessment and +conducted virtually no due diligence of its third-party agents regardless of the perceived level of +corruption in the country in which Smith & Wesson was seeking to do business. Smith & Wesson + 4 +failed to devise adequate policies and procedures for commission payments, the use of samples for +test and evaluation, gifts, and commission advances. The Vice President of International Sales had +almost complete authority to conduct the company’s international business, including the sole +ability to approve most commissions. Smith & Wesson’s FCPA policies and procedures, and its +FCPA-related training and supervision also were inadequate. As a result of these compliance and +internal controls failures, Smith & Wesson’s Vice President of International Sales and the Regional +Director of International Sales were able to cause the company to pay and/or authorize improper +payments in numerous countries around the globe for a period of several years. + +Smith & Wesson’s Remedial Measures + +9. Smith & Wesson took prompt action to remediate its immediate FCPA issues, +including: conducting an internal investigation, terminating its entire international sales staff; +terminating pending international sales transactions; and re-evaluating the markets in which it +sought international sales. In addition, Smith & Wesson implemented a series of significant +measures to improve its internal controls and compliance processes, including: implementing new +internal audit procedures to identify FCPA issues; creating more robust controls on payments, +gifts, and other transactions in connection with international business activity; enhancing its FCPA +compliance policies and procedures; and creating a Business Ethics and Compliance Committee. + +Legal Standards and Violations + +10. 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. + +FCPA Violations + +Anti-Bribery Violations + +11. Smith & Wesson violated the anti-bribery provisions of the federal securities laws +when it authorized its agents to provide gift guns and make other improper payments to foreign +officials in Pakistan, Indonesia, Turkey, Nepal and Bangladesh in order to induce foreign +officials in those countries to award sales contracts to Smith & Wesson. + +12. As a result of the conduct described above, Smith & Wesson 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, in order to obtain or retain business, from giving, or authorizing +the giving of, anything of value to any foreign official for 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 government or +foreign governmental instrumentality to influence any act or decision of such government or +instrumentality. 15 U.S.C. § 78dd-1. + 5 +Books and Records Violations + +13. Smith & Wesson failed to properly account for the improper payments to its agent +in Pakistan, the inflated lab testing payments to its agent in Indonesia, and the improper expense +payments to its agents in Turkey in its books and records. Instead, Smith & Wesson improperly +characterized the payments it made in Pakistan as legitimate commissions, and those that it made +in Indonesia and Turkey as legitimate business expenses. + +14. As a result of the conduct described above, Smith & Wesson 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 disposition of their assets. 15 U.S.C. § 78m(b)(2)(A). + +Internal Controls Violations + +15. Smith & Wesson failed to devise and maintain sufficient internal controls with +respect to its international sales operations. While the company had a basic corporate policy +prohibiting the payment of bribes, it failed to implement a reasonable system of controls to effectuate +that policy. For example, Smith & Wesson failed to devise adequate policies and procedures with +regard to commission payments, the use of samples for test and evaluation, gifts, and commission +advances. Further, Smith & Wesson’s FCPA policies and procedures, and its FCPA-related +training and supervision were inadequate. + +16. As a result of the conduct described above, Smith & Wesson violated Section +13(b)(2)(B) of the Exchange Act, which requires reporting companies to, among other things, +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that transactions are executed in accordance with management’s general or specific +authorization; transactions are recorded as necessary to maintain accountability for assets, and +that access to assets is permitted only in accordance with management’s general or specific +authorization. 15 U.S.C. § 78m(b)(2)(B). + +Commission Consideration of Smith & Wesson’s Remedial Efforts + +In determining to accept the Offer, the Commission considered the remedial acts +promptly undertaken by Respondent and the cooperation afforded the Commission staff. + +IV. + +UNDERTAKINGS + + Respondent undertakes to: + +17. Report to the Commission staff on the status of Respondent’s remediation and +implementation of compliance measures at six-month to twelve-month intervals during a two-year +term, as set forth below. Should Respondent discover credible evidence, not already reported to +the Commission staff, that questionable or corrupt payments or questionable or corrupt transfers of + 6 +property or interests may have been offered, promised, paid, or authorized by an entity or person +working directly for Respondent, or that related false books and records have been maintained, +Respondent shall promptly report such conduct to the Commission staff. During this two-year +period, Respondent shall: (i) conduct an initial review and submit an initial report, and (ii) conduct +and prepare follow-up reviews and reports, as described below: + +a. Respondent shall submit to the Commission staff a written report within +180 calendar days of the signing of this agreement setting forth a complete description of its +remediation efforts to date, its proposals reasonably designed to improve the policies and +procedures of Respondent for ensuring compliance with the FCPA and other applicable anti- +corruption laws, and the parameters of the subsequent reviews. The report shall be transmitted to +Paul G. Block, Assistant Regional Director, Enforcement Division, Boston Regional Office, U.S. +Securities and Exchange Commission, 33 Arch Street, Suite 2300, Boston, Massachusetts 02110. +The Commission staff may, upon written request of Respondent and for good cause shown, +approve an extension of the time period for issuance of the report. + +b. Respondent shall undertake two follow-up reviews, incorporating any +comments provided by the Commission staff on Respondent’s initial review and 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. + +c. The first follow-up review and report shall be completed by 180 days after +the initial review. A subsequent follow-up review and report shall be completed by 360 days after +the completion of the preceding follow-up review. + +d. The Commission staff may, upon written request of Respondent and for +good cause shown, approve an extension of the time period for issuance of the report. + +18. The Commission staff may make reasonable requests for further evidence of +compliance, and Respondent agrees to provide such evidence. + +19. The periodic review 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 +or undermine the objectives of the reporting requirement. For these reasons, among others, the +reports and 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. + +V. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Smith & Wesson’s Offer. + + 7 + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Smith & Wesson shall +cease and desist from committing or causing any violations and any future violations of Sections +30A, 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; + +B. Respondent shall comply with the undertakings enumerated in Section IV above; +and + +C. Respondent shall, within ten (10) days of the entry of this Order, pay $2,034,892 to +the United States Treasury, including $107,852 in disgorgement, $21,040 in prejudgment interest, +and a civil monetary penalty of $1,906,000. If timely payment is not made, additional interest shall +accrue pursuant to SEC Rule of Practice 600 and 31 U.S.C. § 3717. Payment must be made in one +of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(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 +Smith & Wesson as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Paul G. Block, Assistant +Regional Director, Foreign Corrupt Practices Act Unit, Boston Regional Office, Securities and +Exchange Division, 33 Arch Street, Suite 2300, Boston, Massachusetts 02110. + + By the Commission. + + + + + Jill M. Peterson + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3572.txt b/raw/aaer/2014/AAER-3572.txt new file mode 100644 index 0000000000000000000000000000000000000000..59d632d2430190fff9cc8daf85958f016f8ec9ff --- /dev/null +++ b/raw/aaer/2014/AAER-3572.txt @@ -0,0 +1,599 @@ + + +UNITED STATES OF AMERICA +Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72722 / July 30, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3572 / July 30, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15991 + + + +In the Matter of + +EDWARD L. CUMMINGS, CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE ACT +OF 1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Edward L. +Cummings, CPA (“Respondent” or “Cummings”) 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 . . . 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)(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, 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 + + During the 2008 and first quarter 2009 reporting periods (the “relevant period”), QSGI Inc. +(“QSGI” or the “Company”) was a reseller of and maintenance services provider in relation to used +computer equipment. Cummings, who served as QSGI’s Chief Financial Officer prior to +becoming its Vice President of Finance and Controller in 2009, was aware during the relevant +period of deficiencies in and the circumvention of internal controls relating to inventory and the +resulting falsification of the Company’s books and records. He also participated in the decision, on +occasion during the relevant period, to improperly accelerate by up to a week recognition on +QSGI’s books and records of accounts receivable and receipt of inventory in order to increase the +borrowing base available under a revolving credit facility with the Company’s chief creditor. +Cummings withheld this information from the Company’s external auditors in connection with +their audit of the financial statements for the fiscal year ended December 31, 2008 and review of +the financial statements for the quarter ended March 31, 2009, and made affirmative + +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 + +misrepresentations and statements that were misleading as a result of his omission of information, +including in management representation letters, about the design, maintenance, and operation of +internal controls. Further, Cummings signed a Form 10-K for the 2008 fiscal year containing +management’s report on internal control over financial reporting (“ICFR”), as required by Section +404 of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley Act”) and Exchange Act Rule 13a-15(c), +which falsely represented that the Company’s Chief Executive Officer had participated in +assessing the effectiveness of the Company’s ICFR. Cummings also signed certifications required +under Section 302 of the Sarbanes-Oxley Act and Rule 13a-14 of the Exchange Act falsely +representing that the other certifying officer, the CEO, and Cummings had evaluated ICFR and, +based on their evaluation, disclosed all significant deficiencies to the auditors. Cummings signed +the Forms 10-K and 10-Q filed with the Commission to which the certifications were attached. + +B. RESPONDENT + + Cummings co-founded QSGI Inc. in 2001. He thereafter served as Chief Financial Officer +and Treasurer until May 2009, when he became Vice President of Finance and Controller. +Cummings also served as a Director from February 2004 until October 2008. He was terminated in +September 2009 following the Company’s filing for Chapter 11 bankruptcy in July 2009, but +continued until June 2011 to work as a financial consultant to the Company while it reorganized. +Cummings was licensed as a certified public accountant in the State of Pennsylvania in 1977; his +license has been inactive since 1979. + +C. FACTS + +1. Cummings’ Awareness of Deficiencies In and Circumvention of Inventory +Controls + +a. QSGI is a Delaware corporation headquartered during the relevant period in +West Palm Beach, Florida. Its common stock is registered with the +Commission pursuant to Section 12(g) of the Exchange Act and is quoted +on the OTC Link (formerly “Pink Sheets”) operated by OTC Markets +Group. + +b. From May 2004 through the time QSGI filed for bankruptcy in July 2009, +QSGI maintained inventory principally at facilities in New Jersey and +Minnesota. The New Jersey inventory, which comprised 50% of the +Company’s reported gross inventory and 55% of its reported net inventory, +after reduction for reserves, as of the close of its fiscal year ended December +31, 2008, was comprised of laptops, monitors, and other consumer +electronics and components. The Minnesota inventory, which comprised +40% of QSGI’s reported gross inventory and 35% of its reported net +inventory, after reduction for reserves, as of the close of QSGI’s 2008 fiscal +year, was comprised chiefly of servers, mainframes, and component parts. + +4 + +c. QSGI experienced recurring inventory control problems, particularly with +its Minnesota operations. Throughout 2008 until the Company filed for +bankruptcy in mid-2009: (1) certain inventory received into QSGI facilities +was shipped out again without being entered into the Company’s books and +records; and (2) items were removed from physical inventory without being +relieved from inventory on the books and records. With regard to the latter, +personnel not only removed component parts from the physical inventory of +component parts without relieving the items from recorded inventory, but +occasionally stripped component parts from operating systems which +continued to be recorded on the books and records as intact systems. These +component parts were then sold by the Company or used for the Company’s +maintenance services. + +d. These internal control problems resulted in the falsification of QSGI’s +books and records relating to QSGI’s inventory. See Accounting Standards +Codification 330 - Inventory. + +e. These inventory control problems emerged at the Minnesota facility +beginning in 2007 for several reasons. First, a manufacturer’s policy of +curtailing resellers’ ability to modify machines to customers’ specifications +hastened QSGI’s shift from selling machines to selling parts and providing +repair and maintenance services. This, in turn, contributed to the problem in +Minnesota of personnel removing component parts from operating systems +without any corresponding adjustment to the Company’s books and records. +The units continued to be recorded on the books and records as intact +systems. Second, key personnel, including accounting personnel, left the +Minnesota operations in late 2007. Personnel designated to replace the +departed accounting staff lacked an accounting background and failed to +fully carry out their responsibilities. Third, while QSGI management, +including Cummings, had undertaken to design, document, and implement +internal controls to come into compliance with the federal securities laws, +such efforts were not begun in earnest in Minnesota until late 2007, after the +departure of key personnel. Prior to that point, QSGI senior management +had accorded Minnesota personnel a fair amount of autonomy, including +using an accounting system that differed from the one used in New Jersey. + +f. Efforts to introduce new controls to the Minnesota operations during the +2008 fiscal year largely failed. This was due to a failure to design +procedures taking into account the existing control environment, including +the qualifications and experience level of persons employed to handle +accounting. Training, for example, either did not take place or was +inadequate. Additionally, attempts to monitor compliance on an ongoing +basis were inadequate. As a result, circumvention of the controls in the +Minnesota operations occurred regularly. +5 + + +g. From October 2004 until he was terminated in September 2009, Cummings +participated in the design and implementation of internal controls directed at +bringing QSGI into compliance with the federal securities laws. +Notwithstanding his and others’ efforts, Cummings was aware during the +relevant period of ongoing deficiencies in and circumvention of internal +controls relating to inventory, particularly in the Minnesota operations. + +h. In the final days of the 2008 fiscal year, QSGI senior management, including +Cummings, communicated openly amongst themselves about the failed +implementation, including training in, and circumvention of controls +introduced to the Minnesota office earlier in the year. They commonly +agreed that corrective action was needed which, given the timing, could not +be undertaken until 2009. + +i. Cummings was aware that the problems continued throughout the first +quarter ended March 31, 2009. + +2. Cummings’ Participation in Improper Acceleration of Recognition of Inventory +and Accounts Receivable + + a. QSGI reported net losses in each of the four fiscal years from 2005 through +2008. As a result, the external auditors issued “going concern” opinions +included in the Forms 10-K for the fiscal years ended December 31, 2007 +and 2008, which stated that the losses raised substantial doubts about the +Company’s ability to continue as a going concern. In the circumstances, +QSGI’s ability to procure funds was critical to its continued operation. + + b. In mid-2008, QSGI entered into a revolving credit facility with its chief +creditor. QSGI’s inventory and accounts receivable factored into the +weekly calculation of the borrowing base under the revolving credit facility. +A QSGI employee calculated the borrowing base and reported it to +Cummings and another officer for their review prior to transmission to the +chief creditor. + +c. On occasion during the relevant period, the weekly calculation would +show that QSGI had exceeded its borrowing limit or would not be able to +borrow enough to continue operations through the upcoming week. In +order to increase the borrowing base, recognition of accounts receivable +and/or the receipt of product into inventory were improperly accelerated +on QSGI’s books and records. Each time acceleration occurred it was by +a matter of days up to approximately a week in advance of when all +conditions for recognition would be appropriate under generally accepted +6 + +accounting principles. See Accounting Standards Codification 330 - +Inventory and 310 - Accounts Receivable. + +d. Once the accounts receivable and/or receipt of inventory were improperly +recorded on QSGI’s books and records, the QSGI employee would +recalculate the borrowing base using the new figures. + +e. Cummings participated in and was aware of the decision to improperly +accelerate by up to a week the recognition of accounts receivable and the +receipt of product into inventory for purposes of recalculating the +borrowing base. He signed the borrowing base certificates reflecting the +recalculated numbers. Cummings was not aware of any acceleration of +accounts receivable or inventory from one public reporting period to +another that would have materially affected the accuracy of the financial +statements. + +3. Cummings Misled QSGI’s Auditors + + a. Cummings acted as principal liaison between the Company and the external +auditors during the relevant period. At no time did he disclose, or direct +anyone else to disclose, to QSGI’s external auditors the deficiencies in and +circumvention of internal controls and the improper acceleration of accounts +receivable and inventory recognition described above. + + b. To the contrary, he made misrepresentations, and statements that were +misleading as a result of his omission of information, to the external +auditors. In connection with the external auditor’s audit of the financial +statements included in QSGI’s Form 10-K for the fiscal year ended +December 31, 2008 and its review of the financial statements included in +the Form 10-Q for the first quarter ended March 31, 2009, Cummings +signed management representation letters. In the management +representation letter relating to the 2008 Form 10-K, Cummings omitted to +mention the existence of significant deficiencies in the design or operation +of ICFR. Further, in connection with the auditors’ testing of internal +controls during the audit of the 2008 financial statements, Cummings orally +represented to them that key controls were in place and that there were no +significant deficiencies with QSGI’s ICFR. In the management +representation letter relating to the first quarter Form 10-Q, he falsely stated +that he had disclosed to the auditors all significant deficiencies in the design +or operation of the Company’s ICFR. + + c. Had Cummings disclosed to the external auditors the deficiencies in and the +circumvention of inventory controls and the improper acceleration of +accounts receivable and inventory recognition described above, the auditors +7 + +would have changed the nature, timing, and extent of their procedures in +conducting the audit of the financial statements for the fiscal year ended +December 31, 2008 and review of the financial statements for the quarter +ended March 31, 2009. + +4. Cummings’ False Representations in Management’s Report on ICFR + + a. QSGI’s Form 10-K for the fiscal year ended December 31, 2008 included +the Company management’s report on ICFR, as required by Section 404 of +the Sarbanes-Oxley Act and Exchange Act Rule 13a-15(c). + +b. The management report falsely represented that QSGI’s management, +with the participation of QSGI’s CEO and Cummings, had evaluated +QSGI’s ICFR as of December 31, 2008 using the criteria set forth by the +Committee of Sponsoring Organizations of the Treadway Commission in +Internal Control – Integrated Framework. In fact, the CEO had not +participated and was unfamiliar with the referenced framework. + +c. Cummings signed the Form 10-K in his capacity as CFO and Treasurer. + + 5. Cummings’ False Sarbanes-Oxley Act Section 302 Certifications + +a. Pursuant to Sarbanes-Oxley Act Section 302 and Exchange Act Rule 13a- +14, Cummings signed certifications which were attached to QSGI’s Forms +10-K and 10-Q for the periods ended December 31, 2008 and March 31, +2009, respectively. + +b. Cummings certified in each that the other certifying officer and he had +disclosed, based on their “most recent evaluation of [ICFR],” to QSGI’s +external auditors all significant deficiencies, “in the design or operation of +[ICFR] which are reasonably likely to adversely affect [QSGI’s] ability to +record, process, summarize and report financial information.” Improperly +omitted from the certification attached to the Form 10-K, but included in +the certification attached to the Form 10-Q, were Cummings’ certifications +to the effect that the other certifying officer and he: (1) had been +responsible for establishing and maintaining ICFR and designing, or +supervising others in the design of, ICFR; and (2) had designed, or caused +to be designed, such ICFR. + +c. Cummings’ certifications were false because: (1) the other certifying +officer, the Company CEO, had not participated in designing, establishing, +or maintaining ICFR, and had not evaluated ICFR; (2) Cummings and +others had on occasion circumvented QSGI’s internal controls in +accelerating improperly by up to a week the recognition of accounts +8 + +receivable and inventory for purposes of maximizing the borrowing base +under a revolving credit facility with the Company’s chief creditor; and +(2) the other certifying officer and Cummings had not made the referenced +disclosures to the external auditors. + + 6. Violations + +a. Exchange Act Section 10(b) and Rule 10b-5 thereunder prohibit, in +connection with the purchase or sale of any security, a) the use of any +device, scheme, or artifice to defraud; b) the making of material +misrepresentations or omissions; and c) any act, practice, or course of +business which operates or would operate as a fraud or deceit upon any +person. A finding of scienter is required to establish a violation. Aaron v. +SEC, 446 U.S. 680, 697 (1980). The three subdivisions of Rule 10b-5 +should be considered mutually supportive, rather than mutually exclusive. +See Cady, Roberts & Co., 40 S.E.C. 907, 913 (1961) (noting that “a breach +of duty of disclosure may be viewed as a device or scheme, an implied +misrepresentation, and an act or practice, violative of all three +subdivisions”). + +b. “For purposes of Rule 10b-5, the maker of a statement is the person or +entity with ultimate authority over the statement, including its content and +whether and how to communicate it.” Janus Capital Group, Inc. v. First +Derivatives Traders, 131 S. Ct. 2296, 2302 (2011). + +c. Courts construe the “in connection with” requirement flexibly to effectuate +its remedial purposes. SEC v. Zandford, 535 U.S. 813, 819 (2002). Any +statement that is “reasonably calculated to influence the investing public” +satisfies the “in connection with” requirement. SEC v. Tex. Gulf Sulphur +Co., 401 F.2d 833, 861-62 (2d. Cir. 1968). When the fraud alleged involves +public dissemination in a document on which an investor would presumably +rely, the “in connection with” requirement is generally met by proof of the +means of dissemination and the materiality of the misrepresentation. SEC v. +Rana Research, 8 F.3d 1358, 1362 (9th Cir. 1993)). + +d. Information is material if there is a “substantial likelihood that the +disclosure of the omitted fact would have been viewed by the reasonable +investor as having significantly altered the ‘total mix’ of information made +available.” Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988) (quoting +TSC Industries, Inc. v. Northway, Inc., 426 U.S. 438, 449 (1976)). “It is +well-settled that information impugning management’s integrity is material +to shareholders.” United States v. Hatfield, 724 F. Supp. 2d 321, 328 +(E.D.N.Y. 2010). + +9 + +e. Scienter is the “mental state embracing the intent to deceive, manipulate or +defraud.” Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). +Scienter can be established by showing knowing misconduct or severe +recklessness, which is defined as “an extreme departure of the standards of +ordinary care… which presents a danger of misleading buyers or sellers that +is either known to the defendant or is so obvious that the actor must have +been aware of it.” SEC v. Carriba Air, Inc., 681 F.2d 1318, 1324 (11th Cir. +1982). + +f. As discussed above, Cummings made materially false and misleading +statements in his certifications attached to the Forms 10-K and 10-Q for the +fiscal year ended December 31, 2008 and the quarter ended March 31, +2009, respectively, to the effect that the other certifying officer and he had: +(1) evaluated QSGI’s ICFR; and (2) disclosed to the external auditors all +significant deficiencies which were reasonably likely to adversely affect +QSGI’s ability to record, process, summarize and report financial +information. Further, Cummings signed the 2008 Form 10-K in his +capacity as an officer which included a management’s report on ICFR +which falsely stated that QSGI’s CEO had participated with management, in +assessing ICFR pursuant to a specified framework. Cummings knew, or +was reckless in not knowing, that these statements were false. As a result of +the foregoing, Cummings violated Section 10(b) of the Exchange Act and +Rule 10b-5(a), (b), and (c) thereunder. + + g. Section 13(b)(2)(A) of the Exchange Act requires Section 12 registrants to +make and keep books, records, and accounts that accurately and fairly +reflect the transactions and dispositions of their assets. Section 13(b)(2)(B) +of the Exchange Act requires reporting issuers to devise and maintain +effective internal accounting controls. Section 13(b)(5) of the Exchange +Act provides that no person shall knowingly falsify any such book, record, +or account or circumvent internal controls. Rule 13b2-1 also prohibits the +falsification of any book, record, or account subject to Section 13(b)(2)(A). + + h. As discussed above, deficiencies in the design and operation of internal +controls, particularly relating to inventory in the Minnesota operations, had +persisted at QSGI. During the relevant period, these deficiencies included: +(1) certain inventory received into QSGI facilities being shipped out again +without being entered into the Company’s books and records; (2) items +being removed from physical inventory without being relieved from +inventory on the books and records; (3) recognition of inventory and +accounts receivable being improperly accelerated by up to a week; and (4) +the failure to disclose significant deficiencies to the external auditors, and +the provision of false management representation letters to the external +auditors in connection with their audit of the 2008 fiscal year and review of +10 + +the first quarter 2009 financial statements. The deficiencies were reflective +of a failure to design internal controls mindful of the control environment, +including the qualifications of personnel tasked with accounting functions, +and the circumvention of such controls as existed. As a result, QSGI failed +to devise and maintain effective internal controls and to make and keep +books, records and accounts that accurately and fairly reflected the +transactions and dispositions of the Company’s assets. Cummings caused +these violations by failing to design effective internal controls; +circumventing controls that existed; and withholding information from the +external auditors and making false representations or material omissions in +management representation letters. As a result of the actions described +above, Cummings caused QSGI’s violations of Exchange Act Sections +13(b)(2)(A) and 13(b)(2)(B), and violated Exchange Act Section 13(b)(5) +and Rule 13b2-1 thereunder. + + i. Exchange Act Rule 13b2-2 prohibits any director or officer of an issuer +from directly or indirectly making or causing to be made a materially false +or misleading statement or 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 financial statement audits, +reviews, or examinations or the preparation or filing of any document or +report required to be filed with the Commission. + +j. As discussed above, Cummings omitted from a management representation +letter to the external auditors in connection with their audit of the 2008 +financial statements the existence of significant deficiencies in internal +controls, while orally representing to the auditors in connection with the +same audit that he had disclosed all such significant deficiencies. He +affirmatively misrepresented in a management representation letter relating +to the external auditors’ review of the first quarter 2009 financial statements +that he had disclosed all significant deficiencies in internal controls. As a +result of the actions described above, Cummings violated Exchange Act +Rule 13b2-2. + +k. Exchange Act Rule 13a-14(a), which the Commission promulgated in +response to Section 302 of the Sarbanes-Oxley Act, requires that the +issuer’s principal executive officer and principal financial officer certify +each periodic report containing financial statements filed by an issuer +pursuant to Section 13(a) of the Exchange Act. The certifications are +included as exhibits to the Forms 10-K and 10-Q. + +l. Item 601(b)(31) of Regulation S-K prescribes the wording. Amongst other +things, it requires the certifying officer to certify that the other certifying +11 + +officer(s) and he/she, “are responsible for establishing and maintaining . . . . +internal control over financial reporting . . . ,” and (1) “. . . . [d]esigned such +internal control over financial reporting, or caused such internal control over +financial reporting to be designed under our supervision . . . . ; and (2) “ . . +have disclosed, based on [their] most recent evaluation of internal control +over financial reporting, to the registrant’s auditors . . . [a]ll significant +deficiencies . . . in the design or operation of internal control over financial +reporting which are reasonably likely to adversely affect the registrant’s +ability to record, process, summarize and report financial information . . . .” + +m. Cummings falsely certified in the certifications attached to the Forms 10-K +and 10-Q for the fiscal year ended December 31, 2008 and the quarter +ended March 31, 2009, respectively, that the other certifying officer, the +Company’s CEO, and he had: (1) evaluated QSGI’s ICFR; and (2) +disclosed all significant deficiencies to the external auditors which were +reasonably likely to adversely affect QSGI’s ability to record, process, +summarize, and report financial information. As a result, Cummings +violated Exchange Act Rule 13a-14 by signing false Section 302 +certifications. + +n. Pursuant to Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, +Cummings willfully violated Sections 10(b) and 13(b)(5) of the Exchange +Act and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2. + + 7. Findings + + Based on the foregoing, the Commission finds that Cummings: (a) willfully violated +Sections 10(b) and 13(b)(5) of the Exchange Act and Rules 10b-5, 13a-14, 13b2-1, and 13b2-2 +promulgated thereunder; and (b) caused QSGI’s violations of 13(b)(2)(A) and 13(b)(2)(B) of the +Exchange Act. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Cummings’ Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent shall cease and desist from committing or causing any violations and +any future violations of Sections 10(b), 13(b)(5), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the +Exchange Act and Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 promulgated thereunder. + +B. Respondent is denied the privilege of appearing or practicing before the +Commission as an accountant. +12 + +C. After five (5) 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: + +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, and such registration continues to be effective; + +b. Respondent, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection +did not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + +c. Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed +by the Board (other than reinstatement by the Commission); and + +d. Respondent acknowledges his responsibility, as long as Respondent +appears or practices before the Commission as an independent +accountant, to comply with all requirements of the Commission and +the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +D. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, if +state licensure is dependent on reinstatement by the Commission, the Commission will consider an +application on its other merits. The Commission’s review may include consideration of, in +addition to the matters referenced above, any other matters relating to Respondent’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission. +13 + + + E. Respondent is prohibited for a period of five (5) years from the date of the 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. + + F. Respondent shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $23,000.00 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. Payment must +be made in one of the following ways: + + (1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + + (2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + (3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Cummings as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Scott W. Friestad, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + By the Commission. + + + + Jill M. Peterson + Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3573.txt b/raw/aaer/2014/AAER-3573.txt new file mode 100644 index 0000000000000000000000000000000000000000..938d8018556cfb4c8e6843dabe60591f6e9aec22 --- /dev/null +++ b/raw/aaer/2014/AAER-3573.txt @@ -0,0 +1,403 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72723 / July 30, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3573 / July 30, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15992 + + +In the Matter of + + MARC SHERMAN + +Respondent. + + + +ORDER INSTITUTING CEASE- +AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 21C OF +THE SECURITIES EXCHANGE +ACT OF 1934 + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate +that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of +the Securities Exchange Act of 1934 (“Exchange Act”) against Marc Sherman +(“Respondent” or “Sherman”). + +II. + +After an investigation, the Division of Enforcement alleges that: + +A. SUMMARY + +1. During its 2008 fiscal year and continuing up to its filing for +Chapter 11 bankruptcy on July 2, 2009 (the “relevant period”), QSGI Inc. (“QSGI” or the +“Company”) was a reseller of and maintenance services provider for used computer +equipment. Sherman, who during the relevant period served as QSGI’s Chief Executive +Officer and Chairman, was aware of deficiencies in and the circumvention of internal +controls for inventory and the resulting falsification of the Company’s books and records. +On occasion in 2008 and increasing in frequency in 2009, Sherman improperly accelerated +the recognition on QSGI’s books and records of accounts receivable and receipt of +inventory in order to increase the borrowing base available under a revolving credit facility +with the Company’s chief creditor. Sherman withheld this information from the +Company’s external auditors in connection with their audit of the financial statements for + 2 +the fiscal year ended December 31, 2008 and review of the financial statements for the +quarter ended March 31, 2009, and made affirmative material misrepresentations and +statements that were materially misleading as a result of his omission of information in +management representation letters to the auditors about the design, maintenance, and +operation of internal controls. Further, Sherman signed a Form 10-K and a Form 10-K/A +for the 2008 fiscal year, each containing a management’s report on internal control over +financial reporting (“ICFR”), as required by Section 404 of the Sarbanes-Oxley Act of +2002 (“Sarbanes-Oxley Act”) and Exchange Act Rule 13a-15(c), which falsely represented +that he, in his capacity as CEO, had participated in assessing the effectiveness of the +Company’s ICFR. Sherman also signed certifications required under Section 302 of the +Sarbanes-Oxley Act and Rule 13a-14 of the Exchange Act included in filings with the +Commission falsely representing that he had evaluated ICFR and, based on this evaluation, +disclosed all significant deficiencies to the auditors. The certifications were attached to the +2008 Forms 10-K and 10-K/A, and to the first quarter 2009 Form 10-Q filed with the +Commission, which Sherman also signed. + + B. RESPONDENT + + 2. Sherman, age 50 and a resident of West Palm Beach, Florida, +founded QSGI in 2001. He has since served as QSGI’s CEO and Chairman of its Board of +Directors. After the Company filed for bankruptcy and until at least July 2010, he served as +Chief Financial Officer and Chief Accounting Officer. + + C. RELEVANT ENTITY + +3. QSGI, Inc., incorporated in 1967 in Delaware under a different name +and headquartered during the relevant period in West Palm Beach, Florida, is engaged in the +business of purchasing, refurbishing, selling, and servicing used computer equipment, parts +and mainframes. On May 4, 2011, the U.S. Bankruptcy Court for the Southern District of +Florida, West Palm Beach Division, confirmed QSGI’s plan of reorganization pursuant to +which, effective June 17, 2011, the corporate shell merged with a private company which +had been founded by Sherman and others. The Company’s common stock is registered +with the Commission pursuant to Section 12(g) of the Exchange Act and quoted on the +OTC Link (formerly “Pink Sheets”) operated by OTC Markets Group Inc. + +D. SHERMAN’S AWARENESS OF DEFICIENCIES IN AND +CIRCUMVENTION OF INVENTORY CONTROLS . + + 4. During the relevant period, QSGI maintained inventory principally +at facilities in New Jersey and Minnesota. The New Jersey inventory, which comprised +50% of the company’s reported gross inventory and 55% of its reported net inventory, after +reduction for reserves, as of the close of its fiscal year ended December 31, 2008, was +comprised of laptops, monitors, and other consumer electronics and components. The +Minnesota inventory, which comprised 40% of QSGI’s reported gross inventory and 35% +of its reported net inventory, after reduction for reserves, as of the close of QSGI’s 2008 +fiscal year, was comprised chiefly of servers, mainframes, and component parts. + 3 + + 5. For a period of years prior to the Company filing for bankruptcy in +2009, QSGI experienced recurring inventory control problems. Throughout the relevant +period, Company personnel: (1) shipped certain inventory received into its facilities out to +customers without making the appropriate entries into the Company’s books and records; +and (2) removed items from physical inventory without relieving the inventory from the +Company’s books and records. Company personnel removed component parts from the +physical inventory for such parts without recording the parts removed and occasionally +stripped component parts from operating systems without recording the parts removed. As +a result, the Company’s books and records incorrectly reflected certain components in +inventory and operating systems as intact systems. These component parts were then sold +by the Company or used for the Company’s maintenance services. + +6. These internal control problems resulted in the falsification of +QSGI’s books and records relating to QSGI’s inventory. + + 7. These inventory control problems escalated at the Minnesota facility +beginning in 2007 for several reasons. First, a manufacturer’s policy of curtailing resellers’ +ability to modify machines to customers’ specifications hastened QSGI’s shift from selling +machines to selling parts and providing repair and maintenance services. This, in turn, +exacerbated the problem in Minnesota of personnel removing component parts from +operating systems without any corresponding adjustment to the Company’s books and +records. The units continued to be recorded on the books and records as intact systems. +Second, key personnel, including accounting personnel, left the Minnesota operations in +late 2007. Personnel designated to replace the departed accounting staff lacked an +accounting background and failed to fully carry out their responsibilities. Third, while +QSGI management had undertaken to design, document, and implement internal controls to +come into compliance with federal securities law requirements, such efforts were not begun +in earnest in Minnesota until late 2007, after the departure of key personnel. Prior to that +point, QSGI senior management had accorded Minnesota personnel a fair amount of +autonomy, including using an accounting system that differed from the one used in New +Jersey. + +8. The Company’s efforts to introduce new controls to the Minnesota +operations during the 2008 fiscal year largely failed. More particularly, the Company +failed to design procedures taking into account the existing control environment, including +the qualifications and experience level of persons employed to handle accounting. Training +of accounting, sales, and warehouse personnel either did not take place or was inadequate. +As a result, controls the Company attempted to implement in February 2008 were widely +ignored during the ensuing ten months of the 2008 fiscal year and well into the 2009 fiscal +year. For example, sales and warehouse personnel often failed to document their removal +of items from inventory or, to the extent they did prepare the paperwork, accounting +personnel often failed to process the paperwork and to adjust inventory in the company’s +financial reporting system. The Company’s attempts to monitor compliance on an ongoing +basis were also inadequate. Company personnel regularly circumvented controls. + + 4 + 9. In periodic filings with the Commission relating to the relevant +period and certifications included therein pursuant to Rule 13a-14 of the Exchange Act, +Sherman acknowledged his responsibility for the design and operation of internal controls. + +10. During the relevant period, Sherman knew of ongoing deficiencies +in and the circumvention of internal controls relating to inventory. For example, in the +final days of the 2008 fiscal year, QSGI senior management, including Sherman, +communicated openly amongst themselves about the failed implementation, including +training in, and circumvention of controls introduced to the Minnesota operations earlier in +the year. Management agreed that corrective action was needed which, given the timing, +could not be undertaken until 2009. Based on further communications, management, +including Sherman, was aware that the problems continued through the Company filing for +bankruptcy in July 2009. + +D. SHERMAN’S IMPROPER ACCELERATION OF RECOGNITION +OF INVENTORY AND ACCOUNTS RECEIVABLE . + +11. QSGI reported net losses in each fiscal year from 2005 through +2008. Under these circumstances, QSGI’s ability to procure operating funds was critical to +the Company’s survival. + +12. In mid-2008, QSGI entered into a revolving credit facility with its +chief creditor. QSGI’s inventory and accounts receivable factored into the weekly +calculation of the borrowing base under the revolving credit facility. A QSGI employee +calculated the borrowing base and reported it to Sherman and to QSGI’s Chief Financial +Officer, subsequently redesignated QSGI’s Vice President of Finance and Controller, +(“PFO”) for their review prior to sending it to the chief creditor. + + 13. On occasion in 2008 and continuing on a more frequent basis up +until the company filed for bankruptcy in July 2009, the weekly calculations would show +that QSGI had exceeded its borrowing limit or would not be able to borrow enough to +continue operations through the upcoming week. When this occurred, Sherman, either +directly or indirectly through the PFO, directed the QSGI employee to not report the +calculations to the creditor pending other items being posted to the books and records so +that the employee could redo the weekly calculation. + +14. In order to increase the borrowing base, Sherman directed the +accelerated recognition of accounts receivable and/or the receipt of product into inventory +on QSGI’s books and records. Under generally accepted accounting principles, +recognition of the accounts receivables and receipt of product into inventory should not +have occurred until days or up to approximately a week later, when all conditions for +recognition had been satisfied. + +15. Once the accounts receivable and/or receipt of inventory were +improperly recorded on QSGI’s books and records, the QSGI employee would recalculate +the borrowing base using the new figures + 5 + E. SHERMAN MISLED QSGI’s EXTERNAL AUDITORS + + 16. At no time during the relevant period did Sherman disclose, or direct +anyone else to disclose, to QSGI’s external auditors the foregoing inventory and accounts +receivable issues and the resulting falsification of QSGI’s books and records. + +17. To the contrary, in management representations letters to the +auditors, Sherman made affirmative misrepresentations and made statements that were +misleading as a result of his omitting material facts which were necessary in order to make +the statements made not misleading. Sherman affirmatively represented in management +representation letters he provided to the auditors in connection with their review of +quarterly financial statements in 2008 that either there were no significant deficiencies or +that he had disclosed to the auditors all such deficiencies. At the conclusion of the fiscal +year, he provided yet another management representation letter in connection with the +external auditors’ audit of the 2008 fiscal year financial statements in which he +acknowledged his responsibility for establishing and maintaining ICFR. Omitted from the +letter was any reference to the existence, or his disclosure to the auditors, of significant +deficiencies. Following on his management representation letters for the first three quarters +of 2008, however, and in the context of his having acknowledged in the year-end +management representation letter his responsibility for establishing and maintaining ICFR, +the omission of any reference to significant deficiencies implied falsely that none existed. +In the management representation letter relating to the external auditors’ review of the first +quarter 2009 financial statements, Sherman affirmatively misrepresented that he had +disclosed to the auditors all significant deficiencies. + +18. Had Sherman disclosed to the external auditors the deficiencies in +and the circumvention of inventory controls and the improper acceleration of accounts +receivable and inventory recognition described above, the auditors would have changed the +nature, timing, and extent of their procedures in conducting the audit of the financial +statements for the fiscal year ended December 31, 2008 and review of the financial +statements for the quarter ended March 31, 2009. + +F. SHERMAN’S FALSE REPRESENTATIONS IN MANAGEMENT’S +REPORT ON ICFR AND CONCERNING QSGI’S CRITICAL +ACCOUNTING POLICIES + .. . .... +19. QSGI’s Form 10-K for the fiscal year ended December 31, 2008 +included a Company management’s report on ICFR, as required by Section 404 of the +Sarbanes-Oxley Act and Exchange Act Rule 13a-15(c). A management’s report on ICFR +was also included in a Form 10-K/A for the 2008 fiscal year. + +20. The management report included in both filings falsely represented +that QSGI’s management, with the participation of QSGI’s CEO, Sherman, had evaluated +QSGI’s ICFR as of December 31, 2008 using the criteria set forth by the Committee of +Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated + 6 +Framework. In fact, Sherman, in his capacity as CEO, did not participate in any evaluation +and was unfamiliar with the referenced framework. + + 21. The discussion on critical accounting policies in QSGI’s Form 10-K +for the fiscal year ended December 31, 2008 falsely stated that: (1) QSGI “recognize[d] +revenue when it is realized or realizable and earned”; and (2) “[m]anagement continually +monitors its inventory valuation . . . .” + + 22. The discussion on critical accounting policies included in QSGI’s +Form 10-K/A for the fiscal year ended December 31, 2008 falsely stated that, +“[m]anagement closely monitors and analyzes inventory for potential obsolescence and +slow-moving items on an item-by-item basis . . . .” + + 23. Sherman knew, or was reckless in not knowing, that these +statements were materially false and misleading. During the relevant period, he had +directed the improper accelerated recognition of accounts receivable, which would have +had the effect of improperly increasing revenue by a commensurate amount. He also knew +that the Company did not closely monitor inventory in the manner described because the +Company lacked the necessary resources. + + 24. Sherman signed the 2008 Form 10-K in his capacity as Chief +Executive Officer and Chairman of QSGI’s Board of Directors. Sherman signed the 2008 +Form 10-K/A in his capacity as Chairman, CEO, CFO and CAO. He was the sole signing +officer of the Form 10-K/A. The 2008 Form 10-K and Form 10-K/A were filed with the +Commission on March 31, 2009 and July 23, 2010, respectively. + + G. SHERMAN’S FALSE SARBANES-OXLEY CERTIFICATIONS + +25. Pursuant to Sarbanes-Oxley Act Section 302 and Exchange Act +Rule 13a-14, Sherman signed certifications which were attached to QSGI’s 2008 Forms +10-K and 10-K/A and Form 10-Q for the periods ended December 31, 2008 and March 31, +2009, respectively. + +26. Sherman individually certified in each filing that, based on his and +the other certifying officer’s “most recent evaluation of [ICFR],” they had disclosed to +QSGI’s external auditors all significant deficiencies, “in the design or operation of [ICFR] +which are reasonably likely to adversely affect [QSGI’s] ability to record, process, +summarize and report financial information.” Omitted from the certification attached to the +Form 10-K, but included in the certification attached to the Form 10-Q, were Sherman’s +certifications to the effect that the other certifying officer and he: (1) had been responsible +for establishing and maintaining ICFR and designing, or supervising others in the design +of, ICFR; and (2) had designed, or caused to be designed, such ICFR. + +27. Sherman’s certifications were false because: (1) he had not +participated in designing, establishing, or maintaining ICFR, and had not evaluated ICFR; +(2) he and others had on occasion circumvented QSGI’s internal controls in accelerating + 7 +improperly the recognition of accounts receivable and inventory; and (3) the other +certifying officer and Sherman had not made the referenced disclosures to the external +auditors. + +28. Sherman knew, or was reckless in not knowing, that his +certifications were materially false and misleading. + +29. As mentioned, Sherman signed the 2008 Form 10-K and Form 10- +K/A, which were filed with the Commission. Sherman also signed the Form 10-Q for the +first quarter of 2009 in his capacity as CEO and Chairman of the Board of Directors, +which was filed with the Commission on May 14, 2009. + +H. VIOLATIONS + + 30. As a result of the conduct described above, Sherman violated +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibits fraudulent +conduct in connection with the purchase or sale of any security involving: a) the use of any +device, scheme, or artifice to defraud; b) the making of material misrepresentations or +omissions; and c) any act, practice, or course of business which operates or would operate +as a fraud or deceit upon any person. + + 31. As a result of the conduct described above, Sherman caused QSGI’s +violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B), which require reporting +issuers to make and keep accurate books and records and devise and maintain effective +internal accounting controls, respectively. + +32. As a result of the conduct described above, Sherman violated +Exchange Act Section 13(b)(5), which prohibits any person from knowingly circumventing +or knowingly failing to implement a system of internal accounting controls or knowingly +falsifying any book, record or account subject to Exchange Act Section 13(b)(2). Sherman +also violated Exchange Act Rule 13b2-1, which prohibits any person from, directly or +indirectly, falsifying or causing to be falsified, any book, record or account subject to +Exchange Act Section 13(b)(2). + + 33. As a result of the conduct described above, Sherman violated +Exchange Act Rule 13b2-2, which prohibits any director or officer of an issuer from, +directly or indirectly: (a) making or causing to be made a materially false or misleading +statement; or (b) omitting or causing another person to omit to state a material fact +necessary in order to make statements made, in light of the circumstances under which such +statements were made, not misleading, to an accountant in connection with financial +statement audits, reviews, or examinations or the preparation or filing of any document or +report required to be filed with the Commission. + + 34. As a result of the conduct described above, Sherman violated +Exchange Act Rule 13a-14(a), which requires that an issuer’s principal executive officer, or + 8 +person’s performing similar functions, certify each periodic report containing financial +statements filed by an issuer pursuant to Section 13(a) of the Exchange Act. + +III. + +In view of the allegations made by the Division of Enforcement, the Commission +deems it necessary and appropriate that cease-and-desist proceedings be instituted to +determine: + +A. Whether the allegations set forth in Section II hereof are true and, in +connection therewith, to afford Respondent an opportunity to establish any defenses to such +allegations; + +B. Whether, pursuant to Section 21C of the Exchange Act, Respondent should +be ordered to cease and desist from committing or causing violations of and any future +violations of Sections 10(b), 13(b)(2)(A), 13(b)(2)(B) and 13(b)(5) of the Exchange Act and +Rules 10b-5, 13a-14, 13b2-1 and 13b2-2 thereunder; + +C. What, if any, remedial action is appropriate against Respondent, including, +but not limited to, civil penalties pursuant to Section 21B(a) of the Exchange Act; + +D. Whether, pursuant to Section 21C(f) of the Exchange Act, Respondent +should be prohibited, conditionally or unconditionally, and permanently or for such period +of time as it shall determine, 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; and + +IV. + +IT IS ORDERED that a public hearing for the purpose of taking evidence on the +questions set forth in Section III hereof shall be convened not earlier than 30 days and not +later than 60 days from service of this Order at a time and place to be fixed, and before an +Administrative Law Judge to be designated by further order as provided by Rule 110 of the +Commission's Rules of Practice, 17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by +Rule 220 of the Commission's Rules of Practice, 17 C.F.R. § 201.220. + +If Respondent fails to file the directed answer, or fails to appear at a hearing after +being duly notified, the Respondent may be deemed in default and the proceedings may be +determined against him upon consideration of this Order, the allegations of which may be +deemed to be true as provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's +Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f) and 201.310. + + 9 +This Order shall be served forthwith upon Respondent personally or by certified +mail. + +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an +initial decision no later than 300 days from the date of service of this Order, pursuant to +Rule 360(a)(2) of the Commission’s Rules of Practice. + +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually +related proceeding will be permitted to participate or advise in the decision of this matter, +except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is +not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it +is not deemed subject to the provisions of Section 553 delaying the effective date of any +final Commission action. + + By the Commission. + + + + Jill M. Peterson + Assistant Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3574.pdf b/raw/aaer/2014/AAER-3574.pdf new file mode 100644 index 0000000000000000000000000000000000000000..9ad4a00b2de899da850bcff526d979ca755bcdbc Binary files /dev/null and b/raw/aaer/2014/AAER-3574.pdf differ diff --git a/raw/aaer/2014/AAER-3575.txt b/raw/aaer/2014/AAER-3575.txt new file mode 100644 index 0000000000000000000000000000000000000000..82e21698286d4dc0970971fd6c1449e4776b6ca3 --- /dev/null +++ b/raw/aaer/2014/AAER-3575.txt @@ -0,0 +1,73 @@ + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72845 / August 14, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3575 / August 14, 2014 + +ADMINISTRATIVE PROCEEDING +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), : EXTENSION ORDER +DELOITTE TOUCHE TOHMATSU CERTIFIED : + PUBLIC ACCOUNTANTS LTD., and : +PRICEWATERHOUSECOOPERS ZHONG : + TIAN CPAs LIMITED : + : + : + : + + + + On August 11, 2014, Respondents Ernst & Young Hua Ming LLP, KPMG +Huazhen (Special General Partnership), Deloitte Touche Tohmatsu Certified Public +Accountants, Ltd., PricewaterhouseCoopers Zhong Tian CPAs Limited (collectively the +“Big Four Respondents”), and the Division of Enforcement (“Division”), jointly +requested a 45-day extension to the briefing schedules set by the Commission by order +dated June 2, 2014. +1 The Division represents that Respondent BDO China Dahua CPA +Co. Ltd. (“Dahua”) agrees with the proposed extension. + + In support of their motion, the Division and the Big Four Respondents state that +the 45-day extension is warranted, in light of the progress made thus far and current +prospects for potential settlement, and it is worthwhile to continue their discussions. + + +1 Extension Order, Exchange Act Release No. 72296 (June 2, 2014). +2 + + Extensions of time are disfavored. It appears appropriate, however, to grant the +requested extension. Therefore, + + It is ORDERED that the briefing schedule is extended as follows: + +November 3, 2014: Big Four Respondents’ consolidated opening brief; the +Division’s opening brief (as to remedies imposed on Dahua). + +December 19, 2014: Division’s principal brief and response to Big Four +Respondents’ opening brief; Dahua’s response brief to the Division’s opening +brief (as to remedies imposed by Dahua). + +January 9, 2015: Big Four Respondents’ single consolidated response and reply +brief. + +January 26, 2015: Division’s reply brief (as to the Division’s Petition for review). + + For the Commission, by its Secretary, pursuant to delegated authority. + + + + + Lynn M. Powalski +Deputy Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3576.pdf b/raw/aaer/2014/AAER-3576.pdf new file mode 100644 index 0000000000000000000000000000000000000000..2793cab66a17cfafe738b7fa7d5da892464015f0 Binary files /dev/null and b/raw/aaer/2014/AAER-3576.pdf differ diff --git a/raw/aaer/2014/AAER-3576.txt b/raw/aaer/2014/AAER-3576.txt new file mode 100644 index 0000000000000000000000000000000000000000..edd8e1f1b82d17e6b75b1491629b7e8fc54ae9f0 --- /dev/null +++ b/raw/aaer/2014/AAER-3576.txt @@ -0,0 +1,319 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9634 / August 22, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72904 / August 22, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3576 / August 22, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16033 + + +In the Matter of + +AIRTOUCH COMMUNICATIONS, INC., +HIDEYUKI KANAKUBO, AND +JEROME KAISER, CPA, + +Respondents. + + + + +ORDER INSTITUTING +ADMINISTRATIVE AND +CEASE-AND-DESIST +PROCEEDINGS PURSUANT +TO SECTION 8A OF THE +SECURITIES ACT OF 1933 +AND SECTIONS 4C AND 21C +OF THE SECURITIES +EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE + +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 AirTouch Communications, Inc., Hideyuki Kanakubo, and +Jerome Kaiser, CPA (collectively, “Respondents”), and additionally as to Kaiser, pursuant to +Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +II. +After an investigation, the Division of Enforcement alleges that: +A. SUMMARY +1. This matter involves fraudulent financial disclosures and omissions by +AirTouch Communications, Inc. (“AirTouch”), a Newport Beach, California issuer, its founder and +former president and CEO Hideyuki Kanakubo (“Kanakubo”), and its former CFO and corporate + 2 +secretary Jerome Kaiser, CPA (“Kaiser”), in the company’s voluntarily filed Form 10-Q for the +third quarter of 2012, and in fraudulent statements and omissions to an investor in connection with +a $2 million loan made to the company in the fall of 2012. +2. In the third quarter of 2012, AirTouch improperly recognized net revenues +of $1.031 million based on $1.24 million of inventory shipped to a Florida entity. This revenue +recognition was improper because, as both Kanakubo and Kaiser knew, or were reckless in not +knowing, a fulfillment and logistics agreement executed contemporaneously with the Florida +entity’s purchase order—and upon which the purchase order was conditioned—relieved that entity +of any obligation to pay AirTouch unless and until an AirTouch customer purchased the inventory. +Kanakubo and Kaiser also knowingly, recklessly or negligently made false representations and +omissions about this revenue to an AirTouch investor and lender. Their conduct in inflating the +revenues and obtaining financing was also deceptive and constituted a scheme to defraud. +3. In early 2013, AirTouch filed a Form 8-K disclosing its intention to restate +net revenues for the third quarter of 2012, based on erroneous revenue recognition. +B. RESPONDENTS +4. AirTouch Communications, Inc. is a Delaware corporation with its +principal place of business in Newport Beach, California. AirTouch’s common stock is quoted on +the OTC Pinks under the symbol “ATCH.” AirTouch develops and sells telecommunications +equipment designed to integrate mobile telephones into landline telephone systems within a +consumer’s home. +5. Hideyuki Kanakubo resides in Irvine, California. He is AirTouch’s +founder and former president, CEO, director, and chief technology officer. At all relevant times, +Kanakubo was responsible for the management of AirTouch’s business. As of May 31, 2014, +Kanakubo beneficially owned or controlled 1,858,143 shares of AirTouch common stock, or 9% of +the company’s total outstanding shares. Kanakubo resigned as president and CEO in March 2013. +He resigned as chief technology officer in April 2013. +6. Jerome Kaiser, CPA resides in Chowchilla, California. Kaiser is a +licensed Certified Public Accountant and an active member in the AICPA and California Society +of Public Accountants. Kaiser holds a BS in Accounting and an MS in Business Taxation. He is +AirTouch’s former CFO and corporate secretary. At all relevant times, Kaiser was responsible for +the management of AirTouch’s business. As of May 31, 2014, Kaiser owned options to acquire +520,096 shares of AirTouch common stock at a strike price of $2 per share. He resigned from +AirTouch in April 2013. +C. FACTUAL BACKGROUND +7. In or around early 2012, AirTouch developed a new product, the “U250 +SmartLinx”, designed for sale to Mexico’s largest provider of landline telephone services (the +“Mexican Entity”). +8. On July 30, 2012, AirTouch contacted a Florida provider of logistics and +fulfillment services (the “Florida Entity”) about the possibility of warehousing AirTouch’s U250 + 3 +SmartLinx product for possible sale to the Mexican Entity. AirTouch had never done business +with the Florida Entity prior to July 30, 2012. +9. During contract negotiations related to this potential warehousing +arrangement, the Florida Entity’s CEO told Kanakubo that the Florida Entity was not buying any +product from AirTouch, but rather would only warehouse the U250 SmartLinx inventory for +eventual delivery to the Mexican Entity or other customers of AirTouch. AirTouch’s salesperson +relayed the same information to Kaiser. +10. On July 30, 2012, Kaiser sent Kanakubo a Fulfillment and Logistics +Agreement between AirTouch and the Florida Entity (the “Agreement”), asking him to +immediately review and sign it, which Kanakubo did. The Agreement included, among other +terms, the following provisions: +a) “Section 3 (Orders and Acceptance): [The Florida Entity]’s purchase orders are +subject to purchase orders by [the Mexican Entity] and/or any other customer that +may be assigned from time to time by AirTouch. In the event [the Mexican Entity] +or any of the customers does not fulfill the purchase orders and/or cancels the +orders, [the Florida Entity] shall have the right to return these products to AirTouch +and obtain a full credit equal to the original purchase amount with no offsets or +deductions or any kind.”; +b) “Section 5 (Resale to [the Mexican Entity] and/or Assigned Customers by +AirTouch): [The Florida Entity] shall store the merchandise until shipment of the +Products and shall invoice AirTouch for storage of the products, in/out control, +invoicing, stock reconciliation, at 1.5% of the invoice value for the first 30 days and +an additional 1% for each additional 30 days.”; and +c) “Section 6 (Payment): [The Florida Entity] shall pay for Products in 90 days in +accordance with the payment terms invoiced by AirTouch. However, [the Florida +Entity] shall not be obligated to pay AirTouch until the Products have been received +by [the Mexican Entity] and [the Florida Entity] has received full payment therefor, +at which time then [the Florida Entity] shall pay AirTouch for the Products within +10 days thereafter.” +11. The same day, the Florida Entity issued a $1.74 million “purchase order” +for 20,000 U250 SmartLinx (the “Purchase Order”). The Purchase Order stated a payment term of +“Net 90” but also stated that its payment terms were “according to term sheet.” The Agreement +was the “term sheet.” Kaiser received emails where representatives of the Florida Entity described +the Purchase Order as “conditional” upon AirTouch’s execution of the Agreement. Kanakubo was +also made aware that the Florida Entity would not issue the Purchase Order unless AirTouch first +executed the Agreement. +12. On July 31, 2012, the Florida Entity sent Kaiser the counter-signed +Agreement and the Purchase Order in a single email. Before forwarding this email to AirTouch’s +controller, he deleted the Agreement as an attachment, and forwarded only the Purchase Order. + 4 +13. AirTouch shipped approximately $1.24 million of inventory to the Florida +Entity during the third quarter of 2012, pursuant to the Agreement and the Purchase Order. +AirTouch recognized revenue on all $1.24 million of inventory shipped to the Florida Entity during +the quarter. +14. In October 2012, in connection with AirTouch’s quarterly review, +AirTouch’s controller provided its outside independent accountant with a copy of the Purchase +Order, but not the Agreement. The outside independent accountant did not receive the Agreement +since Kaiser had never provided AirTouch’s controller with the Agreement. +15. When discussing the purported receivable AirTouch booked from the +Florida Entity at board meetings, Kanakubo and Kaiser did not inform AirTouch’s outside +directors, including the chairman of the audit committee, that shipments to the Florida Entity were +controlled by the Agreement. +16. AirTouch did not receive any payment from the Florida Entity during the +third quarter of 2012, and likewise received no commitment from the Mexican Entity that it would +buy product shipped to the Florida Entity, or otherwise. +1. AirTouch, Kanakubo and Kaiser Made False and Misleading Statements +and Engaged in a Scheme to Defraud and Deceptive Conduct Concerning +Revenue Recognition in AirTouch’s Form 10-Q for the Third Quarter 2012 +17. On November 14, 2012, AirTouch filed its Form 10-Q for the third quarter +of 2012, reporting net revenues of $1,031,747. Without the revenue recognized on the inventory +shipped to the Florida Entity, AirTouch would not have had any positive revenue for the quarter. +18. Under Generally Accepted Accounting Principles (“GAAP”), revenue +cannot be recognized unless it is “realized or realizable” and “earned.” +19. AirTouch’s recognition of revenues for the inventory shipped to the Florida +Entity did not comply with GAAP. Because AirTouch did not sell any product to the Florida +Entity—the Purchase Order and the Agreement merely documented, for tracking purposes, the +transfer of AirTouch inventory to the Florida Entity in contemplation of future sales—the revenue +associated with shipments to the Florida Entity was not realized, realizable or earned. +20. AirTouch’s revenue recognition policy, which was disclosed in the 10-Q +and was consistent with the requirements of Generally Accepted Accounting Principles, permitted +the recognition of revenue only where: “(1) persuasive evidence of an arrangement exists in the +form of an accepted purchase order or equivalent documentation; (2) delivery has occurred, based +on shipping terms, or services have been provided; (3) the company’s price to the buyer is fixed or +determinable, as documented on the accepted purchase order or similar documentation; and (4) +collectability is reasonably assured.” +21. Given the terms of the Purchase Order and the Agreement, AirTouch had no +reasonable assurance of collectability from the Florida Entity because AirTouch did not even have +a valid receivable to collect from the Florida Entity. + 5 +22. Kanakubo and Kaiser signed certifications intended to be made pursuant to +the Sarbanes-Oxley Act of 2002, stating that the Form 10-Q fairly presented AirTouch’s financial +condition and results. +23. Kanakubo and Kaiser knew, or were reckless in not knowing, that +AirTouch’s Form 10-Q contained materially false or misleading statements concerning reported +net revenues and compliance with GAAP or AirTouch’s revenue recognition policy. +24. The false and misleading statements in AirTouch’s Form 10-Q occurred in +connection with the purchase or sale of securities. +25. The false and misleading statements in AirTouch’s Form 10-Q were +material. These statements would have been viewed by a reasonable investor as significantly +altering the total mix of available information, given that AirTouch would not have had any +positive revenues for the quarter if it did not recognize the revenue from the Florida Entity. The +Form 10-Q also reflected AirTouch’s largest revenues ever reported for a quarter. +26. Kanakubo and Kaiser each knew about the Agreement but concealed it from +others involved in AirTouch’s financial reporting process, including the controller, the chairman of +the audit committee, and the company’s outside independent accountant. These acts of +concealment, along with other deceptive conduct, contributed to a revenue recognition scheme and +operated as a fraud. +27. Because of Kanakubo’s and Kaiser’s positions as AirTouch’s senior +management, their scienter is attributable to AirTouch. +28. At all relevant times, Kanakubo and Kaiser were the company’s principal +officers; they were the members of management in charge of AirTouch’s day-to-day management, +policies, and operations; and they were responsible for preparing and signing AirTouch’s SEC +filings. +2. Kanakubo and Kaiser Made False and Misleading Statements and +Omissions to an Investor and Engaged in a Scheme to Defraud and Deceptive +Conduct Concerning Revenues from the Florida Entity +29. In or around 2012, Kanakubo and Kaiser solicited a short term bridge loan +from an existing AirTouch investor (“Investor A”), in exchange for a promissory note and a +warrant to purchase 100,000 shares of AirTouch common stock. Investor A recommended the +loan and warrant acquisition opportunity to a related entity, for which he served as the authorized +agent during the due diligence process. +30. On October 3, 2012, Kanakubo falsely told Investor A by email that the +inventory to be shipped by AirTouch to the Florida Entity—which he mischaracterized as an +“authorized fulfillment house” for the Mexican Entity—pertained to an existing purchase order +from the Mexican Entity. +31. Around the same time, Kaiser provided Investor A’s representatives with +the Purchase Order, but did not provide them with or disclose the existence of the Agreement. + 6 +32. On October 17, 2012, AirTouch received the loan of $2 million from +Investor A in exchange for a warrant to purchase its common stock. +33. Two days later, on October 19, 2012, Kanakubo approved a $15,000 bonus +payment to Kaiser for his work on raising capital. The same day, Kanakubo authorized a $15,000 +payment to himself in connection with unused vacation time. +34. Kanakubo and Kaiser knew, or were reckless in not knowing, that their +statements to Investor A concerning revenues from the Florida Entity were materially false and +misleading. +35. Kanakubo and Kaiser also failed to act with reasonable care because: +(1) they did not ensure that Investor A was provided with all material information necessary to +make their statements to him concerning the inventory shipped to the Florida Entity not +misleading; and (2) they provided Investor A’s representatives with the Purchase Order but not the +Agreement. +36. The false and misleading statements and omissions to Investor A occurred +in the offer or sale of, and in connection with the purchase or sale of, securities. +37. Kanakubo’s and Kaiser’s false and misleading statements to Investor A, and +their failure to disclose the terms of the Agreement, were material. Kanakubo’s and Kaiser’s +statements to Investor A, and the terms of the Agreement, would have been viewed by a reasonable +investor as significantly altering the total mix of available information because, among other +reasons, AirTouch had not sold any of the inventory warehoused with the Florida Entity to the +Mexican Entity, and thus had no basis to represent that it expected to collect revenue from the +Florida Entity. +38. Kanakubo and Kaiser lured Investor A over several months into loaning +AirTouch $2 million based on a distorted view of AirTouch’s finances and relationships with third +parties, including the Mexican Entity and the Florida Entity. They led Investor A to believe that +AirTouch would receive a substantial financial commitment from the Mexican Entity, which +would then provide AirTouch with sufficient cash flow for AirTouch to service and repay the loan. +These inducements by Kanakubo and Kaiser, along with other deceptive conduct, contributed to an +offering fraud scheme and a fraudulent transaction. +39. Because of Kanakubo’s and Kaiser’s positions as AirTouch’s senior +management, their scienter and their negligence are attributable to AirTouch. +40. At all relevant times, Kanakubo and Kaiser were the company’s principal +officers; they were the members of management in charge of AirTouch’s day-to-day management, +policies, and operations; and they were responsible for negotiating with Investor A, providing +Investor A with due diligence materials, and for preparing and signing AirTouch’s SEC filings. +3. AirTouch Announces It Will Restate Revenues +41. In January 2013, AirTouch’s board of directors commenced an internal +investigation concerning the net revenues reported in the Form 10-Q for the third quarter of 2012. + 7 +42. At this time, Kaiser provided the chairman of the audit committee with the +Purchase Order, but withheld the Agreement. +43. AirTouch’s board of directors and its outside auditor subsequently received +the Agreement, and determined to restate reported revenues for the third quarter of 2012. +44. AirTouch filed a Form 8-K on February 7, 2013, announcing errors in +revenue recognition and the intention to file an amended Form 10-Q. No amended Form 10-Q has +been filed. +E. VIOLATIONS +45. As a result of the conduct described above, Respondents AirTouch and +Kanakubo violated, and Kaiser willfully violated, Sections 17(a) of the Securities Act, and Section +10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in the +offer and sale of securities and in connection with the purchase or sale of securities. +46. Respondents Kanakubo and Kaiser are jointly and severally liable under +Section 8A(a) of the Securities Act for causing AirTouch’s violations of Section 17(a) of the +Securities Act and under Section 21C(a) of the Exchange Act for causing AirTouch’s violations of +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and in the case of Kaiser, for +willfully aiding and abetting AirTouch’s violations of the Securities Act and the Exchange Act. +III. +In view of the allegations made by the Division of Enforcement, the Commission deems it +appropriate in the public interest that public administrative and cease-and-desist proceedings be +instituted to determine: +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondents an opportunity to establish any defenses to such allegations; +B. Whether, pursuant to Section 8A of the Securities Act and Section 21C of the +Exchange Act, Respondents should be ordered to cease and desist from committing or causing +violations of and any future violations of Sections 17(a) of the Securities Act and Sections 10(b) of +the Exchange Act and Rule 10b-5 thereunder, whether Respondents should be ordered to pay a civil +penalty pursuant to Section 8A(g) of the Securities Act, in the public interest, and Section 21B(a) of +the Exchange Act; whether Respondents should be ordered to pay disgorgement pursuant to Section +8A(e) of the Securities Act and Sections 21B(e) and 21C(e) of the Exchange Act; and whether other +appropriate relief should be granted, including a prohibition from service as an officer or director of +any issuer pursuant to Section 8A(f) of the Securities Act and Section 21C(f) of the Exchange Act; +and +C. Whether, pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice, it is appropriate to censure or deny Kaiser the privilege of +appearing or practicing before the Commission. + 8 +IV. +IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions +set forth in Section III hereof shall be convened not earlier than 30 days and not later than 60 days +from service of this Order at a time and place to be fixed, and before an Administrative Law Judge +to be designated by further order as provided by Rule 110 of the Commission's Rules of Practice, 17 +C.F.R. § 201.110. +IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission's Rules of Practice, 17 C.F.R. § 201.220. +If Respondents fail to file the directed answer, or fails to appear at a hearing after being duly +notified, Respondents 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 personally or by certified mail. +IT IS FURTHER ORDERED that the Administrative Law Judge shall issue an initial +decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) of +the Commission’s Rules of Practice. +In the absence of an appropriate waiver, no officer or employee of the Commission engaged +in the performance of investigative or prosecuting functions in this or any factually related +proceeding will be permitted to participate or advise in the decision of this matter, except as witness +or counsel in proceedings held pursuant to notice. Since this proceeding is not “rule making” within +the meaning of Section 551 of the Administrative Procedure Act, it is not deemed subject to the +provisions of Section 553 delaying the effective date of any final Commission action. + By the Commission. + + + + Jill M. Peterson + Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3578.pdf b/raw/aaer/2014/AAER-3578.pdf new file mode 100644 index 0000000000000000000000000000000000000000..791e14d8a60ec1be845e03cf40c9b8cfcba080a2 Binary files /dev/null and b/raw/aaer/2014/AAER-3578.pdf differ diff --git a/raw/aaer/2014/AAER-3578.txt b/raw/aaer/2014/AAER-3578.txt new file mode 100644 index 0000000000000000000000000000000000000000..29ff5c8bf35158aa998eda938a5fb039e248a6d5 --- /dev/null +++ b/raw/aaer/2014/AAER-3578.txt @@ -0,0 +1,278 @@ +1 + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72938A / August 28, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3578A / August 28, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16045 + + +In the Matter of + +Lynn R. Blodgett and +Kevin R. Kyser, CPA + +Respondents. + +CORRECTED ORDER INSTITUTING +CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), Lynn R. Blodgett (“Blodgett”), and Kevin R. Kyser +(“Kyser”). +II. + In anticipation of the institution of these proceedings, Blodgett and Kyser have submitted +an Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for +the purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + 2 +III. + On the basis of this Order and Respondents’ Offer, the Commission finds1 that: +Summary +1. At or near the end of each quarter ended September 30, 2008 through the quarter +ended June 30, 2009, Affiliated Computer Services, Inc. (“ACS”) arranged for an equipment +manufacturer to re-direct certain of its pre-existing orders through ACS, which gave the +appearance that ACS was involved. ACS, however, had no substantive involvement in the orders, +and there were no changes to the terms of the pre-existing orders. Because of the nature of these +arrangements, ACS should not have reported revenue from these arrangements and therefore +misreported revenues in its financial reports filed on Form 10-K and Forms 10-Q for these periods. +As a result, ACS falsely reported its internal revenue growth, which Blodgett and Kyser +highlighted in earnings releases and analyst conference calls during the period.2 In addition, +ACS’s periodic filings with the Commission inadequately or incompletely described these so- +called “resale transactions.” ACS improperly reported approximately $125 million in revenue due +to such arrangements. + +2. During all relevant periods, Respondents Blodgett and Kyser were, respectively, +ACS’s chief executive officer and chief financial officer. As such, they were responsible for the +content of ACS’s filings with the Commission, as well as ACS’s earnings releases and analyst +conference calls. Blodgett and Kyser received bonuses that were higher than they would have +been had ACS correctly applied generally accepted accounting principles (GAAP) with respect to +determining the amount of revenue to report from the “resale transactions.”3 + +3. Based on the conduct described below, Respondents were a cause of ACS’s +violations of the reporting, record-keeping, and internal controls provisions of the Exchange Act. +In addition, Blodgett and Kyser violated the Exchange Act’s certification requirements relating to +ACS’s Forms 10-Q for each fiscal quarter from September 30, 2008 through March 31, 2009 and +ACS’s Form 10-K for the fiscal year ended June 30, 2009. + +Respondents +4. Lynn R. Blodgett, age 59, served as the President and Chief Executive Officer of +ACS from November 2006 and as a director from September 2005 until Xerox Corporation +acquired ACS in February 2010. Following Xerox Corporation’s acquisition of ACS, Blodgett + +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 Internal revenue growth was a non-GAAP measure that ACS disclosed “to provide both management and +investors a more complete understanding of the Company’s underlying operational trends and results.” + +3 Financial statements filed with the Commission that are not prepared in accordance with GAAP are +presumed to be misleading or inaccurate. Regulation S-X 210.4-01 [17 C.F.R. § 210.4-01]. + 3 +became an executive vice president of Xerox Corporation and has served as the President of Xerox +Services since January 2012. +5. Kevin R. Kyser, age 44, served as an executive vice president and the Chief +Financial Officer of ACS from September 2007 until Xerox Corporation acquired ACS in +February 2010. Following Xerox Corporation’s acquisition of ACS, Kyser continued as ACS’s +Chief Financial Officer until named the Chief Operating Officer of Xerox’s Information +Technology Outsourcing Group in January 2012, a position he held until he resigned in May 2013. +Kyser’s license as a certified public accountant in the state of Texas expired in April 2008. +Relevant Entity +6. Affiliated Computer Services, Inc. was a Delaware corporation headquartered in +Dallas, Texas during the relevant period. The registration of ACS’s common stock pursuant to +12(b) of the Exchange Act was withdrawn following ACS’s merger in February 2010 with a +subsidiary of Xerox Corporation, and the ACS corporate entity was subsequently dissolved. +Facts +7. ACS provided business process outsourcing and information technology services +through two reportable operating segments: the Commercial Services Group, which accounted for +approximately 60% of ACS’s fiscal year 2009 revenues, and the Government Services Group, +which accounted for the remaining 40% of ACS’s revenues. ACS historically generated +approximately 85% of its revenues from recurring, long-term contracts and 15% from non- +recurring transactions. The “resale transactions” discussed below originated in ACS’s Commercial +Services Group and were classified as non-recurring revenue. +ACS mischaracterized “resale transactions” to increase revenue +8. In its Form 10-K for the fiscal year ended June 30, 2008, ACS disclosed that its +primary goal for fiscal year 2009 was to increase internal revenue growth. In an August 7, 2008 +analyst call, Blodgett characterized ACS as “well positioned to accelerate internal revenue growth +in fiscal year 2009.” + +9. Shortly before the end of its first quarter of fiscal year 2009, ACS noted that the +company’s revenue would, at current rates, fall short of company guidance and consensus analyst +expectations. To increase revenue, ACS arranged for an equipment manufacturer to re-direct +through ACS approximately $20 million of pre-existing orders that the manufacturer already had +received from another reseller. ACS’s transaction documents gave the appearance that ACS was +involved in the “resale transactions,” but ACS in fact had no such involvement. Among other +things, even after ACS was inserted into the “resale transactions,” the pricing for equipment +remained unchanged, the equipment continued to be shipped from the manufacturer directly to the +reseller’s customers (i.e., ACS never had actual or constructive possession of it), and the reseller’s +customers were unaware that ACS was involved. In short, these pre-existing orders between the +manufacturer and other reseller proceeded in all material respects according to their original terms +and were unaffected by ACS’s late insertion. + 4 +10. ACS executed virtually identical “resale transactions” at the end of the next three +quarters.4 In total, ACS reported revenue of $124.5 million from such arrangements during fiscal +2009. +ACS’s improper accounting +11. ACS improperly applied GAAP in determining the amount of revenue to report in +each of its quarters in FY 2009. In making a determination of the amount of revenue to report, +ACS did not appropriately take into account all of the critical terms of the arrangement and +therefore failed to reflect the lack of economic substance of the “resale transactions” under GAAP. +In addition, ACS’s internal controls were insufficient to provide reasonable assurance that ACS +reported revenues in conformity with GAAP, primarily because ACS failed to appropriately +evaluate the economic substance of the “resale transactions.” +12. The revenue from these “resale transactions” enabled ACS to meet its publicly +disclosed internal revenue growth (“IRG”) guidance for three of the four quarters for that fiscal +year. ACS missed its guidance for its third quarter even with the improperly reported revenue. +The table below summarizes the amount of the resale revenue (as reported), ACS’s public IRG +guidance, IRG (as reported), IRG (as adjusted), and the percent misstated by quarter and for the +year: +Period +“Resale” +Revenue +(as reported) +($ in millions) +ACS’s +Public +IRG +Guidance +IRG +(as reported) +IRG +(as adjusted) +IRG Over +Statement + +% +Over +Statement +Q1 2009 $ 19.9 5% 5% 3.4% 1.6% 47% +Q2 2009 $ 40.6 4-5% 4% 1.2% 2.8% 233% +Q3 2009 $ 39.7 5-6% 3% (0.2)% 3.2% 1,600% +Q4 2009 $ 24.2 3% 3% 1.7% 1.3% 76% +FY 2009 $ 124.5 5-6% 3% 1.5% 1.5% 100% +ACS failed to properly disclose the “resale transactions” and their impact on IRG +13. Even though the “resale transactions” were the largest contributors to ACS’s +internal revenue growth, ACS did not disclose them in its September 30, 2008 Form 10-Q. In +subsequent quarters, ACS disclosed these transactions as “information technology outsourcing +related to deliveries of hardware and software.” This description did not accurately disclose the +nature of these transactions and falsely suggested that they were executed as part of existing ACS +outsourcing contracts. + +4 Contemporaneous with the “resale transactions” executed for the quarters ended September 30, 2008 and +December 31, 2008, ACS also agreed to purchase equipment from the equipment manufacturer or the reseller. + 5 +14. Blodgett and Kyser understood the origination of these “resale transactions” and +their impact on ACS’s reported revenue growth. However, Blodgett and Kyser did not ensure that +ACS adequately described their significance in ACS’s public filings and on analyst calls. Blodgett +and Kyser certified each of ACS’s fiscal year 2009 Forms 10-Q and 10-K. +Blodgett’s and Kyser’s bonuses +15. As part of their compensation, Blodgett and Kyser received bonus payments that +were, in part, tied to ACS’s financial performance, including revenue growth. As a result of the +improperly reported revenue, Blodgett and Kyser received bonuses based on fiscal 2009 +performance that were 43% higher than they would have received if ACS had properly applied +GAAP with respect to determining the amount of revenue to report from the resale transactions. +Violations +16. ACS violated Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, +and 13a-13 thereunder by filing Forms 8-K, 10-Q, and 10-K for fiscal 2009 that improperly +reported revenue related to the resale transactions, materially misstated ACS’s internal revenue +growth and either inadequately or incompletely described the significance of the resale transactions +to internal revenue growth. Blodgett and Kyser were a cause of ACS’s violations of these +provisions. +17. ACS violated Section 13(b)(2)(A) by keeping books and records that inaccurately +reported ACS’s resale transactions during fiscal year 2009. ACS also violated Section 13(b)(2)(B) +by failing to devise and maintain a system of internal controls sufficient to provide reasonable +assurance that transactions are recorded and financial statements are prepared in accordance with +GAAP. Blodgett and Kyser were a cause of ACS’s violations of these provisions. +18. As a result of the conduct described above, Blodgett and Kyser violated Rule +13a-14 under the Exchange Act, which sets forth the requirements for certain reports filed under +Section 13(a) of the Exchange Act to include specified certifications by each principal executive +and principal financial officer of the issuer. +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. Respondent Blodgett 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, and 13a-14 thereunder; + B. Respondent Kyser 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, and 13a-14 thereunder; + 6 +C. Respondent Blodgett shall, within thirty (30) days of the entry of this Order, pay +disgorgement of $351,050 and prejudgment interest of $61,682 to the United States +Treasury. If timely payment is not made, additional interest shall accrue pursuant +to SEC Rule of Practice 600. Further, Respondent Blodgett shall, within thirty (30) +days of the entry of this Order, pay a civil money penalty in the amount of $52,000 +to the United States Treasury. If timely payment is not made, additional interest +shall accrue pursuant to 31 U.S.C. 3717. +D. Respondent Kyser shall, within thirty (30) days of the entry of this Order, pay +disgorgement of $133,192 and prejudgment interest of $23,403 to the United States +Treasury. If timely payment is not made, additional interest shall accrue pursuant +to SEC Rule of Practice 600. Further, Respondent Kyser shall, within thirty (30) +days of the entry of this Order, pay a civil money penalty in the amount of $52,000 + +to the United States Treasury. 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 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) 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 Lynn Blodgett or Kevin Kyser as a Respondent in these proceedings, +and the file number of these proceedings; a copy of the cover letter and check or +money order must be sent to David L. Peavler, Associate Regional Director, Fort +Worth Regional Office, Division of Enforcement, Securities and Exchange +Commission, 801 Cherry Street, Suite 1900, Fort Worth, Texas, 76102. +F. Such civil money penalties may be distributed pursuant to Section 308(a) of the +Sarbanes-Oxley Act of 2002, as amended (“Fair Fund distribution”). Regardless of +whether any such Fair Fund distribution is made, amounts ordered to be paid as +civil money penalties pursuant to this Order shall be treated as penalties paid to the +government for all purposes, including all tax purposes. To preserve the deterrent +effect of the civil penalty, Respondents agree that in any Related Investor Action, +they shall not argue that they are entitled to, nor shall they benefit by, offset or +reduction of any award of compensatory damages by the amount of any part of + 7 +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 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 paragraph, a "Related Investor Action" means a +private damages action brought against either 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. + + + + Jill M. Peterson + Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3580.txt b/raw/aaer/2014/AAER-3580.txt new file mode 100644 index 0000000000000000000000000000000000000000..27e0f98229c6987b31eed4c33df6df7c0dc653a3 --- /dev/null +++ b/raw/aaer/2014/AAER-3580.txt @@ -0,0 +1,473 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 9637 / September 4, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72976 / September 4, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3580 / September 4, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-15680 + + + + + +In the Matter of + +EUGENE M. EGEBERG III, CPA, + +Respondent. + + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS + PURSUANT TO SECTION 8A OF THE +SECURITIES ACT OF 1933, SECTIONS +4C AND 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, AND RULES +102(e)(1)(ii) AND (iii) OF THE +COMMISSION’S RULES OF PRACTICE +AND A CEASE-AND-DESIST ORDER + + +I. + + On January 17, 2014, the Securities and Exchange Commission (“Commission”) instituted +public administrative and cease-and-desist proceedings against Eugene M. Egeberg III, CPA +(“Egeberg” or “Respondent”) pursuant to Section 8A of the Securities Act of 1933 (“Securities +Act”), Sections 4C and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rules +102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice. + +II. + + Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over him and +the subject matter of these proceedings, which are admitted, Respondent consents to the entry of +2 + +this Order Making Findings And Imposing Remedial Sanctions Pursuant to Section 8A of the +Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rules +102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice and a Cease-and-Desist Order, as set +forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds that1: + + +A. RESPONDENT +1. Eugene M. Egeberg III, CPA, a resident of Hampstead, Maryland, operates a self- +named sole-proprietorship accounting firm in Baltimore, Maryland. Egeberg is a Maryland- +licensed CPA and was previously registered with the Public Company Accounting Oversight +Board (“PCAOB”) before his voluntary request for withdrawal was accepted by the PCAOB in +November 2012. +B. RELATED ISSUERS + +2. Fox Petroleum, Inc. (“Fox Petroleum”) is a Nevada corporation located in New +York, New York with a class of securities registered with the Commission pursuant to Exchange +Act Section 12(g). Egeberg audited Fox Petroleum’s financial statements for its fiscal years ended +February 28, 2010, February 28, 2011, and February 28, 2012. + +3. RPM Advantage, Inc. (“RPM Advantage”) is a Nevada corporation located in +Houston, Texas. RPM Advantage’s stock was previously registered with the Commission pursuant +to Exchange Act Section 12(g). On November 8, 2011, and again on January 30, 2012, RPM +Advantage had its securities registration revoked by the Commission pursuant to Exchange Act +Section 12(j). Egeberg audited RPM Advantage’s financial statements for its fiscal years ended +December 31, 2006 through December 31, 2010. +C. FACTS +Failure to Conduct Audits with Due Professional Care and Skepticism, and Failure to +Obtain Competent and Sufficient Evidential Matter. +4. AU2 § 230.01, Due Professional Care in the Performance of Work, requires that an +auditor exercise due professional care in the planning and performance of an audit, and in +preparation of the audit report. Due professional care requires an auditor to exercise professional + +1The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +2 References in this order are to the PCAOB standards in effect at the time of the relevant conduct. + +3 + +skepticism throughout the audit process. AU § 230.07-08. Similarly, AU § 326, Evidential +Matter, required that the auditor obtain sufficient competent audit evidence to support the opinion +expressed in the auditor’s report, for fiscal years beginning before December 15, 2010. AU § +315.09, Communications Between Predecessor and Successor Auditors, requires a successor +auditor to make specific and reasonable inquiries of the predecessor auditor regarding information +that might bear on the integrity of management, disagreements with management as to accounting +principles or auditing procedures, communications to audit committees regarding fraud or illegal +acts by clients, and the predecessor auditor’s understanding as to the reasons for the change of +auditors. +5. Egeberg violated AU § 230 by conducting the purported Fox Petroleum audits for +Fiscal Years 2010 and 2011, without exercising appropriate due professional care or professional +skepticism and violated AU § 326 by failing to obtain sufficient competent evidential matter. +Egeberg did so by failing to perform any audit tests or procedures to determine the accuracy of Fox +Petroleum’s financial statements. On a checklist Egeberg completed for Fox Petroleum, he noted, +for example, that the company’s large accounts payable balance was a troublesome audit area.3 +Egeberg, however, performed no tests to determine whether the balance was accurate. Instead, +Egeberg simply concluded that management’s representations were adequate. See also AU § +333.02, Management Representations, which states, in part, “…[R]epresentations from +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.” +6. Similarly, Egeberg noted that unrecorded liabilities were a potential fraud risk for +Fox Petroleum, but that his concerns were satisfied by the company’s “overhauled financials.” +Egeberg never identified what he was specifically referring to by that, nor did he point to any +documentation showing how the supposed overhauls satisfied him. Egeberg’s acceptance of these +assertions at face value, without further inspection or procedures, constituted a failure to exercise +due professional care and skepticism and a failure to obtain sufficient competent evidential matter. +7. Egeberg was also required to inquire with the prior auditor for Fox Petroleum’s +2009 financial statements, the period immediately prior to the 2010 financial period. Egeberg +never inquired with the previous auditor regarding Fox Petroleum, in violation of AU § 315. Fox +Petroleum’s 2010 financial statements had already been audited and filed with the Commission in +a Form 10-K, but the prior auditor, who was hired to audit just that one period, had his PCAOB +registration permanently revoked on October 19, 2010 for non-cooperation with a PCAOB +investigation. Egeberg was unaware that his audit of the 2010 financial statements was a re-audit, +even though it was public knowledge and the Form 10-K was available on the Commission’s + +3 Egeberg downloaded the checklist from the American Institute of Certified Public Accountants’ (“AICPA”) +website. This checklist came from the AICPA’s Peer Review Program Manual. AICPA STANDARDS FOR +PERFORMING AND REPORTING ON PEER REVIEWS § 20,400, et seq. (Am. Inst. of Certified Pub. Accountants 2009). +The checklist was designed as part of the AICPA’s Peer Review Programs and was designed for independent +reviewers to examine member-auditors’ engagements after completion of the engagement to promote accounting +and auditing quality. AICPA STANDARDS FOR PERFORMING AND REPORTING ON PEER REVIEWS § 1000.02 (Am. +Inst. of Certified Pub. Accountants 2013). +4 + +website. Egeberg was required to try to inquire with the prior auditor regarding the re-audit of the +2010 financial statements for Fox Petroleum, pursuant to AU § 315.14. +8. Egeberg also violated AU § 230 by conducting the purported RPM Advantage +audits without excercising appropriate due professional care or professional skepticism and +violated AU § 326 by failing to obtain sufficient competent evidential matter. Much like with Fox +Petroleum, Egeberg failed to document any audit procedures he performed for any of RPM +Advantage’s balances on its financial statements. Auditing Standard No. 3. Moreover, it is +questionable that Egeberg actually audited RPM Advantage’s financial statements, because they +were arithmetically incorrect. + +9. Egeberg claimed he inquired about RPM Advantage’s predecessor auditor, but he +determined that the auditor was “unavailable.” RPM Advantage’s prior auditor had, on January 7, +2010, just one month prior to Egeberg’s engagement, been suspended from appearance or practice +before the Commission as an accountant with the right to apply for reinstatement after five years +pursuant to Rule of Practice 102(e)(1)(ii) and (iii) for numerous audit deficiencies, including +failure to exercise due professional care and failure to maintain adequate audit documentation. The +order suspending the prior auditor was publicly available, and a minimal search would have +informed Egeberg of the suspension. +10. An example of Egeberg’s lack of due care and skepticism on the RPM Advantage +audits is the lack of work to obtain audit evidence to analyze the impact of the balances carried +over from the 2005 financial statements on the 2006 financial statements and consistency of +accounting principles. See AU § 315.12. Egeberg noted on his checklist for RPM Advantage, +under the section for past adjustments and risk, that the financial statements were materially +misstated and that “there was no method to ascertain.” Egeberg claimed that the only records the +company had were the previous SEC filings, and thus he had no method to ascertain past +adjustments. Egeberg failed to point to any actual procedures that he performed. Egeberg had no +audit work papers, and had no other evidence to overcome his lack of audit documentation on the +subject. Because there were no records for prior periods and because Egeberg did not make +inquiries of the prior auditor for RPM Advantage, due professional care and skepticism should +have caused him to apply appropriate auditing procedures to account balances at the beginning of +fiscal year 2006 and to transactions in prior periods, but he did not. See AU § 315.12. See also +AU § 315.13 (“[t]he successor auditor’s review of the predecessor auditor’s working papers may +affect the nature, timing, and extent of the successor auditor’s procedures with respect to the +opening balances and consistency of accounting principles.”) + + +Failure to Obtain Engagement Quality Reviews. +11. Auditing Standard No. 7, Engagement Quality Review, requires an engagement +quality review and concurring approval of issuance of audit report for each audit engagement and +5 + +for each engagement to review interim financial information for fiscal years beginning after +December 15, 2009. The engagement quality reviewer may not be the same person as the +engagement partner. A sole practice firm, like Egeberg’s, is thus required to engage a qualified +individual from outside the firm to serve as the engagement quality reviewer. +12. Egeberg failed to obtain an engagement quality review for the Fox Petroleum audit +engagement for its fiscal years ended February 28, 2011 and February 28, 2012, and for the audit +of RPM Advantage’s financial statements for its fiscal year ended December 31, 2010, in violation +of Auditing Standard No. 7. + Deficiencies in the Audits of Fox Petroleum’s Subsidiaries. +13. In September 2011, Fox Petroleum purchased two companies, Renfro Energy, LLC +(“Renfro”) and Cameron Parish Pipelines, LLC (“CPP”). Fox Petroleum engaged Egeberg to +conduct audits of Renfro and CPP for each company’s fiscal years ended December 31, 2009 and +December 31, 2010. On November 1, 2011, at 11:49 p.m., the CEO of Fox Petroleum emailed +Egeberg informing him of the purchase of the two companies. The CEO told Egeberg that the two +companies’ financial statements would need to be audited as part of the purchase agreement, and +that the two separate auditors for each company were unable to complete the audits by November +3, less than two days later. The Fox Petroleum CEO asked whether Egeberg would be able to +complete the audits for both companies for fiscal years 2009 and 2010 within the less than two-day +period, and told Egeberg that a $5 million credit line was contingent upon the deal closing, and that +if the deal closed on time, Egeberg would be able to collect outstanding bills for his audit of Fox +Petroleum that he had thus far been unable to collect. Less than forty hours later, Egeberg signed +off on the audits of four years’ worth of financial statements for Renfro and CPP. Egeberg +provided audit reports stating that he conducted the audits in accordance with PCAOB standards. +Those audit reports, along with the financial statements for Renfro and CPP, were both included in +a Form 8-K that Fox Petroleum publicly filed on November 3, 2011. +14. It is implausible that Egeberg could have conducted proper audits for Renfro and +CPP, each with two years of financial statements, in such a short time, regardless of the +companies’ small sizes. Further, each company had separate auditors who were each unable to +complete the audits in this short time, despite having already begun the work. Similarly troubling +is that Fox Petroleum’s CEO enticed Egeberg to complete the two audits under significant pressure +by promising him past-due payment owed for the Fox Petroleum audits, but only if Egeberg could +complete the audits in the two-day timeframe. These circumstances suggest that Egeberg rubber- +stamped the audit reports to help Fox Petroleum acquire the $5 million credit line in hopes of +payment for his completed audit of Fox Petroleum. +15. Neither Renfro nor CPP were SEC issuers. Notwithstanding, Egeberg included in +his audit report for each company the statement that the audits were conducted “in accordance with +standards required by the [PCAOB].” The audit reports were subsequently included on Forms 8-K +filed by Fox Petroleum with the Commission. The egregiously deficient audits of Renfro and CPP +further demonstrate Egeberg’s pattern of poor audit work and strengthen the need for the Rule +102(e) suspension. +6 + +16. Egeberg violated Auditing Standard No. 3, Audit Documentation, for his audits of +Renfro and CPP because he had no evidence demonstrating that he performed audit work for +Renfro or CPP. Egeberg’s failure to maintain documentation places a burden upon the auditor to +provide persuasive other evidence that sufficient procedures were performed, sufficient evidence +was obtained, and appropriate conclusions were reached with respect to the relevant financial +statement assertions, which Egeberg failed to do. +17. Egeberg failed to perform the audits of Renfro and CPP with due professional care +and professional skepticism, in violation of AU § 230. Egeberg also failed to collect competent +evidential matter for those audits, in violation of AU § 326. Egeberg has provided no documented +evidence of procedures performed to ensure that Renfro’s and CPP’s financial statements were +presented fairly and accurately. Similarly, Egeberg could not identify any procedures performed to +determine the accuracy of the financial statements. +18. Egeberg violated Auditing Standard No. 7 by failing to obtain an engagement +quality review for Renfro’s and CPP’s fiscal years ended December 31, 2010. + Additonal Audit Deficiencies in RPM Advantage and Fox Petroleum Audits. +19. Egeberg lacked the knowledge, proficiency, training, and skill to audit issuers +registered with the Commission. AU § 210, Training and Proficiency of the Independent Auditor, +requires that an audit be performed by “a person or persons having adequate technical training and +proficiency as an auditor.” AU § 210.01. AU § 230, Due Professional Care in the Performance of +Work, further requires that auditors engage in audit tasks “commensurate with their level of +knowledge, skill, and ability so that they can evaluate the audit evidence they are examining,” and +that “[t]he auditor with final responsibility for the engagement should know, at a minimum, the +relevant professional accounting and auditing standards . . . .” AU § 230.06. +20. Egeberg has never had any audit training. He has taken only four courses during +his professional career relating to audits and audit procedures, with at least two of them being self- +directed online courses completed as part of his continuing professional education requirements. +The extent of Egeberg’s professional practice since college has primarily been preparing tax +returns and general ledger bookkeeping for individuals and businesses. Yet he issued audit reports +covering financial statements for as many as twenty public companies before withdrawing his +PCAOB registration. +21. Because he had no training, Egeberg conducted all of his audits according to a +checklist he downloaded from the AICPA’s website, as discussed supra in footnote 3. This +checklist came from the AICPA’s Peer Review Program Manual. AICPA + STANDARDS FOR +PERFORMING AND REPORTING ON PEER REVIEWS § 20,400, et seq. (Am. Inst. of Certified Pub. +Accountants 2009). The peer review checklist that Egeberg used for his engagements was not +designed to substitute for the more rigorous and detail-oriented requirements for audit +engagements. Furthermore, AICPA’s Peer Review Program is not applicable to Commission +issuers. Id. §1000.03. +7 + +22. By following the Peer Review Program checklist, without any other experience or +guidance, Egeberg demonstrated his complete lack of understanding of public company audits. +Following these checklists also contributed to Egeberg’s performance of grossly deficient audits. + Failure to Design and Plan Audits. +23. AU § 311, Planning and Supervision, required that for audits of companies with +fiscal years beginning before December 15, 2010, +the auditor should consider the nature, extent, and timing of work to be +performed and should prepare a written audit program (or set of written +audit programs) for every audit. The audit program should set forth in +reasonable detail the audit procedures that the auditor believes are necessary +to accomplish the objectives of the audit. The form of the audit program +and the extent of its detail will vary with the circumstances. In developing +the program, the auditor should be guided by the results of the planning +considerations and procedures. As the audit progresses, changed conditions +may make it necessary to modify planned audit procedures. +AU §311.05. +24. Egeberg was required to design and plan audit procedures and programs for each +audit engagement. The audit programs should have taken into consideration, among other things, +the companies’ industries, the companies’ business practices, and judgments of potential +materiality and risk. AU § 311. Egeberg failed to perform any of these planning activities. +Instead, he simply followed the Peer Review Program checklist for each of his clients, which +simply asks whether the auditor properly designed an audit for the client, and for each of Egeberg’s +clients, he checked “yes.” There was no planning by Egeberg for any of the audits for 2006 to +2011, in violation of AU § 311. +Egeberg’s Complete Lack of Audit Work Papers. +25. Egeberg’s audits completely lacked audit work papers. Thus, Egeberg repeatedly +violated Auditing Standard No. 3, ¶ 6, Audit Documentation, which requires that audit +documentation “contain sufficient information to enable an experienced auditor, having no +previous connection with the engagement (a) to understand the nature, timing, extent, and results +of the procedures performed, evidence obtained, and conclusions reached, and (b) to determine +who performed the work and the date such work was completed as well as the person who +reviewed the work and the date of such review.” An auditor that has not adequately documented +that he performed a procedure, obtained evidence, or reached an appropriate conclusion must +demonstrate with persuasive other evidence that it did so, and oral assertions and explanations +alone do not constitute persuasive other evidence. See Auditing Standard No. 3, ¶ 9. +8 + + Egeberg’s Failure to Issue Accurate Audit Reports. +26. PCAOB standards require that the auditor’s report contain an opinion on the +financial statements taken as a whole and contain a clear indication of the character of the auditor’s +work. The auditor can determine that he is able to issue an audit report containing an unqualified +opinion only if he has conducted the audit in accordance with standards set forth by the PCAOB. +(AU § 508.07, Reports on Audited Financial Statements.) +27. Additionally, Regulation S-X, 17 CFR § 210 et seq., prescribes the qualifications of +accountants and the contents of the accountants’ reports that must be submitted with corporate +financial statements. In particular, it requires that the financial statements of a public corporation +must be audited by an accountant in accordance with Generally Accepted Auditing Standards +(“GAAS”). 17 CFR § 210.1-02(d). “[R]eferences in Commission rules and staff guidance and in +the federal securities laws to GAAS or to specific standards under GAAS, as they relate to issuers, +should be understood to mean the standards of the PCAOB plus any applicable rules of the +Commission.” (See SEC Release No. 34-49708 (May 14, 2004)). Thus, an auditor violates +Regulation S-X Rule 2-02(b)(1) if it issues a report stating that it had conducted its audit in +accordance with PCAOB standards when it had not. See Andrew Sims, CPA, Rel. No. 34-59584, +AAER No. 2950 (Mar. 17, 2009) (settled action). +28. The culmination of Egeberg’s numerous audit deficiencies made any representation +by Egeberg in his audit reports that his audits complied with PCAOB standards inaccurate. +Egeberg falsely made these representations in his audit reports for RPM Advantage and Fox +Petroleum, and Fox Petroleum’s subsidiaries, Renfro and CPP. +D. VIOLATIONS +29. Section 102(e)(1) of the Commission’s Rules of Practice provides 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 by the Commission after notice and +opportunity for hearing in the matter: . . . (ii) to be lacking in character or integrity or to have +engaged in unethical or improper professional conduct; or (iii) to have willfully violated, … any +provision of the Federal securities laws or the rules and regulations thereunder.” Section 4C of the +Exchange Act provides, in relevant part, that: “The Commission may censure any person, or deny, +temporarily or permanently, to any person the privilege of appearing or practicing before the +Commission in any way, if that person is found . . . (2) to … have engaged in … improper +professional conduct; or (3) to have willfully violated, . . . any provision of the securities laws or +the rules and regulations thereunder.” + +30. Section 4C of the Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules +of Practice define improper professional conduct with respect to persons licensed to practice as +accountants. Section 4C of the Exchange Act and Rule 102(e)(1)(iv) of the Commission’s Rules +of Practice provide that improper professional conduct means “intentional or knowing conduct, +including reckless conduct, that results in a violation of applicable professional standards,” Section +9 + +4C(b)(1) of the Exchange Act and Rule 102(e)(1)(iv)(A), and the following two types of negligent +conduct: + +(1) a single instance of highly unreasonable conduct that results in a violation of applicable +professional standards in circumstances in which an accountant knows, or should know, +that heightened scrutiny is warranted. +(2) repeated instances of unreasonable conduct, each resulting in a violation of applicable +professional standards, that indicate a lack of competence to practice before the +Commission. Rule 102(e)(1)(iv)(B). +As noted previously, “unreasonable conduct” as used in this provision means ordinary negligence. +See In re Dohan & Co. CPA, et al., Intial Decision Release No. 420, at p. 16, 2011 SEC LEXIS +2205, at *39 (June 27, 2011). The initial decision became the final decision of the Commission. In +re Dohan & Co. CPA, et al., Securities Exchange Act Rel. No. 64970, 2011 SEC LEXIS 2548 +(July 26, 2011). The Commission defines recklessness under Rule 102(e) to be the same as +recklessness under the antifraud provisions. Thus, recklessness is “an extreme departure from the +standards of ordinary care, . . . which presents a danger of misleading buyers or sellers that is either +known to the [actor] or is so obvious that the actor must have been aware of it.” Amendment to +Rule 102(e) of the Commission’s Rules of Practice, 63 Fed. Reg. 57164, 57167 (Oct. 26, 1998). It +is “a lesser form of intent,” “not merely a heightened form of ordinary negligence.” Id. (internal +citations and quotations omitted). Egeberg’s conduct of falsely representing that his audit reports +were conducted in accordance with PCAOB standards was reckless and intentional under Rule +102(e) and Section 4C of the Exchange Act. +31. As a result of the conduct described above, Egeberg engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule +102(e)(1)(iv)(B)(2) of the Commission’s Rules of Practice. Egeberg’s unreasonable conduct +included his failures with respect to his audits of Fox Petroleum for its fiscal years ended February +28, 2010, 2011, and 2012, and his audits of Fox Petroleum subsidiaries Renfro and CPP for their +fiscal years ended December 31, 2009 and 2010. These repeated instances of unreasonable +conduct resulted in violations of PCAOB Standards AU Section 210, AU Section 230, AU Section +311, AU Section 315, AU Section 326, AU Section 508, Auditing Standard No. 3, and Auditing +Standard No. 7. +32. Egeberg engaged in improper professional conduct under Rule 102(e)(1)(ii), and +willfully violated Exchange Act Section 10(b) and Rule 10b-5(b) thereunder, and Rule 2-02(b)(1) +of Regulation S-X, which calls for sanction under Rule 102(e)(1)(iii), because his auditing +practices were so deficient that the audits amounted to no audits as all. SEC v. Price Waterhouse, +797 F. Supp. 1217, 1240 (S.D.N.Y. 1992) citing McLean v. Alexander, 599 F.2d 1190, 1198 (3 +rd +Cir. 1979). An auditor violates Exchange Act Section 10(b) and Rule 10b-5 thereunder by issuing +false audit reports. Egeberg violated these antifraud provisions by intentionally issuing audit +reports that falsely stated that his audits were conducted in accordance with PCAOB standards, and +these statements were material. Egeberg’s audits were not conducted in accordance with PCAOB +standards, but instead constituted complete departures from professional standards. +10 + +33. Egeberg willfully violated Regulation S-X Rule 2-02(b)(1) because he issued +reports stating that he had conducted his audits of RPM Advantage, Fox Petroleum, Renfro, and +CPP in accordance with PCAOB standards, when he had not. +34. Based on the foregoing, the Commission finds that Egeberg engaged in improper +professional conduct and willfully violated the Federal securities laws and the rules and regulations +thereunder pursuant to Section 4C of the Exchange Act and Rules 102(e)(1)(ii) and (iii) of the +Commission’s Rules of Practice. +35. Based on the foregoing, the Commission finds that Egeberg violated Section 10(b) +of the Exchange Act, Rule 10b-5(b) and Regulation S-X Rule 2-02(b)(1) thereunder, and should be +ordered to cease and desist from committing or causing violations of and any future violations of +Section 10(b) of the Exchange Act, Rule 10b-5(b) and Regulation S-X Rule 2-02(b)(1) thereunder, +and should be ordered to pay a civil money penalty pursuant to Section 8A(g) of the Securities Act +and Section 21B of the Exchange Act, and should be ordered to pay disgorgement with prejudgment +interest pursuant to Section 8A(e) of the Securities Act, and Sections 21B(e) and 21C(e) of the +Exchange Act. +IV. + +In view of the foregoing, the Commission deems it necessary and appropriate for the +protection of investors to impose the sanction specified in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Egeberg shall cease and desist from committing or causing any violations and any +future violations of Section 10(b) of the Exchange Act, Rule 10b-5(b) and Regulation S-X Rule 2- +02(b)(1) thereunder. + +B. Egeberg is denied the privilege of appearing or practicing before the Commission as +an accountant. + +C. Respondent shall, within ten days of the entry of this Order, pay disgorgement of +$11,250 and prejudgment interest of $633.08 to the United States Treasury. If timely payment is +not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. Egeberg shall, +within 10 days of the entry of this Order, pay a civil penalty of $15,000. 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 +11 + + +(3) Respondent may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand- +delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +D. Payments by check or money order must be accompanied by a cover letter +identifying Egeberg 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 Gerald W. +Hodgkins, Associate Director, Division of Enforcement, Securities and Exchange Commission, +100 F St., NE, Washington, DC 20549-6561. + +E. Based upon Respondent's sworn representations in his Statement of Financial +Condition dated November 2013 and other documents submitted to the Commission, the +Commission is not imposing a penalty against Respondent in excess of $15,000. + +F. The Division of Enforcement 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 + + + + Jill M. Peterson + Assistant Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3581.pdf b/raw/aaer/2014/AAER-3581.pdf new file mode 100644 index 0000000000000000000000000000000000000000..427414766c476640053f11e64a7b8b6e9e0474dc Binary files /dev/null and b/raw/aaer/2014/AAER-3581.pdf differ diff --git a/raw/aaer/2014/AAER-3581.txt b/raw/aaer/2014/AAER-3581.txt new file mode 100644 index 0000000000000000000000000000000000000000..7cb0a0badff48a517184da3d7dbbc28e0aa89482 --- /dev/null +++ b/raw/aaer/2014/AAER-3581.txt @@ -0,0 +1,64 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 72997 / September 4, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT ACT +Release No. 3581 / September 4, 2014 + +Admin. Proc. File No. 3-15168 + + + +In the Matter of + +JOHN J. AESOPH, CPA, +and +DARREN M. BENNETT, CPA + +ORDER GRANTING PETITIONS +FOR REVIEW AND SCHEDULING +BRIEFS + +Pursuant to Commission Rule of Practice 411,1 the petitions of John J. Aesoph, CPA, +Darren M. Bennett, CPA, and the Division of Enforcement for review of the administrative law +judge's initial decision2 are granted. Pursuant to Rule of Practice 411(d),3 the Commission will +determine what sanctions, if any, are appropriate in this matter. +On August 11, 2014, Respondents and the Division of Enforcement jointly requested a +delay to the typical briefing schedule under Rule of Practice 450(a),4 "because lead counsel for +the Division will be participating in a hearing in another administrative proceeding at the time +the parties anticipate briefing in this matter would ordinarily occur." Under these circumstances, +it appears appropriate for the Commission to order briefing according to the parties' proposed +dates. +Accordingly, IT IS ORDERED, pursuant to Rule of Practice 450(a),5 that Aesoph's, +Bennett's, and the Division's briefs in support of their petitions for review shall be filed by +October 24, 2014. The parties' briefs in opposition shall be filed by December 23, 2014, and any + +1 17 C.F.R. § 201.411. +2 John J. Aesoph, CPA, and Darren M. Bennett, CPA, Initial Decision Release No. 624, 2014 +WL 2915931 (June 27, 2014). +3 17 C.F.R. § 201.411(d). +4 17 C.F.R. § 201.450(a) (stating that, "unless otherwise provided, opening briefs shall be +filed within 30 days of the date of the briefing schedule order"). +5 17 C.F.R. § 201.450(a). +2 + +reply briefs shall be filed by January 23, 2015.6 Pursuant to Rule of Practice 180(c),7 failure to +file a brief in support of the petition may result in dismissal of this review proceeding as to that +petitioner. +For the Commission, by the Office of General Counsel, pursuant to delegated authority + + + + + Lynn M. Powalski + Deputy Secretary + +6 As provided by Rule of Practice 450(a), no briefs in addition to those specified in this +schedule may be filed without leave of the Commission. Attention is called to Rules 150 – 153, +17 C.F.R. § 201.150 – 153, with respect to form and service, and Rules of Practice 450(b) and +(c), 17 C.F.R. § 201.450(b), 201.450(c), with respect to content and length limitations. Requests +for extensions of time to file briefs are disfavored. +7 17 C.F.R. § 201.180(c). \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3582.pdf b/raw/aaer/2014/AAER-3582.pdf new file mode 100644 index 0000000000000000000000000000000000000000..5f3fafa0d343d5181f4a4238020ef22b14aec29f Binary files /dev/null and b/raw/aaer/2014/AAER-3582.pdf differ diff --git a/raw/aaer/2014/AAER-3582.txt b/raw/aaer/2014/AAER-3582.txt new file mode 100644 index 0000000000000000000000000000000000000000..d5008028f485f0a3caa98f360b6d087cfb6c63d8 --- /dev/null +++ b/raw/aaer/2014/AAER-3582.txt @@ -0,0 +1,561 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9646 / September 11, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73076 / September 11, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3582 / September 11, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16098 + + +In the Matter of + +Wilmington Trust Corporation, + +Respondent. + + + + +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS PURSUANT TO SECTION +8A OF THE SECURITIES ACT OF 1933 AND +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING 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 Wilmington Trust Corporation (“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 + 2 +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 + +These proceedings arise out of false and misleading disclosures by Wilmington Trust +Corporation (“Wilmington Trust” or the “Bank”) concerning its accruing loans past due 90 days or +more over multiple quarters during 2009 and 2010, its nonaccruing loans in the third quarter of +2009, and its reserves for loan losses in the third and fourth quarters of 2009. Wilmington Trust +was the public holding company for Wilmington Trust Company, a retail and commercial bank +headquartered in Wilmington, Delaware. By mid-2009, many of the construction projects +underlying the Bank’s loans stalled or failed to sell or lease when completed. At the same time, an +increasing number of the Bank’s loans to these projects “matured,” i.e., the loan’s term expired +without being extended, modified or paid off, such that the principal balance of the loan was +contractually due. + +The Bank had deficient underwriting and loan monitoring controls and failed, for these and +other reasons, to take appropriate action on many of its matured loans for protracted periods of +time. As a result, the Bank had a large volume of loans that were past due, for reasons of maturity, +90 days or more. Generally Accepted Accounting Principles (“GAAP”) requires that banks +disclose loans that are past due 90 days or more and still accruing, +2 and Regulation S-K (through +SEC Industry Guide 3) further indicates that banks should disclose their “accruing loans which are +contractually past due 90 days or more as to principal or interest payments.” +3 However, rather than +disclose as past due loans that were matured (but purportedly “current for interest”), the Bank +negligently and routinely omitted such loans from its disclosures of past due loans, based on +unwritten, informal criteria that were loosely applied and liberally adjusted. + + + + +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 See Accounting Standards Codification (“ASC”) 310-10-50-7(b). References to GAAP in +this Order are to standards in effect at the time of the misconduct. In July 2009, the Financial +Accounting Standards Board promulgated its “Accounting Standards Codification,” effective for +fiscal quarters ending after September 15, 2009, which changed the applicable citation standards +but not the substantive GAAP requirements. + +3 17 C.F.R. § 229.303; SEC Industry Guide 3, Statistical Disclosure by Bank Holding +Companies, 57 F.R. 36442. + 3 +As a result, the Bank omitted almost $339 million in matured loans past due 90 days or +more from its disclosures in its filings with the Commission for the third quarter of 2009. The +Bank further omitted over $330 million in matured loans past due 90 days or more from its +disclosures in its filings for the year ended 2009, including its Form 10-K. The Bank then +incorporated its false and misleading Form 10-K for 2009 by reference into the offering materials +for a February 2010 public offering in which the Bank sold $287 million of its common stock. + +At the end of 2009, amidst increasing regulatory scrutiny, the Bank decided to address its +misreporting of past due loans beginning in 2010; however, the Bank negligently implemented +various practices that had the effect of avoiding full disclosure of the problems with matured loans +in its portfolio. These practices included an “extension push” to extend the maturity dates of +matured and maturing loans. This resulted in multiple short-term extensions for a high volume of +loans even when the Bank did not have updated financial and collateral information for the loans, +had not performed appropriate analysis for re-underwriting, or was engaged in difficult +negotiations with borrowers concerning their matured loans. Wilmington Trust also failed to +disclose in its Form 10-K, as required by Regulation S-K, that its matured, maturing and short-term +extended commercial loan portfolio represented a material, but unquantified, risk to the stability of +the Bank. + +Despite modifications to its past due reporting practices in the first and second quarters of +2010, the Bank negligently continued to omit significant volumes of matured past due loans from +its disclosures, repeated its false disclosures from prior periods, and made misleading supplemental +disclosures concerning the Bank’s past due reporting and matured loan extension practices. + +Finally, in its Form 10-Q for the third quarter of 2009 and its Form10-K for 2009, the Bank +also negligently failed, as required by GAAP, to properly disclose significant increases in the +Bank’s nonaccruing loans according to its policy, and to properly account for updated collateral +values and significant declines in commercial loan risk ratings in its loan loss provisions and +reserves. + +RESPONDENT + +1. Wilmington Trust was, during the relevant period, a bank holding company based +in Wilmington, Delaware and incorporated under the laws of the State of Delaware. Its securities +were registered with the Commission pursuant to Section 12(b) of the Exchange Act, and its +common stock traded on the New York Stock Exchange under the symbol “WL.” On May 16, +2011, Wilmington Trust was acquired by M&T Bank Corporation (“M&T”) in a stock-for-stock +transaction, and Wilmington Trust’s securities were removed from registration. Wilmington Trust +survives as a subsidiary of M&T. + +OTHER RELEVANT ENTITY + +2. M&T is a bank holding company headquartered in Buffalo, New York. On May +16, 2011, M&T acquired Wilmington Trust in a stock-for-stock transaction. M&T is the + 4 +successor-in-interest to Wilmington Trust. M&T did not commit any of the misconduct that is the +subject of this Order, all of which preceded M&T’s acquisition of Wilmington Trust. + +FACTS + +Past Due Loan Disclosure Guidelines + +3. Under GAAP, banks are required to disclose their past due loans. Accounting +Standards Codification (“ASC”) Topic 310-10-50 stipulates certain disclosure requirements for +loans. Specifically, ASC 310-10-50-7(b) requires disclosure of a bank’s recorded investment in +loans “past due 90 days or more and still accruing.”4 + +4. Regulation S-K of the Securities Act, Item 303(a), requires the Management +Discussion and Analysis (“MD&A”) sections of an issuer’s annual filings to disclose any +“information that the registrant believes to be necessary to an understanding of its financial +condition [or] changes in its financial condition.” Item 303(b) requires quarterly filings to discuss +material changes in information described in Item 303(a).5 Instruction 13 to Item 303(a) directs +bank holding companies to the information called for by SEC Industry Guide 3 (“Guide 3”), which +is a policy of the Division of Corporation Finance; the Commission has not adopted the Guide as a +rule. +6 Among other statistical disclosures, Item III.C.1 of Guide 3 specifies disclosure of “accruing +loans which are contractually past due 90 days or more as to principal or interest payments.” + +Background to the Bank’s Past Due Loans Disclosure Violations + +5. From at least 2006 through the third quarter of 2009, the Bank routinely removed, +or, using the Bank’s terminology, “waived” loans from certain internal reports and from its public +disclosures of accruing loans past due 90 days or more if the loan was matured, current for interest +and either 1) a loan managed by the Bank’s Loan Recovery (i.e., workout) unit; or 2) a loan that +the Bank claimed its loan officers were “working on” extending. The matured workout loans were +waived automatically, with no further requirements; for a non-workout loan, the loan officer was +asked summarily to confirm that he or she was “working on” an extension and the loan was then +waived. No documents or actual progress toward an extension were required and, in practice, loan +officers could simply note that the loan was matured, current for interest and should be waived. +The Bank did not have written policies or procedures governing its past due reporting process or its +waiver practices. + +6. On the Bank’s internal “Delinquency Report,” showing past due loans, the Bank’s +credit department indicated past due loans that would be waived. The Bank’s finance department + +4 This standard was preceded by AICPA SOP 01-06 ¶13(g), which is substantively +identical. + +5 17 C.F.R. § 229.303. + +6 SEC Industry Guide 3, Statistical Disclosure by Bank Holding Companies, 57 F.R. +36442. + 5 +then removed the indicated loans from a second internal report, the “Past Due and Nonperforming +Loans Report.” This report was then incorporated in the Bank’s “accruing loans past due 90 days +or more” table disclosure in its SEC filings. The summary past due loan amount also was +disclosed in the notes to the financial statements in the Bank’s Form 10-K annual reports. + +7. Equities and credit ratings analysts viewed loans 90 days or more past due as +nonperforming, even if the Bank maintained them as unimpaired loans. High levels of past due +loans were interpreted by the market as a signal of probable increased credit deterioration. + +8. As early as August 2007, the Bank recognized that it had a mounting problem with +matured loans that it needed to resolve. As the real estate market softened, the Bank was +concerned by the growing volume of waived matured loans and about potential scrutiny from +auditors, examiners and others concerning the waivers. However, even where loan officers had not +taken meaningful steps toward extension, the Bank still waived such loans and omitted them from +its public reporting. + +9. As the real estate market continued to decline, more loans began to mature without +repayment or completion of the underlying projects. Updated appraisals and financial statements +required for re-underwritten extensions were also revealing significant deterioration. Borrowers +balked at providing updated information and at the more onerous terms required by re-underwritten +extensions. Some loan officers, particularly those managing the Bank’s Delaware Commercial +Real Estate (“CRE”) portfolio, were reluctant to pursue the required documents to support re- +underwritten extensions because of concerns that the underwriting analysis and new terms would +lead to borrower nonperformance and loan downgrades. Loan officers voiced their concerns about +this, and their related inability to properly underwrite loan extensions. The Bank was aware that +the volume of matured loans it claimed was “in the process of extension” rose significantly through +2008 and into 2009. + +10. The Bank purported to comply with GAAP and the disclosures required by +Regulation S-K and called for by Industry Guide 3, but failed to do so accurately and completely. +In all relevant filings, the Bank included in its MD&A section concerning credit risk a table +disclosing its purported volume of accruing loans past due 90 days or more and supplemental +disclosures describing them. It also disclosed the purported volume of accruing past due loans in +the notes to the financial statements in its Form 10-Ks. In each period the Bank also claimed in its +filings that it mitigated credit risk by employing “rigorous loan underwriting standards,” +disciplined monitoring of its loan portfolio, and regular “review [of] all past due loans.” + +Understated Past Due Loans Disclosures in the Third Quarter of 2009 + +11. On or about October 7, 2009, the Bank waived $338.9 million in matured, interest +current loan balances that were accruing but past due 90 days or more from the Bank’s +Delinquency Report, and subsequently removed the waived loans from the Bank’s Past Due and +Nonperforming Loans Report. On October 23, 2009, the Bank released its earnings and filed its +Form 8-K, which incorporated the past due numbers from the Past Due and Nonperforming Loans + 6 +Report, omitted the $338.9 million in matured loans, and disclosed only $38.7 million in accruing +loans past due 90 days or more. + +12. During the third quarter of 2009 and prior to the filing of the Bank’s Form 10-Q, +certain senior managers voiced their concerns to senior officers about the growing number of +matured loans that the Bank was claiming were “in the process of extension” but had not, in +reality, been extended for protracted periods of time. Certain Bank personnel were concerned +about the possibility of scrutiny from the Bank’s auditors and bank examiners relating to its +treatment of matured loans. + +13. Concerns around matured and waived loans became heightened in late October +2009, after the Bank entered into an agreement with the Federal Reserve Bank of Philadelphia +(“FRB”) that required Bank management to provide enhanced reporting to the FRB of loans “past +due as to principal or interest more than 90 days.” In response, prior to the filing of the third +quarter Form 10-Q, the Bank initiated several steps, discussed below, to begin phasing out its +waiving of matured loans, and to attempt to extend some of these loans by year end. + +14. Nevertheless, the Bank filed its Form 10-Q on November 9, 2009, again disclosing +only the $38.7 million in accruing past due loans and improperly omitting the $338.9 million that +had been waived. The supplemental disclosures did not provide any information about the Bank’s +matured or waived loans. + +Understated Past Due Loans Disclosures and Extension Push in the Fourth Quarter and Year End +2009 + +15. In the fourth quarter, the Bank decided to continue to waive matured loans if an +extension was “internally approved.” The new criteria purported not to allow a non-workout loan +to be waived where an extension was just being “worked on,” as had sufficed in earlier quarters. +Accordingly, a matured past due loan would be waived from the noted internal reports and omitted +from public filings if the Bank had approved a lending officer’s proposal to extend the loan, +regardless of whether the loan had actually been extended by the borrower. The Bank continued +the automatic waiver of matured, current for interest workout loans. + +16. The Bank initiated an abbreviated extension process to facilitate the “internal +approval” of short-term extensions of matured loans by year end. In combination with the +amended waiver practice, this allowed loans for which the Bank lacked updated appraisals or +financial documentation or was still negotiating terms with the borrower either to be extended +temporarily or “internally approved” and waived so that they would not be reported as past due. +The Bank was aware that executing long-term extensions would be difficult particularly for its +Delaware CRE loans, because poor market conditions meant the Bank needed borrowers to pay +down principal or increased interest rates as a part of long-term loan modifications. Certain of the +Bank’s senior officers and managers were informed that these borrowers were in distressed +situations that could not be quickly remedied, and they recognized that the failure to accomplish +long-term modifications could result in the Bank and its “shareholders get[ting] the crap knocked +out of us by analysts and regulators.” + 7 + +17. In early January 2010, the Bank prepared a Delinquency Report indicating that +$330.2 million in matured loans 90 days or more past due would be waived; of this amount, $177.3 +million was more than 180 days past due. Accordingly, prior to releasing its earnings, the Bank +was aware that the $330.2 million in waived past due loans would be omitted from the Bank’s +public disclosures. A Bank manager raised concerns that the waived loans would be “a disclosure +issue” for the Bank’s public reporting. The Bank knew that many of the waived loans would +require significant structural modifications if they were to be extended, and that the waived loans +required thorough analysis and new maturity dates commensurate with the level of risk posed by +the loan. of the Bank also knew that it did not expect to be complete this process until the second +quarter of 2010. The Bank was aware that it had an additional $432 million in loans that would +mature in the first quarter of 2010 that would also require the same process if they were to be +extended. + +18. Nevertheless, the Bank released its earnings and Form 8-K on January 29, 2010, +disclosing only $30.6 million in accruing loans past due 90 days or more and omitting the $330.2 +million in matured past due loans. The Bank’s Form 10-K for 2009, which was filed on February +22, 2010, again disclosed only $30.6 million accruing loans past due 90 days or more in both the +footnotes to the financial statements and in the MD&A. Neither the earnings release nor the Form +10-K disclosed the Bank’s problems with its matured, maturing and temporarily extended loan +portfolio. + +19. In mid-January 2010, shortly before releasing its earnings, the Bank decided to +attempt to raise additional capital. On February 22, 2010, the Bank announced its common stock +offering; the false and misleading Form 10-K was incorporated by reference in the final Prospectus +Supplement, which was filed on February 25, 2010. In the offering, which closed on March 2, +2010, the Bank sold $287 million in common stock, netting $274 million after costs and +commissions. + +Understated Past Due Loans Disclosures and Extension Push in the First Quarter of 2010 + +20. In the first quarter of 2010, the Bank continued to phase out the waiver practice by +determining that an “internal approval” of a loan extension would no longer suffice to waive +matured loans from certain of the Bank’s internal reports and its public past due reporting; rather, +in order to be waived, a valid extension document had to be signed by the Borrower and received +by the Bank. However, the Bank decided that matured workout loans would still be waived +automatically and, as a result, excluded from the Bank’s public disclosures of accruing loans past +due 90 days or more. + +21. The Bank had uncovered significant issues in ongoing reviews of matured and +maturing loans that were resulting in the Bank’s continued inability to fully analyze and +appropriately re-underwrite those loans. Bank staff recommended that such loans be eligible for +yet additional short-term extensions on an expedited basis without full underwriting analysis. + + 8 +22. As described above, a large number of Delaware CRE loans had been waived from +past due reporting at the end of the fourth quarter of 2009 on the basis that the Bank had “internally +approved” extension proposals; however, many of these loans were not actually extended – i.e., +there was no extension agreement executed between the Bank and the borrower – for most of the +first quarter. In the last two days of the first quarter of 2010, the Bank “internally approved” new +extension proposals for at least 117 of these loans, because the Bank needed yet more time to do +appropriate analysis and gather documentation to re-underwrite the loans. The majority of these +extension proposals contemplated short-term extensions of loans that had been waived from past +due reporting in multiple prior quarters; some of the loans had been matured for over a year. + +23. Notwithstanding the Bank’s expedited extension practices, at quarter end, a +significant volume of matured loans remained. Despite its purported use of stricter waiver criteria, +the Bank subsequently waived at least $48.1 million of these matured loans past due 90 days or +more from certain of its internal reports. The Bank’s press release reporting earnings and Form 8- +K (filed on April 23, 2010) and its Form 10-Q (filed on May 10, 2010) both omitted the $48.1 +million in waived loans and disclosed only $39.7 million in accruing loans past due 90 days or +more. + +24. The Bank’s public filings for the first quarter also presented the materially +understated accruing past due loan amounts previously reported for the fourth quarter of 2009 (and +other periods) for comparison, and did not disclose that the current period’s past due loans were +based on materially different criteria than in prior periods. The earnings press release and Form +10-Q noted an increase in past due loans and stated that the increase was due to matured loans for +which “underwriting extensions” were in progress. However, there was no disclosure to inform +investors of the Bank’s significant, ongoing problems with its matured and short-term extended +loans. This information would have been important to investors to know, because without it they +could not understand the true condition of the Bank’s loan portfolio. + +Understated Past Due Loans Disclosures in the Second Quarter of 2010 + +25. The Bank continued to adjust its criteria for waiving loans and, after the second +quarter of 2010, decided that matured, interest current workout loans should no longer be waived. +In effect, by this point, the Bank had changed its practices such that all matured loans that were +actually past due at the end of the quarter were to be reported as past due. + +26. Before the Bank filed its current and quarterly reports for the second quarter of +2010, the Bank was aware that the market was interested in banks’ loan extension and restructuring +practices, including the practice of extending loans multiple times. The Bank was aware that a +large volume of both its matured loans that were reported as past due as well as loans that were +current had not been fully analyzed or appropriately re-underwritten, but had been waived or +extended multiple times. + +27. Nevertheless, the Bank’s disclosures of accruing loans past due 90 days or more in +its press release reporting its earnings and its Form 8-K (filed on July 23, 2010) and again in its +Form 10-Q (filed on August 5, 2010), omitted $24 million in matured past due loans that had + 9 +extensions that were executed after the close of the quarter. The filings also presented the +materially understated accruing past due loan amounts previously reported for the fourth quarter of +2009 (and other periods) for comparison. There were no disclosures about the high volumes of +multiple extensions without re-underwriting or waivers the Bank had granted. + +28. Although the Bank was aware of the effect of its changed waiver practices (i.e., the +phasing out of matured loan waivers) on the past due loan disclosures over time, the Bank did not +disclose the changes in its practices and made no effort to analyze the impact the changed practices +would have had in prior periods. In addition, during the second quarter conference call, the Bank’s +statements concerning its past due reporting were misleading and the Bank also omitted +information necessary to make the statements not misleading. The Bank’s statements and +omissions, considered together, were materially misleading because they obscured the true +condition of the Bank’s credit portfolio. + +Understated Nonaccruing Loans Disclosures in Form 10-Q for the Third Quarter of 2009 + +29. According to the Bank’s nonaccrual policy, loans that were rated “substandard- +accruing” and also had interest payments being paid by an interest reserve or a second loan to the +same borrower were to be classified as nonaccruing (and therefore impaired according to the +Bank’s application of ASC 310). In early October 2009, after the end of the third quarter, a senior +Bank manager responsible for nonaccrual recommendations identified three construction projects +that had loans that fit these criteria as of the third quarter of 2009. The three loans had total +outstanding balances of $24.1 million. The manager concluded that the loans for all of these +projects required nonaccrual classification, based on the Bank’s nonaccrual policy and conditions +that existed as of the third quarter of 2009. + +30. The manager informed other senior Bank officers that these loans required +nonaccrual (and thus, impaired) classification in late October 2009, and informed them that her +belated identification of these loans as nonaccruing was due to the Bank’s ineffective process for +tracking interest reserve loans. The Bank approved the manager’s nonaccrual recommendations, +which totaled $24.1 million out of $36 million of nonaccrual classifications approved. + +31. The GAAP standard governing subsequent events, ASC 855-10-25-1, states that +“An entity shall recognize in the financial statements the effects of all subsequent events that +provide additional evidence about conditions that existed at the date of the balance sheet, including +the estimates inherent in the process of preparing financial statements.” The conditions underlying +the nonaccrual designations – the loans’ substandard ratings, and the fact that their interest was +being paid via interest reserve – existed as of the date of the third quarter of 2009 balance sheet. +Therefore, in accordance with GAAP, the nonaccruals should have been recognized in the third +quarter financial statements. + +32. On November 9, 2009, the Bank filed its Form 10-Q for the third quarter. Although +the Bank stated in its Form 10-Q that it had evaluated subsequent events through the date of the +filing, the Bank did not account for the three loans as nonaccruing in its Form 10-Q. The Bank +reported a total of $365.9 million in nonaccrual loans. The additional $24.1 million in nonaccruing + 10 +loans would have represented a material 6.6% increase in the total nonaccruals for the quarter. +Properly including this amount of nonaccruing loans would have caused the quarter over quarter +difference in reported nonaccrual loans to increase materially, from $67.1 million to $91.2 million, +or a difference of 35.9%. + +Understated Loan Loss Provision and Reserves in Form 10-Q for the Third Quarter of 2009 + +33. The Bank’s Form 10-Q filed on November 9, 2009 improperly failed to incorporate +the information from four newly-obtained appraisals into its calculation of the Bank’s loan loss +provision and reserves. Significantly prior to the filing date, the Bank’s appraisal department +received appraisals that reflected material collateral value declines for impaired loans related to +four construction projects, including two described in Paragraph 29 above. + +34. However, Wilmington Trust’s deficient internal controls prevented timely +consideration of the effect of the updated collateral values on the Bank’s reserve. Credit Risk +Management staff tasked with allowance calculations did not obtain the updated appraisals in a +timely fashion and there were no effective procedures to assure that Credit Risk Management staff +were informed of updated collateral value information that was received after the end of the +quarter, but prior to filing the periodic SEC reports. Nor did the Bank’s disclosure controls assure +that updated collateral values that Credit Risk Management staff received prior to period public +filings were appropriately considered for subsequent events reporting according to GAAP. + +35. Taken together, the updated appraisals for impaired loans received prior to the +filing of the third quarter 2009 Form 10-Q required a supplemental provision to the reserve of +$12.8 million. This was a material understatement, because the additional required provision +would have increased the recorded $38.7 in provision to $51.5 million, or 33%, and would have +increased the $16.6 million loss before income taxes and noncontrolling interest to $29.4 million, +or 77%. + +Understated Loan Loss Provision and Reserves in the Fourth Quarter 2009 Earnings Release and +10-K for 2009 + +36. In January 2010, before the Bank issued its fourth quarter 2009 earnings press +release and filed its Form 8-K, the Bank’s ongoing review of its Delaware CRE projects revealed +deterioration trajectories in ten highly significant borrower relationships. A senior Bank manager +concluded, and informed certain senior officers, that downgrades were required for the ten +relationships, which would result in an “overall provision increment … [of] $10.5MM.” The loan +reviews also resulted in the identification of 20 other loans that required downgrades which would +have required an additional provision of $1.6 million. The Bank was aware that these downgrades +were not reflected in the loan loss provision and reserves that previously had been calculated for +the fourth quarter. + +37. The Bank represented to its Board of Directors that the loan reviews that resulted in +the downgrades were rigorous and complete with respect to the relevant loans. However, a senior +Bank officer directed that the downgrades not be formalized, and therefore neither the downgrades + 11 +nor the increased reserves described in Paragraph 36 above were incorporated into the Bank’s +quarterly earnings release and Form 8-K or its Form 10-K, which were filed on January 29, 2010 +and February 22, 2010, respectively. + +38. The total provision supplement associated with the downgrades was $12.1 million. +In both of its SEC filings, the Bank recognized a provision of $82.8 million for the fourth quarter; +the additional $12.1 million in provision would have increased it materially, to $94.9 million, or +by14.6%. The Bank recorded a loss before income taxes and noncontrolling interest of $37.3 +million; the increased provision would have deepened the loss by 30%. + +VIOLATIONS + +As a result of the conduct described above, Wilmington Trust violated: + +a. Section 17(a)(2) of the Securities Act, which prohibits, directly or indirectly, in the +offer or sale of securities, obtaining money or property by means of any untrue +statement of a material fact or any omission to state a material fact necessary in order +to make the statements made, in light of the circumstances under which they were +made, not misleading; + +b. Section 17(a)(3) of the Securities Act, which 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; + +c. Exchange Act Section 13(a) and Rules 13a-1, 13a-11, 13a-13 and 12b-20 thereunder, +which require that every issuer of a security registered pursuant to Exchange Act +Section 12 file with the Commission information, documents and annual and +quarterly reports as the Commission may require and mandate that periodic reports +contain such further information as may be necessary to make the required statements +not misleading; + +d. Exchange Act Section 13(b)(2)(A), which requires reporting companies to make and +keep books, records and accounts which, in reasonable detail, accurately and fairly +reflect their transactions and dispositions of their assets; and + +e. Exchange Act Section 13(b)(2)(B), which requires all reporting companies to devise +and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that transactions are recorded as necessary to permit preparation of +financial statements in accordance with GAAP. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Wilmington Trust’s Offer. + + 12 + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent Wilmington Trust shall cease and desist from committing or causing any violations +and any future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Sections +13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11 and +13a-13 thereunder. + +B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +$16,000,000.00 and prejudgment interest of $2,545,896.16, for a total of $18,545,896.16, to the +Securities and Exchange Commission. If timely payment is not made, additional interest shall +accrue pursuant to SEC Rule of Practice 600. Payment must be made in one of the following +ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm +; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Wilmington Trust 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 J. Osnato, Jr., Chief, +Complex Financial Instruments Unit, Division of Enforcement, Securities and Exchange +Commission, Brookfield Place, 200 Vesey Street, Suite 400, NY, NY 10281. + + + By the Commission. + + + + Jill M. Peterson + Assistant Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3583.txt b/raw/aaer/2014/AAER-3583.txt new file mode 100644 index 0000000000000000000000000000000000000000..f4e413024b85f1ff1a277c06650a405ddd422049 --- /dev/null +++ b/raw/aaer/2014/AAER-3583.txt @@ -0,0 +1,583 @@ +1 + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9654 / September 24, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73200 / September 24, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3583 / September 24, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16159 + + +In the Matter of + +SABA SOFTWARE, INC., +PATRICK FARRELL and +SAJEEV MENON + +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 Saba Software, Inc., Patrick Farrell and Sajeev Menon (collectively, “Respondents”). + +II. + + In anticipation of the institution of these proceedings, each of the Respondents has +submitted an Offer of Settlement (the “Offers”) that the Commission has determined to accept. +Solely for the purpose of these proceedings and any other proceedings brought by or on behalf of +the Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over each and over the subject matter of + 2 +these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting +Cease-and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section +21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist +Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents Offers, the Commission finds1 that: + +Summary + + 1. This financial fraud involves falsification of time records and fraudulent revenue +recognition for certain professional services at Saba Software, Inc. (“Saba” or “the Company”), a +Silicon Valley-based enterprise software company that traded on the NASDAQ (ticker: SABA) +until it was de-listed in April 2013 for delinquent SEC filings. The scheme to defraud was carried +out, over the period from Saba’s fiscal year 2008 through the second quarter of fiscal 2012, by +professional services managers in multiple geographies directing consultants in Saba’s Indian +subsidiary (the India Consulting Group or “ICG”) to falsify time records by either recording time +in advance of performance of work or failing to record time for hours worked in order to achieve +their quarterly revenue and margin targets. + + 2. Although the fraud occurred throughout the global professional services +organization, former Vice Presidents Patrick Farrell (“Farrell”) and Sajeev Menon (“Menon”) were +the most senior individuals involved in the improper time-reporting practices during their +respective periods of employment at Saba. They also understood the impact that these improper +practices had on Saba’s reporting of professional services revenue. + + 3. As a result of the falsification of time records by Saba professional services +managers, Saba reported false financial results in at least 40 filings with the Commission and +dozens of press releases. Over the period from October 4, 2007 through January 6, 2012, Saba +cumulatively overstated the Company’s reported pre-tax earnings by approximately $70 million +and made material misstatements regarding its revenue recognition practices. As Saba announced +on August 6, 2012 and November 5, 2012, management has determined that the Company is +required to restate its financial statements for fiscal years 2008 through 2011, as well as the first +two quarters of fiscal 2012. Although Saba has not yet filed its restatement, the Company expects +that the restatement will change the time period during which the affected revenues are recognized, +generally shifting the timing of such revenues to later periods. + + +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 + 4. In addition to the misconduct described herein and the professional services +organization’s circumvention of the internal controls that did exist, the time-reporting misconduct +at Saba went uncorrected and undetected for so long because Saba failed to devise and maintain +adequate internal accounting controls over its professional services business and ICG. Saba +announced on January 18, 2013 that management had determined there were material weaknesses +in its internal control over financial reporting with respect to its accounting and time-reporting +practices over the period of the fraud. + + 5. To date, Saba has not filed any required periodic reports since January 6, 2012. + +Respondents + +6. Saba Software, Inc. (“Saba” or “the Company”) is a Delaware corporation +headquartered in Redwood Shores, California. The software company provides cloud-based +enterprise learning, talent management and social networking tools to businesses and large +organizations. At all relevant times, Saba’s common stock has been registered pursuant to +Section 12 of the Exchange Act. From its IPO in April 2000 until July 31, 2006, its common +stock was registered pursuant to Section 12(g). Thereafter, until June 2013, it was registered +pursuant to Section 12(b). It traded on the Nasdaq Global Market until it was suspended on +April 9, 2013, and then it was delisted effective June 17, 2013 for failure to remain compliant +with its SEC reporting obligations. Upon its delisting and deregistration from Section 12(b), it +reverted to its previous Section 12(g) registration. Its common stock is currently registered +pursuant to Section 12(g) and traded on the OTC Markets. Saba has not filed any periodic +reports since January 6, 2012, when it filed its Form 10-Q for the quarter ended November 30, +2011. + +7. Patrick Farrell, age 55, was Saba’s Vice President of Consulting, North America +Service Operations, from June 2006 to June 2011, when he became interim Vice President of +Global Services. In January 2012, Farrell resumed his responsibilities as Vice President of +Consulting, North America until he left Saba in July 2012. + + 8. Sajeev Menon, age 46, was Regional Vice President of Consulting, Western +Region, North America from September 2009 until June 2011. He served as Vice President of +Consulting, North America from June 2011 until January 2012, when he resumed his Regional +Vice President, Western Region position until he left Saba in July 2012. + +Facts + +A. Saba’s Falsification of Time Records + + 9. Saba provides professional services solutions in conjunction with its product +offerings sold to customers. These professional services are often sold simultaneously with the +software as part of a multiple-element arrangement. Saba’s professional services historically has +accounted for about one third of its approximately $120 million in yearly revenues. Professional +services have been delivered to customers worldwide by (1) customer-facing field consultants in + 4 +North America and Europe (“Field Consultants”) and (2) off-shore technical development services +provided to the Field Consultants by the Company’s India Consulting Group (“ICG Consultants”). +ICG is an organization within Saba’s Indian subsidiary designed to help the Company deliver +professional services to its customers at a lower cost than comparable consultants in North +America and Europe. By 2011, ICG employed 50-60 consultants who generated approximately +14,000 hours of billable work per quarter, which constituted about 17% of consulting revenue and +6% of total revenue per quarter. + + 10. Both Field Consultants and ICG Consultants were required to record time worked +on customer projects in a timesheet database. Hours input into the system by Field or ICG +Consultants were approved on a weekly basis by project managers in North America and Europe, +and revenue for the professional services organization was then measured based on the approved +number of hours in the timesheet database. + + 11. Saba disclosed in its public filings that it recognized revenue for both “time and +materials” and “fixed fee” contracts as the services were performed. This revenue recognition +treatment was consistent with GAAP only if Saba could demonstrate that (1) its customers have +historically paid a consistent rate for its services (measured by Vendor Specific Objective Evidence +or “VSOE”) and (2) it could accurately estimate how many hours it took to complete projects +(“ability to estimate”). Therefore, Saba’s finance personnel depended on accurate time records to +ensure that Saba recognized revenue in accordance with GAAP. + + 12. From at least 2008 through the second quarter of Saba’s fiscal 2012, Saba +professional services employees and managers engaged in two time-keeping practices that led to its +improper revenue recognition. First, there were multiple incidents of ICG Consultants recording +hours and billing customers for the performance of professional services in advance of performing +those services in order to accelerate revenue recognition and achieve the managers’ quarterly +revenue targets (“pre-booking”). Second, ICG and Field Consultants regularly failed to report +professional services time worked in order to conceal budget overruns from management and +finance, instead recording that time to non-billable project codes or not at all (“under-booking”). + + 13. These improper time-keeping practices precluded the time records from serving as +reliable evidence under GAAP to recognize revenue in the manner that Saba did. As such, Saba +management has concluded that Saba cannot demonstrate VSOE for the period from 2008 through +the second quarter of fiscal 2012. Over that period, therefore, Saba was required to recognize +professional services revenues on a completed contract basis, which would have required it to defer +substantially all of its professional services revenue and much of its license revenue (where +software licenses were bundled with professional services) until the contract was completed. +Accordingly, virtually all of Saba’s professional services revenue was misstated over the relevant +time period. + + 5 +B. Farrell’s and Menon’s Knowledge of, and Participation In, the False Time Reporting +Practices + + 14. Farrell served as Vice President of Consulting, North America Service Operations +from June 2006 to June 2011, when Menon assumed his position and he became Vice President of +Global Services. From September 2009 through June 2011, Menon served as Regional Vice +President of Consulting, Western Region, North America. From June 2011 until January 2012, +Menon served as Vice President of Consulting, North America. In January 2012, Menon resumed +his Regional Vice President, Western Region position. In their respective roles, both individuals +were charged with ensuring that the professional services organization met the financial targets set +by Saba’s Chief Executive Officer, Bobby Yazdani, and other senior management. + +15. Although the practices of pre-booking and under-booking were directed by and +known to numerous individuals in the professional services organization and ICG, Farrell and +Menon were the two most senior individuals who directed or approved these improper time- +keeping practices and understood that they would impact Saba’s reported professional services +revenue and violate Company’s policies regarding financial reporting, including Saba’s Revenue +Recognition Policy and Code of Business Conduct. + + 16. Farrell was told that Field Consultants had requested or planned to request that ICG +Consultants pre-book hours in order to achieve their quarterly revenue targets. In other cases, +where Field and ICG Consultants overran budgets provided to customers and the finance +department, Farrell directed the Consultants to “eat” the hours or back them out of the timesheet +database. Despite being told by the finance department that the Company’s accountants and +auditors needed to understand exactly how many hours were being worked and when (regardless of +whether or not they were billed to the customer) in order to ensure that revenue was not being +recognized too quickly, Farrell failed to advise the finance department of these practices or take +any other remedial measures to ensure that there were no misstatements in Saba’s reported +professional services revenue as a result of pre-booking or under-booking. + + 17. In multiple instances, Menon directed consultants reporting to him to book time to +the timesheet database at quarter-end, even though those hours would not be worked until the +following quarter. On numerous occasions, he also advised direct reports to fail to reflect in the +time-keeping system non-billable hours that had been worked or was made aware of this prevalent +practice by those reporting to him. Although Menon was advised by the finance department on +multiple occasions that non-billable hours needed to be visible to those responsible for preparing +Saba’s financial statements, he never told finance, the auditors or anyone outside the professional +services organization about the improper time-keeping practices that he directed and knew about. + +18. Farrell and Menon knew, or were reckless in not knowing, that Field and ICG +Consultants were not accurately reporting their time. They also knew, or were reckless in not +knowing, that improper time-reporting would affect the way in which Saba recognized revenue. +Both Farrell and Menon signed several certifications during the relevant period stating that they +read and understood the Company’s Code of Business Conduct and Revenue Recognition Policy, +both of which prohibited the improper time-reporting practices. + 6 + +19. During their periods of employment with Saba, Farrell and Menon each received +bonuses based on achievement of certain revenue and margin targets that they could not have +achieved absent the false time-reporting practices described above. + +C. Scope and Impact of the Fraud + + 20. Saba’s professional services revenues, gross margins and income were materially +overstated in its periodic filings from October 4, 2007 through January 6, 2012 as a result of the +time-reporting misconduct described above. Those false financial results were also reported in +Saba’s registration statements filed on Forms S-8 on December 18, 2009, October 6, 2011 and +January 6, 2012, and Saba raised money through those offerings. + +21. The practices of pre-booking and under-booking, and the inaccuracy in Saba’s time +records revealed by these practices, have led Saba management to conclude that it can no longer +rely on its calculation of VSOE of fair value for professional services. In this circumstance, ASC +985-605 (Certain Revenue Arrangements That Include Software Elements) and ASC 605-35 +(Revenue Recognition) require that the Company defer to the point where services are complete, +rather than recognize over the period where services are performed, standalone services revenue +and revenue on software license and cloud services agreements that contain bundled professional +services. Accordingly, Saba has determined and announced that it is required to restate its +financial statements for the years 2008, 2009, 2010 and 2011, and the first two quarters of 2012, +due to its material non-compliance with GAAP. Although Saba has not yet filed its required +restatement, the cumulative impact of this alternative revenue recognition treatment is to defer +recognition of approximately $70 million over the period from 2008 through the second fiscal +quarter of 2012. + +22. The falsification of time records also concealed from Saba’s finance team and +auditors information that rendered false and misleading the Company’s disclosures about its +revenue recognition policies, including statements that it had established VSOE and recognized +revenue as services were performed. Those disclosures were made in Forms 10-Q and 10-K filed +from October 10, 2007 through January 6, 2012. + +23. These misstatements are material. First, based on the Company’s own estimates, +the restated financials will reflect overstatements of gross revenue from 6% to 19% and gross +profit from 10% to 41% for each of the fiscal years 2008 through 2011. Second, the effect of the +inflated revenue was that Saba met analyst expectations for EPS in certain quarters and reversed at +least one year (2010) from a net income to a net loss for the year. + +D. Saba’s Deficient Internal Controls Over ICG and Time Reporting + + 24. Several Saba managers described an environment in the professional services +organization in which senior management set aggressive revenue and margin targets. These +pressures were not counter-balanced by effective internal accounting controls. + + 7 + 25. The Company’s internal controls for ensuring the accuracy of professional services +time-keeping were deficient. Although there was a control that required project managers to +approve the time records of Field Consultants and ICG Consultants, this control failed in multiple +ways. There was virtually no training on time entry for Consultants or their managers. Moreover, +managers approving time regularly rejected time entries that resulted in overruns to their project +budget. + + 26. Saba also failed to adequately address the financial reporting and internal control +risks associated with ICG. Almost all Saba’s professional services managers referred to ICG as a +“black box,” reflecting the fact that the consulting managers who approved time entry for revenue +recognition and customer billing purposes had almost no visibility into who was performing what +work and when. Despite this fact, there were insufficient controls in place to address the risk of +inaccurate time reporting. + + 27. Saba admitted in its January 18, 2013 Form 8-K that it had determined there were +material weaknesses in its internal control over financial reporting with respect to its accounting +and time-reporting practices. + +E. Saba’s Required Restatement + + 28. On August 6, 2012, Saba announced that, following an internal accounting review, +management had determined that its annual financial results for fiscal years 2011 and 2010, as well +as the first and second quarters of fiscal year 2012, should be restated as a result of instances of +improper time-recording that it had identified in the Company’s professional services business. On +November 5, 2012, Saba announced that management had determined that the Company’s annual +financial results for fiscal years 2009 and 2008 would also need to be restated. + + 29. Although Saba has announced on multiple occasions that it would complete its +restatement “as soon as practicable,” it has not yet filed its restatement. + +F. Saba’s Filing Delinquencies + + 30. Saba’s last-filed periodic report containing financial statements was its quarterly +report on Form 10-Q dated January 6, 2012. + + 31. On April 9, 2013, Saba’s shares were suspended from trading on Nasdaq. As of +June 30, 2014, Saba common stock traded on the OTC Markets with an average daily trading +volume of 54,006 over the prior three months. + +Violations + + 32. 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 + 8 +conduct described above, Saba violated Section 10(b) of the Exchange Act and Rule 10b-5 +thereunder, and Farrell and Menon each violated Section 10(b) of the Exchange Act and Rules +10b-5(a) and (c) thereunder. + + 33. Section 17(a)(1) of the Securities Act prohibits the use of a device, scheme or +artifice to defraud in the offer or sales 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 +business that operates as a fraud or deceit upon the purchaser. As a result of the conduct described +above, Saba, Farrell and Menon each violated Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the +Securities Act. + + 34. 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 specific 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, Saba violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder, and Farrell and Menon +caused violation of these provisions by Saba. + + 35. 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, Saba violated Section 13(b)(2)(A) of the Exchange Act, +and Farrell and Menon caused violation of these provisions by Saba. + + 36. Section 13(b)(2)(B) of the Exchange Act requires issuers 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 +recorded as necessary to permit preparation of financial statements in accordance with generally +accepted accounting principles. As a result of the conduct described above, Saba violated Section +13(b)(2)(B) of the Exchange Act, and Farrell and Menon caused violation of these provisions by +Saba. + + 37. Section 13(b)(5) of the Exchange Act prohibits any person from knowingly +circumventing or knowingly failing to implement a system of internal accounting controls or +knowingly falsifying books, records, or accounts described in Section 13(b)(2) of the Exchange +Act. As a result of the conduct described above, Farrell and Menon each violated Section 13(b)(5) +of the Exchange Act. + + 38. Rule 13b2-1 promulgated under the Exchange Act prohibits any person from +directly or indirectly falsifying any books and records subject to Section 13(b)(2)(A) of the + 9 +Exchange Act. As a result of the conduct described above, Farrell and Menon each violated +Exchange Act Rule 13b2-1. + +Undertakings + + Respondent Saba has undertaken to: + + 39. By no later than 5:30 p.m. EST on November 17, 2014, file a comprehensive Form +10-K for the fiscal year ended May 31, 2014. That comprehensive annual report shall contain (i) +restated financial results for Saba’s 2010 and 2011 fiscal years (unaudited) as well as the first +two quarters of its 2012 fiscal year and (ii) an opinion from Saba’s independent registered public +accounting firm as to the consolidated balance sheets as of May 31, 2013 and 2014, and the +consolidated statement of operations, stockholders’ equity and cash flows for each of the years in +the three year period ended May 31, 2014; and (iii) an opinion from Saba’s independent +registered public accounting firm on internal controls over financial reporting as of May 31, +2014 (the “2014 Annual Report”). The 2014 Annual Report shall otherwise materially comply +with the technical and substantive requirements for EDGAR documents, and be in accordance +with the requirements of Section 13(a) of the Exchange Act and rules and regulations thereunder. +If Saba files its 2014 Annual Report by no later than 5:30 p.m. EST on November 17, 2014, and +the Division of Enforcement does not notify Saba of a deficiency pursuant to paragraph 42(1), +infra, the Division of Enforcement shall notify the Office of the Secretary of the Commission of +Saba’s compliance with the undertaking set forth in this paragraph and the proceeding will be +terminated in accordance with the Order Instituting Administrative Proceedings Pursuant to +Section 12(j) of the Securities Exchange Act of 1934, Making Findings, Accepting Settlement, +Implementing Settlement, and Staying Proceedings to Implement Settlement entered against +Saba on September 24, 2014. + + 40. Make an additional payment of $100,000 to the Securities and Exchange +Commission on or before December 4, 2014, if Saba does not comply with the undertaking +contained in paragraph 39, supra, in lieu of the Commission seeking a civil monetary penalty +from Saba for violation of this Order pursuant to Section 21(d)(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) 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 + 10 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Saba 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 Schneider, Division of Enforcement, +Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San Francisco, +California 94104. + + 41. If Saba fails to comply with the undertaking set forth in paragraph 39, supra, Saba +has undertaken to file its 2014 Annual Report (as defined in paragraph 39, supra) by no later than +5:30 p.m. EST on February 16, 2015. The 2014 Annual Report shall otherwise materially +comply with the technical and substantive requirements for EDGAR documents, and be in +accordance with the requirements of Section 13(a) of the Exchange Act and rules and regulations +thereunder. If Saba files its 2014 Annual Report by no later than 5:30 p.m. EST on February 16, +2005, and the Division of Enforcement does not notify Saba of a deficiency pursuant to +paragraph 42(1), infra, the Division of Enforcement shall notify the Office of the Secretary of the +Commission of Saba’s compliance with the undertaking set forth in this paragraph and the +proceeding will be terminated in accordance with the Order Instituting Administrative +Proceedings Pursuant to Section 12(j) of the Securities Exchange Act of 1934, Making Findings, +Accepting Settlement, Implementing Settlement, and Staying Proceedings to Implement +Settlement entered against Saba on September 24, 2014. + + 42. If Saba files its 2014 Annual Report by either of the dates set forth in paragraphs +39 and 41, supra, but the Division of Enforcement concludes, in consultation with the Division +of Corporation Finance and any other appropriate staff, that Saba’s filing, or any filing +resubmitted pursuant to paragraph 42(2), infra fails to comply with the undertakings set forth in +paragraphs 39 or 41, supra: + +(1) The Division of Enforcement will advise Saba within ten business days of +Saba’s filing of the nature of the deficiency or deficiencies in the filing; + +(2) Saba will have until March 9, 2015 to remedy any identified deficiency or +deficiencies in the filing and to resubmit it; + +(3) If Saba fails to resubmit such filing by March 9, 2015, or if Saba resubmits +such filings pursuant to paragraph 42(2), supra, and the Division of +Enforcement concludes after March 9, 2015, in consultation with the +Division of Corporation Finance and any other appropriate staff, that any +such filing fails to remedy the identified deficiency or deficiencies, the +Division of Enforcement shall notify the Office of the Secretary of the +Commission and Saba of its conclusion prior to March 16, 2015, and the +registration of Saba’s securities registered pursuant to Exchange Act +Section 12 will be revoked pursuant to Exchange Act Section 12(j) in +accordance with the Order Instituting Administrative Proceedings + 11 +Pursuant to Section 12(j) of the Securities Exchange Act of 1934, Making +Findings, Accepting Settlement, Implementing Settlement and Staying +Proceedings to Implement Settlement entered against Saba on September +24, 2014; and + +(4) If Saba resubmits its filing pursuant to paragraph 42(2), supra, and the +Division of Enforcement has not, in accordance with paragraph 42(1), +supra, advised Saba that the deficiency or deficiencies remain +uncorrected, the Division of Enforcement shall notify the Office of the +Secretary of the Commission of its conclusion prior to March 16, 2015, +and the proceeding will be terminated in accordance with the Order +Instituting Administrative Proceedings Pursuant to Section 12(j) of the +Securities Exchange Act of 1934, Making Findings, Accepting Settlement, +Implementing Settlement and Staying Proceedings to Implement +Settlement entered against Saba on September 24, 2014. + +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 Saba, Farrell and Menon +cease and desist from committing or causing any violations and any future violations of Sections +17(a)(1), (a)(2) and (a)(3) of the Securities Act. + + B. Pursuant to Section 21C of the Exchange Act, Respondent Saba 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, 13a-11 and 13a- +13 thereunder, and Respondents Farrell and Menon 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 +13(b)(5) of the Exchange Act and Rules 10b-5(a) and (c), 12b-20, 13a-1, 13a-11, 13a-13 and 13b2-1 +thereunder. + +C. Respondent Saba shall pay a civil money penalty in the amount of $1,750,000 to the +Securities and Exchange Commission on the following schedule: $750,000 within 30 days of the +entry of this Order; $500,000 within 180 days of the entry of this Order; and $500,000 within 360 +days of the entry of this Order. If any payment is not made by the date the payment is required by +this Order, the entire outstanding balance of civil penalties, plus any additional interest accrued +pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without further application. +Payment must be made in one of the following ways: + +(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 + 12 +(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 Saba +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 Schneider, Division of Enforcement, +Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San Francisco, +California 94104. + +D. Respondent Farrell shall, within 30 days of the entry of this Order, pay +disgorgement of $31,832, a civil penalty of $50,000, and prejudgment interest of $3,185 to the +Securities and Exchange Commission. If timely payment is not made, additional interest shall +accrue pursuant to SEC Rule of Practice 600 and 31 U.S.C. § 3717. Payment must be made in one +of the following ways: + +(1) Respondent may 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 +Farrell 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 Schneider, Division of +Enforcement, Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San +Francisco, California 94104. + +E. Respondent Menon shall pay disgorgement of $17,875, prejudgment interest of +$1,746 and civil penalties of $50,000 to the Securities and Exchange Commission on the following +schedule: $23,207 within 30 days of the entry of this Order; $23,207 within 180 days of the entry +of this Order; and $23,207 within 360 days of the entry of this Order. If any payment is not made + 13 +by the date the payment is required by this Order, the entire outstanding balance of disgorgement, +prejudgment interest, and civil penalties, plus any additional interest accrued pursuant to SEC Rule +of Practice 600 or pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without +further application. Payment must be made in one of the following ways: +(3) 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) 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 +Menon 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 Schneider, Division of +Enforcement, Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San +Francisco, California 94104. + + F. Saba shall comply with its undertakings contained in paragraphs 39, 41 and 42, +supra. + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3584.txt b/raw/aaer/2014/AAER-3584.txt new file mode 100644 index 0000000000000000000000000000000000000000..cdd725ae61fde05dc922d9e05ea8949eb8d14ec7 --- /dev/null +++ b/raw/aaer/2014/AAER-3584.txt @@ -0,0 +1,252 @@ +1 + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73201 / September 24, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3584 / September 24, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16160 + + +In the Matter of + +BABAK (“BOBBY”) +YAZDANI + +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 Bobby Yazdani (“Respondent”). + +II. + + In anticipation of the institution of these proceedings, the Respondent has submitted an +Offer of Settlement (the “Offer”) that the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over each and over the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + + 1. This matter involves misstated revenues in the professional services organization at +Saba Software, Inc. (“Saba” or “the Company”), a Silicon Valley-based enterprise software +company. The misstatements were the result of the falsification of time records over a period of +more than four years by professional services managers in multiple geographies directing +consultants in Saba’s Indian subsidiary (the India Consulting Group or “ICG”) to falsify time +records by either recording time in advance of performance of work or failing to record time for +hours worked in order to achieve their quarterly revenue and margin targets. + + 2. As a result, Saba reported false financial results in its financial statements filed with +the Commission over the period from October 4, 2007 through January 6, 2012. As Saba +announced on August 6, 2012 and November 5, 2012, management has determined that the +Company is required to restate its financial statements for fiscal years 2008 through 2011, as well +as the first two quarters of fiscal 2012. The Company expects that the restatement will change the +time period during which the affected revenues are recognized, generally shifting the timing of +such revenues to later periods. + + 3. Saba’s Chief Executive Officer, Bobby Yazdani, received bonuses and incentive- +and equity-based compensation from Saba, and also realized Saba stock-sale profits, during the 12- +month periods following the filings containing financial results that Saba is required to restate. +Yazdani has not, to date, reimbursed Saba for those amounts. + +Respondent and Related Entity + + 4. Bobby Yazdani, age 49, has a primary residence in Potomac, Maryland and a +condominium in Redwood Shores, California. He founded Saba in April 1997 and served as CEO +from then until 2002 and again from 2003 to March 2013. He served as Chairman of the Board +from April 1997 until March 2013. He resigned both positions in March 2013. Yazdani is +currently self-employed. + + 5. Saba Software, Inc. (“Saba” or “the Company”) is a Delaware corporation +headquartered in Redwood Shores, California. The software company provides cloud-based +enterprise learning, talent management and social networking tools to businesses and large +organizations. At all relevant times, Saba’s common stock has been registered pursuant to Section + +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 +12 of the Exchange Act. From its IPO in April 2000 until July 31, 2006, its common stock was +registered pursuant to Section 12(g). Thereafter, until June 2013, it was registered pursuant to +Section 12(b). It traded on the Nasdaq Global Market until it was suspended on April 9, 2013, and +then it was delisted effective June 17, 2013 for failure to remain compliant with its SEC reporting +obligations. Upon its delisting and deregistration from Section 12(b), it reverted to its previous +Section 12(g) registration. Its common stock is currently registered pursuant to Section 12(g) and +traded on the OTC Markets. Saba has not filed any periodic reports since January 6, 2012, when it +filed its Form 10-Q for the quarter ended November 30, 2011. + +Facts + +A. Saba’s Falsification of Time Records + + 6. Saba’s professional services historically has accounted for about one third of its +approximately $120 million in yearly revenues. Professional services have been delivered to +customers worldwide by (1) customer-facing field consultants in North America and Europe +(“Field Consultants”) and (2) off-shore technical development services provided to the Field +Consultants by the Company’s India Consulting Group (“ICG Consultants”). ICG is an +organization within Saba’s Indian subsidiary designed to help the Company deliver professional +services to its customers at a lower cost than comparable consultants in North America and +Europe. By 2011, ICG employed 50-60 consultants who generated approximately 14,000 hours of +billable work per quarter, which constituted about 17% of consulting revenue and 6% of total +revenue per quarter. + + 7. Both Field Consultants and ICG Consultants were required to record time worked +on customer projects in a timesheet database. Hours input into the system by Field or ICG +Consultants were approved on a weekly basis by project managers in North America and Europe, +and revenue for the professional services organization was then measured based on the approved +number of hours in the timesheet database. + + 8. Saba disclosed in its public filings that it recognized revenue for both “time and +materials” and “fixed fee” contracts as the services were performed. This revenue recognition +treatment was consistent with GAAP only if Saba could demonstrate that (1) its customers have +historically paid a consistent rate for its services (measured by Vendor Specific Objective Evidence +or “VSOE”) and (2) it could accurately estimate how many hours it took to complete projects +(“ability to estimate”). Therefore, Saba’s finance personnel depended on accurate time records to +ensure that Saba recognized revenue in accordance with GAAP. + + 9. From at least 2008 through the second quarter of Saba’s fiscal 2012, Saba +professional services employees and managers engaged in two time-keeping practices that led to its +false revenue recognition. First, there were multiple incidents of ICG Consultants recording hours +and billing customers for the performance of professional services in advance of performing those +services in order to accelerate revenue recognition and achieve quarterly revenue targets (“pre- +booking”). Second, ICG and Field Consultants regularly failed to report professional services time + 4 +worked in order to conceal budget overruns from management and finance, instead recording that +time to non-billable project codes or not at all (“under-booking”). + + 10. These improper time-keeping practices precluded the time records from serving as +reliable evidence under GAAP to recognize revenue in the manner that Saba did. As such, Saba +management has concluded that Saba cannot demonstrate VSOE for the period from 2008 through +the second quarter of fiscal 2012. Over that period, therefore, Saba was required to recognize +professional services revenues on a completed contract basis, which would have required it to defer +substantially all of its professional services revenue and much of its license revenue (where +software licenses were bundled with professional services) until the contract was completed. +Accordingly, virtually all of Saba’s professional services revenue was misstated over the relevant +time period because revenue was recognized earlier than it should have been under the applicable +accounting principles. + +11. The practices of pre-booking and under-booking were directed by and known to +numerous individuals in the professional services organization and ICG, including the two most +senior Saba employees overseeing the professional services organization in North America over +the relevant time period. Those senior Saba employees were told on multiple occasions by the +finance department that the Company’s accountants and auditors needed to understand exactly how +many hours were being worked and when (regardless of whether or not they were billed to the +customer) in order to ensure that revenue was recognized accurately, and they understood that +inaccurate time-keeping would lead to misstatements in Saba’s reported professional services +revenue and violate the Company’s policies regarding financial reporting, including the Code of +Business Conduct and the Revenue Recognition Policy. + +B. Scope and Impact of the Fraud + + 12. Saba’s professional services revenues, gross margins and income were materially +overstated in its periodic filings from October 4, 2007 through January 6, 2012 as a result of the +time-reporting misconduct. + +13. The practices of pre-booking and under-booking, and the fundamental inaccuracy +in Saba’s time records revealed by these practices, have led Saba management to conclude that it +can no longer rely on its calculation of VSOE of fair value for professional services. In this +circumstance, ASC 985-605 (Certain Revenue Arrangements That Include Software Elements) and +ASC 605-35 (Revenue Recognition) require that the Company defer to the point where services are +complete, rather than recognize over the period where services are performed, standalone services +revenue and revenue on software license and cloud services agreements that contain bundled +professional services. Accordingly, Saba has determined and announced that it is required to +restate its financial statements for the years 2008, 2009, 2010 and 2011, and the first two quarters +of 2012, due to its material non-compliance with GAAP. Although Saba has not yet filed its +required restatement, the cumulative impact of this alternative revenue recognition treatment is +approximately $70 million over the period from 2008 through the second fiscal quarter of 2012. +The Company expects that the restatement will change the time period during which the affected +revenues are recognized, generally shifting the timing of such revenues to later periods. + 5 + +14. These misstatements are material. First, based on the Company’s own estimates, +the restated financials will reflect overstatements of gross revenue and profit of more than 5% in +each year for the period 2008 through 2011. Second, the effect of the inflated revenue was that +Saba met analyst expectations for EPS in certain quarters and reversed at least one year (2010) +from a net income to a net loss for the year. + +C. Saba’s Required Restatement + + 15. On August 6, 2012, Saba announced that, following an internal accounting review, +management had determined that its annual financial results for fiscal years 2011 and 2010, as well +as the first and second quarters of fiscal year 2012, should be restated as a result of instances of +improper time-recording that it had identified in the Company’s professional services business. On +November 5, 2012, Saba announced that management had determined that the Company’s annual +financial results for fiscal years 2009 and 2008 would also need to be restated. + +D. Compensation of CEO Yazdani + + 16. During the 12-month periods that followed the filing of the periodic reports +requiring restatement, Yazdani received cash incentive awards and bonuses and also realized +profits from sales of Saba stock. + + 17. Yazdani has not reimbursed those amounts to Saba. + +Violations + + + 18. Section 304 of the Sarbanes-Oxley Act of 2002 requires the chief executive officer +of any issuer required to prepare an accounting restatement due to material noncompliance with the +securities laws as a result of misconduct to reimburse the issuer for (i) any bonus or incentive- +based or equity-based compensation received by that person from the issuer during the 12-month +periods following the false filings, and (ii) any profits realized from the sale of securities of the +issuer during those 12-month periods. Section 304 does not require that a chief executive officer +engage in misconduct to trigger the reimbursement requirement. Yazdani received bonuses and +incentive- and equity-based compensation from Saba, and also realized Saba stock-sale profits, +during the 12-month periods following the filings containing financial results that Saba is required +to restate. He has not, to date, reimbursed the Company for those amounts. + +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, pursuant to Section 21C of the Exchange Act, that: + + 6 + A. Respondent Yazdani cease and desist from committing or causing any violations and +any future violations of Section 304 of the Sarbanes-Oxley Act. + + B. Respondent Yazdani shall, within 30 days of the entry of this Order, reimburse Saba +for a total of $2,570,596 in Saba bonuses, other incentive-based or equity-based Saba compensation, +and Saba stock sale profits pursuant to Section 304(a) of SOX. Respondent shall simultaneously +deliver proof of satisfying this reimbursement obligation to Erin Schneider, Division of +Enforcement, Securities and Exchange Commission, 44 Montgomery Street, Suite 2800, San +Francisco, California 94104. + + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3585.txt b/raw/aaer/2014/AAER-3585.txt new file mode 100644 index 0000000000000000000000000000000000000000..17bbba28f2e70550329866fce19d4c091fa77bb6 --- /dev/null +++ b/raw/aaer/2014/AAER-3585.txt @@ -0,0 +1,369 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73209 / September 25, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3585 / September 25, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16164 + + +In the Matter of + +JDA SOFTWARE GROUP, INC., + +Respondent. + + +ORDER INSTITUTING ADMINISTRATIVE +AND 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 JDA Software Group, 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 +Administrative and 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 finds1 that: + +SUMMARY + + During the time period from fiscal year 2008 through the third quarter of fiscal year 2011, +JDA Software Group, Inc. (“JDA”), a software solutions company, materially misstated its revenue, +net income, and other financial metrics in certain of its annual and quarterly reports filed with the +Commission and in certain of its earnings releases. In particular, JDA failed to properly record and +report revenue from its software license sales in the correct accounting periods because it did not +establish vendor specific objective evidence of fair value (“VSOE”) for Managed Services and +certain types of consulting arrangements sold in conjunction with its software licenses. In addition, +JDA failed to accurately record and report revenues from the sale of software licenses and certain +services agreements that were linked to each other. JDA’s failures in these areas were caused by +inadequate internal controls surrounding revenue recognition. JDA lacked adequate revenue +recognition policies and procedures and failed to identify all service-related contracts needed for +VSOE testing to determine the fair value of certain services. + + Ultimately, in August 2012, JDA restated its financial results for fiscal years 2008 through +the third quarter of fiscal year 2011, and in its restatement acknowledged, among other things, +material weaknesses in its internal controls over financial reporting. By engaging in the foregoing +conduct, JDA violated the reporting, books and records, and internal controls provisions of the +federal securities laws, namely Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act +and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + +RESPONDENT + + JDA Software Group, Inc. (“JDA”), a Delaware corporation headquartered in Scottsdale, +Arizona, is a leading provider of business software solutions for a broad range of industry groups +ranging from foods, manufacturing, retail, government and defense contracting. In December 2012, +JDA was acquired by RedPrairie, a privately held software company for approximately $1.9 billion. +Both JDA and RedPrairie are owned by New Mountain Capital, LLC, a private investment +company. Prior to its acquisition by RedPrairie, JDA’s common stock was registered with the +Commission pursuant to Section 12(b) of the Securities Act of 1933 (“Securities Act”) and traded +on the NASDAQ Global Select Market. Since JDA had stock registered under Section 12 of the +Securities Act, it was required to file reports with the Commission pursuant to Sections 13(a) of the +Exchange Act. + + +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 +BACKGROUND + +1. In 1997, the American Institute of Certified Public Accountants (“AICPA”) issued +Statement of Position 97-2, Software – Revenue Recognition (“SOP 97-2”), the first industry- +specific GAAP guidance on revenue recognition for software and software-related products. +Following the issuance of SOP 97-2, the AICPA also released numerous standards and Technical +Practice Aids (“TPAs”) clarifying specific aspects of software revenue recognition. In June 2009, +existing GAAP pronouncements were codified into the Accounting Standards Codification, +effective for interim and annual periods ending after September 15, 2009. SOP 97-2, its related +amendments and related TPAs were codified at ASC 985-605 (hereinafter “ASC 985-605”). +2. JDA’s business involved selling computer software licenses and services related to +those software licenses to various customers located throughout the world. The primary related +services were: (i) Managed (Hosting/Cloud) Services; (ii) Consulting Services; (iii) Post Contract +Customer Support (Maintenance); and (iv) Education/Training. Managed Services involved, +among other things, JDA hosting the software for customers on JDA’s servers. Consulting +Services involves assisting customers in all phases of systems implementation, including program +and project management. +3. JDA sold its software licenses and related services in three ways: (i) it bundled the +software license and some, if not all, of the related services and sold them as a single contract, +known as a “multiple element arrangement” under the accounting literature; (ii) it sold the software +license and the related services in separate contracts that were linked; or (iii) it sold the software +license and related services in separate contracts that were not linked. These services contracts +were typically offered for a set period of time. +4. As a computer software company, JDA’s ability to recognize revenue from the sale +of software and related services in a multiple element arrangement was governed broadly by ASC +985-605. In order to recognize the full amount of revenue from the sale of a software license +immediately in the quarter in which the sale occurred, JDA had to establish that it had VSOE for +each undelivered element of the bundled services. If JDA was unable to establish VSOE for any +undelivered element, it had to recognize revenue from the software license ratably over the term of +the services agreement. + + + + + + + 4 +5. ASC 985-605 limits the information that a company may use to establish the fair +value of a particular element. This information is limited to: +a. The price charged when the same element is sold separately2; or +b. For an element not yet being sold separately, the price established by management +having the relevant authority; it must be probable that the price, once established, +will not change before the separate introduction of the element into the market +place (“management authority”). +VSOE FOR MANAGED SERVICES + +6. JDA offered Managed Services to its customers. In fiscal years 2008 and 2009, +JDA did not conduct any VSOE studies using stand-alone transactions to determine whether it had +established VSOE for its Managed Services. Rather than using stand-alone transactions, JDA +relied solely on management authority to establish VSOE for its Managed Services. +7. To establish VSOE using management authority, a company must demonstrate that +the actual prices charged for the services in multiple element arrangements conform to the prices +set by management. In fiscal years 2008 and 2009, however, JDA did not have adequate policies +and procedures to determine whether the sales prices for Managed Services in its multiple element +arrangements complied with the prices that were set by JDA’s management. JDA conducted no +testing to make this determination. Thus, as part of its restatement process – and specifically with +regard to Managed Services – JDA determined that it had not established VSOE for Managed +Services in fiscal years 2008 and 2009 because it did not sell its Managed Services offerings at +prices that were consistent with prices set by management. +8. For fiscal year 2010, JDA conducted its first-ever VSOE study for Managed +Services using stand-alone transactions. JDA initially identified five stand-alone Managed +Services transactions and determined that those transactions demonstrated sufficient clustering to +establish VSOE. As part of its 2010 annual audit, JDA’s auditor determined that one of the +transactions was not a stand-alone transaction, and JDA concluded that the remaining four were +sufficient to establish VSOE. +9. As part of the restatement process, however, JDA determined that one of those four +transactions was not a stand-alone transaction because it was “linked” to a software license +agreement. JDA determined that the remaining three transactions did not constitute an acceptable +population by which VSOE for Managed Services could be established. In particular, JDA noted +that “the objective testing populations of stand-alone transactions [the remaining three transactions] + +2 For ease of reference in the Order, we refer to contracts in which services are sold separately as stand-alone +transactions. An analysis of stand-alone transactions for VSOE purposes involves: (i) identifying transactions in +which a particular service is sold separately (not in a multiple element arrangement); (ii) identifying the actual prices +at which those services were sold; and (iii) determining whether those prices demonstrate sufficient clustering (i.e. +prices that are tightly grouped around the average price) to establish VSOE. + + 5 +were not substantial enough to establish VSOE.” Thus, JDA did not properly record revenue from +the sale of certain software licenses in which Managed Services were a bundled or linked service. +VSOE FOR CONSULTING SERVICES + +10. During the relevant period, JDA offered Consulting Services to its customers +throughout the world, including in Japan, Australia, and Europe. JDA offered its Consulting +Services typically through fixed bid contracts or contracts based on a time and material +arrangements with set hourly rates. +11. In fixed bid contracts, JDA set a fixed total dollar amount for a particular consulting +arrangement, which was based on an estimate of the number of hours that were expected to be +spent by the consultants on the project. During the relevant period – and as they had with +Managed Services arrangements in fiscal years 2008 and 2009 – JDA did not conduct VSOE +testing to determine whether the actual contract rates in fixed bid contracts complied with the +consulting rates set by management authority. +12. As part of its restatement process, JDA concluded that from fiscal year 2008 through +fiscal year 2010, JDA’s fixed bid contracts lacked consistency in pricing. In particular, for fixed bid +contracts in fiscal year 2010, JDA found that it only had a 13% compliance rate, and therefore JDA +concluded that VSOE for fixed bid contracts did not exist. +13. With respect to consulting services based upon time and material arrangements, +because consulting and currency rates varied depending on the customer’s geographic region, JDA +was required to establish VSOE for Consulting Services on a geographic basis. JDA, however, did +not conduct any VSOE analysis for certain geographic regions. +14. During its restatement process, JDA conducted an analysis on a geographic basis +and determined that for certain regions it did not have a sufficient volume of consulting contracts to +establish VSOE in certain foreign currencies. Thus, JDA did not properly record revenue from the +sale of certain software licenses in which Consulting Services were a bundled or linked service. +LINKED CONTRACTS + +15. With respect to services offered in stand-alone arrangements, ASC 985-605-55-43 +requires computer software companies to analyze whether the services offered to a customer are +“linked” to a software license sold to the same customer. +16. Pursuant to ASC 985-605-55-4, a group of contracts or agreements may be so +closely related that they are, in effect, parts of a single arrangement. The form of an arrangement is +not necessarily the only indicator of the substance of an arrangement. The existence of any of the +following factors (which are not all-inclusive) may indicate that a group of contracts should be + +3 Prior to the accounting standards codification, TPA 5100.39 provided authoritative +guidance for the analysis of linked contracts. + 6 +accounted for as a single arrangement: (i) the contracts or agreements are negotiated or executed +within a short timeframe of each other; (ii) the different elements are closely interrelated or +interdependent in terms of design, technology, or function; (iii) the fee for one or more contracts or +agreements is subject to refund, forfeiture, or other concession if another contract is not completed +satisfactorily; (iv) one or more elements in one contract or agreement are essential to the +functionality of an element in another contract or agreement; (v) payment terms under one contract +or agreement coincide with performance criteria of another contract or agreement; and (vi) the +negotiations are conducted jointly with two or more parties (for example, from different divisions +of the same company) to do what in essence is a single project. +17. Whether contracts are linked has significant implications from a VSOE, and in turn, +a revenue recognition perspective. If two contracts are deemed to be linked, they are treated as part +of a multiple element arrangement. As noted earlier, software companies are unable to recognize +the full amount of the license revenue in the quarter in which the revenue is obtained unless they +have VSOE for each service that is linked to the license agreement. +18. Moreover, if a service contract is linked to a license agreement, that service +agreement cannot be used as a stand-alone transaction for purposes of establishing VSOE. In fact, +as noted above, JDA determined in connection with its restatement that one of the stand-alone +transactions relied upon in its VSOE study of Managed Services for fiscal year 2010 was linked, +and therefore, could not be included in a population of stand-alone transactions. +19. During the relevant period, JDA’s internal controls and testing for linked contracts +were deficient. JDA’s controls were not adequately designed to identify all of the service contracts +that were in the process of being negotiated with customers. Specifically, JDA did not maintain any +centralized database to track such contracts. In addition, JDA’s controls were not adequately +designed to systematically identify – by customer – any services contracts that were signed within a +defined period of the software license agreement. Accordingly, JDA was unable to conduct +adequate testing for linked contracts in compliance with ASC 985-605-55-4. +20. As JDA determined during its restatement process, any linkage analysis that +occurred was rarely documented. Accordingly, even in those instances where it appeared that +linkage was purportedly considered, it was very difficult to determine what if any analysis was done +or whether the software license was linked to any service due to the lack of documentation. +21. JDA’s linkage analysis was largely limited to determining whether an obligation +existed to deliver services and whether a carve-out from license revenue was necessary where rates +in a related services agreement were below VSOE, and did not consider all of the other factors set +forth in ASC 985-605-55-4. +22. Accordingly, JDA did not properly assess contracts for linkage. Consequently, JDA +reported a material weakness in its internal controls over financial reporting. + + + 7 +THE RESTATEMENT +23. On August 6, 2012, JDA restated its financial statements for fiscal years 2008, 2009, +2010 and the first three quarters of fiscal year 2011. JDA misstated its revenues, net income and +other financial metrics in all reporting periods. In particular, JDA determined in the restatement that +revenue was not recognized in the correct reporting periods. Thus, in some reporting periods, +JDA’s financial results were materially overstated and in others they were materially understated. +The chart below summarizes JDA’s material misstatements: +Financial Metric (figures in$000) 2008 2009 2010 2011 +Revenue - Originally Reported 390,332 385,800 617,209 671,753 +Revenue – Restated 381,516 390,968 593,742 691,243 +Revenue - Over/(Under) Statement 8,816 (5,168) 23,467 (19,490) +Percentage Over/(Under) Statement 2.31% -1.32% 3.95% -2.82% + Gross Profit- Originally Reported + +240,129 363,675 + Gross Profit – Restated + +245,543 338,996 + Gross Profit - Over/(Under) Statement + +(5,414) 24,679 + Percentage Over/(Under) Statement N/A -2.20% 7.28% N/A + Net Income/(Loss) - Originally Reported 3,124 17,746 17,718 71,000 +Net Income/(Loss) – Restated (386) 18,982 2,141 82,688 +Net Income /(Loss) - Over/(Under) +Statement 3,510 (1,236) 15,577 (11,688) +Percentage Over/(Under) Statement 909.33% -6.51% 727.56% -14.14% + EBITDA - Originally Reported 97,354 96,846 160,851 179,637 +EBITDA – Restated 88,538 102,461 135,786 201,608 +EBITDA - Over/(Under) Statement 8,816 (5,615) 25,065 (21,971) +Percentage Over/(Under) Statement 9.96% -5.48% 18.46% -10.90% + +24. In the restatement, JDA identified control failures that constituted material +weaknesses, and a significant deficiency, in its internal controls over financial reporting – +specifically related to multiple element arrangements and VSOE for certain services. +Specifically, JDA acknowledged that material weakness existed in its internal controls over the +application of revenue recognition criteria required by ASC 985-605. +25. JDA noted that the material weakness related to both the insufficient design and +ineffective operation of certain internal controls over the identification of license agreements +linked to consulting agreements and Managed Services, as well as testing and documentation of +VSOE for Managed Services and Consulting Services products. + + 8 +VIOLATIONS +26. Under Section 21C of the Exchange Act, the Commission may impose a cease-and- +desist order upon any person who is violating, has violated, or is about to violate any provision of +the Act and upon any other person that is, was, or would be a cause of the violation, due to an act +or omission the person knew or should have known would contribute to such violation. +27. Section 13(a) of the Exchange Act requires issuers to file such periodic and other +reports as the Commission may prescribe and in conformity with such rules as the Commission may +promulgate. Exchange Act Rules 13a-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’l, 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). +28. Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep books, +records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer.” Section 13(b)(2)(B) of the Exchange Act requires issuers to +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that transactions are recorded as necessary to permit the preparation of financial +statements in conformity with generally accepted accounting principles. +29. By engaging in the conduct above, JDA violated Section 13(a) of the Exchange Act +and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, and Sections 13(b)(2)(A) and 13(b)(2)(B) +of the Exchange Act. +30. In determining to accept Respondent’s Offer, the Commission considered remedial +acts undertaken by JDA, including its enhancement of internal controls, retention of additional +accounting personnel, and JDA’s cooperation with the staff’s investigation. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Section 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + 9 +B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $750,000 to the United States Treasury. If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be made in one of the +following three ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/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 JDA +Software as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Antonia Chion, Division of +Enforcement, Securities and Exchange Commission,100 F Street, NE, Washington, DC 20549- +5030. + + By the Commission. + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3586.txt b/raw/aaer/2014/AAER-3586.txt new file mode 100644 index 0000000000000000000000000000000000000000..debf42f7579db8532b1751d65b4d39f1dfb7e54c --- /dev/null +++ b/raw/aaer/2014/AAER-3586.txt @@ -0,0 +1,257 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73222 / September 25, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3586 / September 25, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16170 + + +In the Matter of + +TRADEBOT 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 Tradebot Systems, Inc. +(“Respondent” or “Tradebot”). + +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 + +A. SUMMARY + +1. Tradebot is a registered broker-dealer that is required to file annual reports +with the Commission containing financial statements audited by an independent public +accountant (“Annual Reports”). + +2. From 2004 through 2012, Mayer Hoffman McCann P.C. (“MHM”) served +as Tradebot’s auditor for the financial statements included in Tradebot’s Annual Reports +filed with the Commission for those years. + +3. MHM is associated with CBIZ, Inc. (“CBIZ”), a publicly traded company, +through a business model referred to as an alternative practice structure (“APS”). CBIZ’s +APS model with MHM utilizes an administrative service agreement (“ASA”) which +requires MHM to lease from CBIZ virtually all of the human capital, equipm ent and +overhead MHM requires to perform its attest work, in exchange for a majority of MHM’s +revenue. + +4. CBIZ is an associated entity of MHM, and CBIZ and MHM are viewed as a +single entity for Commission auditor independence purposes. + +5. From 2008 to at least 2013, Tradebot has traded in CBIZ stock, thereby +impairing MHM’s independence with respect to its audits of Tradebot’s financial +statements for the years 2008 through 2012. As a result, Tradebot’s Annual Reports do not +comply with Rule 17a-5 for those years. + +Respondent + +6. Tradebot Systems, Inc., is a broker dealer registered with the Commission, +and is located in Kansas City, Missouri. + +Related Entities And Individuals + +7. Mayer Hoffman McCann P.C. , is a Missouri professional corporation +headquartered in Leawood, Kansas, with offices throughout the U.S. + +8. CBIZ, Inc., is a Delaware corporation headquartered in Cleveland, Ohio, +that provides products and services to businesses throughout the U.S. CBIZ ’s stock is +traded on the New York Stock Exchange. + +Commission Promulgated Revised Rule 2-01 In 2001 + +9. In 200 0, the Commission promulgated a revision of its auditor +independence requirements under Rule 2 -01 of Regulation S -X. 17 C.F.R. § 210.2 -01. +Included in the revision was subsection 2-01(c)(1)(iv)(A) which provides: + + 3 +(iv) Audit clients' financial relationships . An accountant is not +independent when: + +(A) Investments by the audit client in the accounting firm. An audit client +has, or has agreed to acquire, any direct investment in the accounting +firm, such as stocks, bonds, notes, options, or other securities, or the audit +client's officers or directors are record or beneficial owners of more than +5% of the equity securities of the accounting firm. + +10. Pursuant to Section 17(a) of the Exchange Act and Rule 17a -5(d) +promulgated thereunder, Tradebot is required to file an A nnual Report which contains its +audited financial statements. Rules 17a-5(d), (e) and (f) specifically require that the Annual +Report be audited by a n “independent public accountant” and a “public accountant who +shall be in fact independent” as defined by Rule 2-01(b) and (c) of Regulation S-X. From +2004 through 2012, Tradebot engaged MHM to audit its financial statements included in +the Annual Report. + +Tradebot Traded In CBIZ Stock During The Audit Periods + +11. Commencing in 2008, Tradebot began to regularly trade in CBIZ stock and +continued to trade in that stock through at least June 2013. + +12. Prior to 2012, Tradebot was unaware of any prohibition against it acquiring +any interest in the securities of CBIZ. Prior to the 2012 audit period, MHM had never +inquired whether Tradebot traded in CBIZ stock. + +13. In September 2012, MHM learned from Tradebot that Tradebot had traded +in CBIZ stock, and discussed with Tradebot the possibility that such trades may impact +MHM’s independence of Tradebot. + +14. Tradebot sought guidance from MHM regarding whether Tradebot’s trades +in CBIZ stock may impair MHM’s independence but received no further guidance in tha t +month. + +15. On October 3, 2012, before resolving whether MHM was independent, +Tradebot engaged MHM for the 2012 audit. + +MHM Provided Erroneous Instruction To Tradebot + +16. On December 5, 2012, MHM advised Tradebot that if it had not become the +beneficial owner of more than 5% of the CBIZ stock at one time , MHM’s independence +was not impaired in its audits of Tradebot’s financial statements. As support for its advice +to Tradebot, MHM quoted Rule 2-01(c)(1)(iv)(A). + +17. MHM’s instruction to Tradebot concerning the application of Rule 2 - +01(c)(1)(iv)(A) was erroneous because the 5% threshold referenced in the rule does not +apply to Tradebot; rather, it applies to Tradebot’s officers and directors. + 4 + +18. In January and February 2013, MHM had communications w ith +Commission Staff (“Staff”) regarding Tradebot’s trading in CBIZ securities and the +potential impact such trading had on MHM’s independence for the 2008 through 2012 +Tradebot audits. + +19. On February 15, 2013, as part of its discussions with Staff regarding +whether Tradebot would be required to refile its Annual Reports, Tradebot represented to +the Staff, through MHM, that it had ceased trading in CBIZ stock. + +20. According to Tradebot, in an effort to cause Tradebot to cease trading in +CBIZ stock, Tradebot’s president erroneously disabled trading for the ticker symbol +“CBIZ” instead of “CBZ” in Tradebot’s trading system and, as a result, Tradebot never +ceased trading in CBIZ stock. According to Tradebot, the symbols “CBIZ” and “CBZ” +were both listed as stocks in Tradebot’s trading system because, in the past, CBIZ stock +had traded under the symbol “CBIZ.” + +21. Tradebot never checked its trading system to ensure it had ceased trading in +CBIZ stock. + +22. On February 28, 2013, MHM issued a Report of Independent Registe red +Public Accounting Firm for Tradebot’s 2012 financial statements (“MHM’s Report”). +Tradebot included MHM’s Report in its Annual Report which it filed with the Commission +on March 1, 2013. + +23. Shortly thereafter, Tradebot determined that it would not retai n MHM for +the 2013 audit because of the restriction on Tradebot trading in CBIZ stock. + +MHM Provided Audit Opinions For 2008 Through 2012 That Represented It Was +Independent Of Tradebot When It Was Not + +24. MHM performed audits of Tradebot’s financial statemen ts for the periods +2008 through 2012 in connection with Tradebot’s Annual Reports filed with the +Commission. MHM provided audit opinions for those audits which indicated, among other +things, that MHM was independent of Tradebot for those audits. + +25. In fact, due to Tradebot’s trading of CBIZ stock, MHM was not +independent of Tradebot for the 2008 through 2012 audits included in the Annual Reports +filed with the Commission for those years. + +Tradebot’s Violations + +26. As a result of the conduct described above, Tradebot violated Section 17(a) +of the Exchange Act and Rule 17a -5 thereunder, which require Tradebot to file Annual +Reports with the Commission that contain financial statements audited by an independent +public accountant. + + 5 +IV. + +In view of the fo regoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Tradebot’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Tradebot cease +and desist from committing or causing any violations and any future violations of Section +17(a) of the Exchange Act and Rule 17a-5 thereunder. + + B. Respondent shall, within 14 days of the entry of this Order, pay a civil +money penalty in the amount of $ 50,000 to the Securities and E xchange Commission. If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying Tradebot Systems, Inc., as a Respondent in these proceedings, and the file +number of these pr oceedings; a copy of the cover letter and check or money order must +be sent to Karen L. Martinez, Regional Director, Salt Lake Regional Office, 351 South +West Temple, Suite 6.100, Salt Lake City, UT 84101. + +C. The Division of Enforcement ("Division") ma y, at any time following the +entry of this Order, petition the Commission to: (1) reopen this matter to consider +whether Respondent provided accurate and complete financial information at the time +such representations were made; and (2) seek an order directing payment of disgorgement +and pre -judgment interest. No other issue shall be considered in connection with this +petition other than whether the financial information provided by Respondent was +fraudulent, misleading, inaccurate, or incomplete in any mat erial respect. Respondent +may not, by way of defense to any such petition: (1) contest the findings in this Order; (2) + 6 +assert that payment of disgorgement and interest should not be ordered; (3) contest the +amount of disgorgement and interest to be ordered; or (4) assert any defense to liability or +remedy, including, but not limited to, any statute of limitations defense. + + + By the Commission. + + + + Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3587.txt b/raw/aaer/2014/AAER-3587.txt new file mode 100644 index 0000000000000000000000000000000000000000..f4f07b95bec1a3d9da98e75c59e67e49f35b1d91 --- /dev/null +++ b/raw/aaer/2014/AAER-3587.txt @@ -0,0 +1,519 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73224 / September 25, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3587 / September 25, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16171 + + +In the Matter of + +MAYER HOFFMAN +McCANN, P.C. + + Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANCE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE AND NOTICE OF +HEARING + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e) of the Commission’s Rules of +Practice against Mayer Hoffman McCann, P.C. (“Respondent” or “MHM”). + +II. + +After an investigation, the Division of Enforcement (“Enforcement”) and the Office of the +Chief Accountant (“OCA”) allege that: + +A. SUMMARY + +1. Mayer Hoffman McCann P.C. (“MHM”) is a public accounting firm associated with +CBIZ, Inc. (“CBIZ”), a publicly traded company , through a business model referred to as a n +alternative practice structure (“APS”) . CBIZ’s APS model with MHM utilizes an administrative +service agreement (“ASA”) which requires MHM to lease from CBIZ virtually all of the human +capital, equipment and overhead MHM requires to perform its attest work, in exchange for a majority +of MHM’s revenue. + +2 + +2. CBIZ is an associated entity of MHM, and CBIZ and MHM are viewed as a single +entity for Commission auditor independence purposes. + +3. MHM has numerous attest clients that file reports with the Commission , including +Tradebot Systems, Inc. “(Tradebot”), a registered broker-dealer. Pursuant to Rule 17a-5 promulgated +under Section 17(a) of the Exchange Act, Tradebot is required to file annual reports with the +Commission containing financial statements audited by an independent public accountant (“Annual +Reports”). + +4. MHM audited Tradebot’s Annual Reports from 2004 through 2012. From 2008 to at +least 2013, Tradebot invested in CBIZ stock, thereby impairing MHM’s independence with respect +to its audits of Tradebot’s 2008 through 2012 financial statements . As a result, Tradebot’s Annual +Reports do not comply with Rule 17a-5 for those periods. + +5. In addition to MHM’s independence violations related to the Tradebot audits, MHM’s +procedures were deficient to prevent such independence violations for all of its broker -dealer and +investment fund audit clients, and resulted in MHM’s multiple failures to comply with the auditor +independence rules. + +6. MHM lacked an appropriate system of quality controls to detect transactions in CBIZ +stock by its attest clients in order to ensure that those engagements complied with the firm’s legal and +ethical requirements. MHM’s quality control and audit procedures failed to meet adequate +professional standards with respect to its audits of Tradebot. + +7. During the audit of its 2012 year, Tradebot was made aware that trading in CBIZ +stock would impair MHM’s independence. Tradebot continued to trade in CBIZ stock. + +B. RESPONDENT + +8. Mayer Hoffman McCann P.C. , is a Missouri professional corporation +headquartered in Leawood, Kansas, with offices throughout the U.S. MHM’s Commission -related +attest practice includes registered broker-dealers, investment funds and publicly traded companies. + +C. RELATED ENTITIES + +9. CBIZ, Inc. , is a Delaware corporation headquartered in Cleveland, Ohio, that +provides products and services to businesses throughout the U.S. CBIZ associates with several U.S. +public accounting firms through its APS model, with MHM being the largest. CBIZ’s stock is traded +on the New York Stock Exchange. + +10. Tradebot Systems, Inc., is a broker dealer registered with the Commission, and is +located in Kansas City, Missouri. + + + +3 + +D. CBIZ AND MHM ASSOCIATION + +11. In about 1996 , CBIZ began using the APS model to expand its revenue base by +acquiring the non -attest practices of public accounting firms and forming relationships with those +public accounting firms by means of ASAs. + +12. From about 1998 to present, CBIZ entered into periodic ASAs with MHM which +provide, among other things, that virtually all of MHM’s shareholders are salaried employees of +CBIZ and are leased to MHM along with other CBIZ professional and non-professional staff, office +space, equipment, and marketing and other services, to enable MHM to perform its attest practice, in +exchange for approximately 85% of MHM’s revenues. + +E. SEC STAFF INFORMED CBIZ IT IS SUBJECT TO THE COMMISSION’S +INDEPENDENCE STANDARDS + +13. On November 2, 1998, OCA became aware of CBIZ’s use of the APS model and its +acquisition of non-attest practices of accounting firms. OCA notified CBIZ of the application of the +Commission’s independence rules: + +[Y]our affiliation with certain accounting firms … may subject you to the +application of the independence rules set forth in Rule 2-01 of Regulation S-X. + +. . . [A]ny accounting firm and the acquirer (“acquirer”) of that accounting firm that +employs any accountants that work on SEC clients of the accounting firm should +continue to fully comply with the SEC’s independence requirements. + +14. On August 13, 1999, OCA sent guidance to CBIZ related to independence disclosures +provided in a CBIZ Form S-4 filing then under review. In that letter, OCA stated: + +[T]he Commission and the staff are concerned about the significant public policy +issues that are raised in situations where audits of public companies are performed +by auditors under an alternative business structure. . . . [CBIZ] has acquired the +non-attest businesses of several accounting firms (“the Attest Firms”) that have +audited clients required to file financial statements with the [Commission]. . . . + +. . . [I]n the application of the independence rules, the SEC staff will view [CBIZ] +and all Attest Firms as a single entity. As a result, [CBIZ] must abide by all of the +independence rules that the Attest Firm must follow in order for the Attest Firm to +be independent of an SEC audit client. . . . + +F. SEC PROMULGATED REVISED RULE 2-01 IN 2001 + +15. In 2000, the Commission promulgated an extensive revision of its auditor +independence requirements under Rule 2-01 of Regulation S-X. 17 C.F.R. § 210.2-01. The revised +rule was adopted in respons e to “an increasingly complex web of business and financial +4 + +relationships” of public accounting firms. Included in the revision was subsection 2-01(c)(1)(iv)(A). +It provides: + +(iv) Audit clients' financial relationships. An accountant is not independent when: + +(A) Investments by the audit client in the accounting firm. An audit client has, or +has agreed to acquire, any direct investment in the accounting firm, such as stocks, +bonds, notes, options, or other securities, or the audit client's officers or directors +are record or beneficial owners of more than 5% of the equity securities of the +accounting firm. + +16. Rule 2-01(f)(2) of Regulation S-X defines “accounting firm” as “an organization . . . +that is engaged in the practice of public accounting . . . and all of the organization’s . . . associated +entities . . . .” + +17. CBIZ is an associated entity of MHM by virtue of its APS relationship and ASA with +MHM. + +G. MHM LEARNED OF TRADEBOT TRADES IN CBIZ STOCK + +18. Pursuant to Rule 17a-5(d) of the Exchange Act, Tradebot is required to file an annual +report (“Annual Report”) which contains its audited financial statements. Rules 17a-5(d), (e) and (f) +specifically require that the Annual Report be audited by a n “independent public accountant” and a +“public accountant who shall be in fact independent” as defined by Rule 2-01(b) and (c). From 2004 +through 20 12, Tradebot engaged MHM to audit its financial statements included in t he Annual +Report. + +19. Commencing in 2008, Tradebot began to regularly trade in CBIZ stock and continued +to trade in that stock through 2013. + +20. Prior to 2012, Tradebot was unaware of any prohibition against it acquiring any +interest in the securities of CBIZ. Prior to the 2012 audit period, MHM had never inquired whether +Tradebot traded in CBIZ stock. + +21. In about mid -2012, MHM’s engagement shareholder learned from Tradebot’s CFO +that Tradebot had traded in CBIZ stock and discussed with Tradebot’s CFO the possibility that such +trades may impact MHM’s independence. + +22. In response, MHM’s engagement shareholder contacted MHM’s national office +shareholder over independence and asked “whether or not that was something we need to be +concerned about from an independence i ssue.” MHM’s national office shareholder over +independence indicated he was not sure and forwarded the question to MHM’s national director of +professional standards, MHM’s president, and members of MHM’s executive committee. + +23. On September 4, 2012 , Tradebot’s CFO emailed MHM’s engagement shareholder +seeking further guidance on the impact of Tradebot’s trading in CBIZ, asking: “Can you send me the +link pointing to the independence issue related to trading public stock.” +5 + + +24. On September 6, 2012, MHM’s engageme nt shareholder responded to Tradebot’s +CFO’s email, stating: “I do not have anything specific to this situation to send (as it does not exist). +It is basically an interpretation of the SEC rules. Our New York office had inquired of a similar +situation in which the entity holds CBIZ stock and it was determined to be an issue…. Unfortunately +our chief independence officer is on a long vacation and I am trying to get a hold of him for +thoughts.” + +H. MHM WAS ENG AGED FOR 2012 AUDIT BEFORE INDEPENDENCE +ISSUE WAS RESOLVED + +25. On October 3, 2012, before resolving whether MHM was independent, Tradebot +engaged MHM for the 2012 audit. In connection with that engagement, MHM did not discuss with +Tradebot the unresolved independence issue and proceeded to sign the engagement letter. + +26. MHM’s potential independence conflict should have been resolved prior to signing +the engagement letter. + +I. MHM PROVIDED ERRONEOUS INSTRUCTION TO TRADEBOT +REGARDING INDEPENDENCE ISSUE + +27. On October 28, 2012, MHM’s national office shareholder over independence +contacted MHM’s national director of professional standards and MHM’s president regarding the +Tradebot independence issue. On October 30, 2012, MHM’s national director of professiona l +standards provided guidance to MHM’s national office shareholder over independence and MHM’s +engagement shareholder, citing Rule 2 -01(c)(1)(iv)(A) and instructing them that he thought MHM +would have to resign if Tradebot would be able to acquire more tha n 5% of the equity securities of +CBIZ. + +28. MHM’s national director of professional standards’s guidance to MHM’s national +office shareholder over independence and MHM’s engagement shareholder did not comply with +Rule 2-01(c)(1)(iv)(A). + +29. In October 2012, MHM r equested a meeting with the Commission staff (“Staff”) to +discuss matters relevant to the investigation, including a response to a request by the Staff to know +whether MHM monitored the holdings of its broker-dealer clients for CBIZ stock, and whether there +were instances of a broker-dealer client taking a position in CBIZ stock. + +30. The Staff met with MHM on December 4, 2012; MHM’s president attended the +meeting with MHM’s counsel. At the meeting, despite MHM’s and MHM’s president’s knowledge +regarding Tradebot’s trades in CBIZ, MHM failed to inform the Staff of Tradebot’s trades in CBIZ, +even after specific requests for information regarding possible broker -dealer attest client trades in +CBIZ stock. At that meeting the Staff conveyed to MHM that an audit client holding even one share +of CBIZ would impair MHM’s independence. + +6 + +31. On December 5, 2012, one day after MHM’s meeting with the Staff, MHM’s +engagement shareholder emailed Tradebot concerning MHM’s conclusion regarding the +independence question posed in September 2012, stating: + +Following up on the independence issues we discussed earlier this year, below is +the SEC rule. I am assuming Tradebot has not become the beneficial owner of +more than 5% of the CBIZ stock at one time, however, I would like to propose +perhaps you put a limit on the number of shares to be acquired at any one time. Is +that possible?? + +Reg. SX §210.2-01(c)(1)(iv)(A)- + +An accountant is not independent when: +(A) Investments by the audit client in the accounting firm. An audit client has, +or has agreed to acquire, any direct investment in the accounting firm, such as +stocks, bonds, notes, options, or other securities, or the audit client’s officers or +directors are record or beneficial owners of more than 5% of the equity securities +of the accounting firm. + +32. MHM’s engagement shareholder’s instruction to Tradebot was erroneous because the +5% threshold referenced in the rule does not apply to Tradebot; rather, it only applies to Tradebot’s +officers and directors. + +33. Tradebot responded to MHM’s engagement shareholder’s email by indicating it +would place a 10,000 share limit on trades in CBIZ, an amount that was below 5% of CBIZ’s +outstanding shares. + +34. Tradebot continued to trade in CBIZ stock through 2013. + +J. MHM LACKED QUALITY CONTROL OR AUDIT PROCEDURES TO +ENSURE CLIENTS DID NOT TRADE IN CBIZ STOCK + +35. Until 2013, MHM did not have any quality control or audit procedures to ensure +clients did not trade in CBIZ stock or to otherwise comply with Rule 2-01(c)(1)(iv)(A). Until 2013, +MHM provided no guidance to any audit client, including Tradebot, regarding trading prohibitions in +CBIZ stock by the audit client. Further, MHM did not implement any audit procedures during its +audits of Tradebot, or any other broker -dealer clients, to r eview the securities they were trading to +ensure compliance with Rule 2-01(c)(1)(iv)(A). + +K. MHM PROVIDED AUDIT OPINIONS FOR 2008 THROUGH 2012 THAT +REPRESENTED IT WAS INDEPENDENT OF TRADEBOT + +36. MHM performed audits of Tradebot’s financial statements for the per iods 2008 +through 2012 in connection with Tradebot’s Annual Reports filed with the Commission. MHM +provided audit opinions for those audits which indicated, among other things, that MHM was +independent of Tradebot for those audits, when in fact, MHM was not independent. + +7 + +L. MHM’s IMPROPER PROFESSIONAL CONDUCT + +37. Section 4C(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules +of Practice allow the Commission to censure, or deny temporarily or permanently, an accounting +firm’s privilege of practicing b efore it if the firm is found to have “engaged . . . in improper +professional conduct.” + +38. Pursuant to Section 4C (2) and Rule 102(e) (1)(ii), improper professional conduct +involves a violation of applicable professional standards through intentional, knowing or reckless +conduct, and two types of negligent conduct: a single instance of highly unreasonable conduct for +which heightened scrutiny is warranted; or repeated instances of unreasonable conduct that indicate a +lack of competence to practice before the Commission. + +39. “Because of the importance of an accountant’s independence to the integrity of the +financial reporting system, the Commission has concluded that circumstances that raise questions +about an accountant’s independence always merit heightened scrutiny .” Amendment to Rule +102(e) of the Commission’s Rules of Practice, Release No. 33 -7593 (Oct. 19, 1998), 63 Fed. +Reg. 57168. + +1. Relevant Audit Standards + +40. The term “applicable professional standards” primarily refers to generally accepted +accounting principles (“GAAP”), generally accepted auditing standards (“GAAS”), the AICPA Code +of Professional Conduct, and Commission regulations, but is broad enough to accommodate changes +in the body of professional guidance routinely used by accountants. + +41. For auditors of registered broker -dealers, such as Tradebot, the app licable +professional standards related to GAAS are those that have been issued by the AICPA. 1 + +42. Both Rule 2-01 and GAAS require auditors to maintain strict independence from their +audit clients. AICPA Auditing Standards AU Section 150.02 requires that the auditor “maintain +independence . . . in all matters relating to the audit.” AICPA Auditing Standards AU Section 220.03 +states “[i]t is of utmost importance to the profession that the general public maintain confidence in +the independence of auditors.” + +43. GAAS requires that an auditor have policies and procedures designed to prevent +independence impairment, and client acceptance and continuance procedures that ensure compliance +with legal requirements, discussed below. + +44. MHM was negligent in its failure to comply with those professional standards. + + + +1 The AICPA auditing standards are applicable for the audits of broker-dealers, Commission +Guidance Regarding Auditing, Attestation, and Related Practice Standards Related to Brokers and +Dealers, Release No. 34-62991, Sept. 24, 2010. +8 + +2. MHM’S Independence Was Impaired When It Audited Tr adebot’s 2008 – +2012 Financial Statements + +a. Rule 17a-5 + +45. Rule 17a-5 of the Exchange Act requires registered broker dealers to file periodic +reports with the Commission including, pursuant to Rule 17a -5(d)(1)(i), an annual report “ which +shall be audited by an independent public accountant.” Rule 17a-5(e)(1)(i) further states: “An audit +shall be conducted by a public accountant who shall be in fact independent as defined in paragraph +(f)(3) of this section herein, and shall give an opinion covering the state ments filed pursuant to +paragraph (d)…” + +46. Rule 17a-5(f)(3) defines independence as “in accordance with the provisions of § +210.2-01(b) and (c) of this chapter.” + +b. Rule 2-01(b) and (c) + +47. The general standard of auditor independence is described in Rule 2-01(b) and states +an accountant is not independent if not “capable of exercising objective and impartial judgment on all +issues encompassed within the accountant’s engagement.” + +48. Additionally, Rule 2 -01(c)’s subsections set forth “a non -exclusive specification of +circumstances inconsistent with” Rule 2-01(b)’s general requirement. The Commission stated: “As +to circumstances specifically set forth in our rule, we have set forth a bright-line test: an auditor is not +independent if he or she maintains the relationships, acquires the interests, or engages in the +transactions specified in the rule.” Revision of the Commission’s Auditor Independence +Requirements, Release No. 33-7919, 65 Fed. Reg. 76008 at 76030. + +49. When MHM audited Tradebot’s financial statements during the audit periods in +which Tradebot had acquired direct investments in CBIZ stock, namely 2008 through 2012, MHM’s +independence was impaired as to those audits. + + +3. MHM Violated Other Applicable Professional Standards + +50. MHM violated professional standards that require an accounting firm to establish +policies and procedures designed to assure independence, and client engagement procedures that +ensure compliance with legal requirements and risks associated with the engagement. + +a. MHM Failed to Design Policies and Procedures That Assured +Independence + +51. AICPA quality control standards are professional standards under GAAS. Pursuant +to AICPA QC Section 10 Paragraph 22, an auditor is requir ed to have policies and procedures +“designed to provide with reasonable assurance that the firm … maintain independence . . . .” + +9 + +52. In about 2012, MHM had well over a hundred broker dealer and investment fund +clients, including Tradebot, which regularly trade in the securities of thousands of public companies. +Despite the risks of audit clients trading in CBIZ securities, MHM did not have any written policies +or procedures to address the independence issues established by Rule 2-01(c)(1)(iv)(A) of audit +clients trading in CBIZ securities. + +53. Further, MHM did not have any written procedures to inform audit clients of the +transactional proscriptions of trading in CBIZ securities or any written procedures to follow if audit +clients traded in CBIZ securities in violation of Rule 2-01(c)(1)(iv)(A). + +54. Until 2013, MHM’s audit clients were unaware of restrictions on the trading of CBIZ +securities. + +b. MHM Failed To Follow Proper Client Engagement Procedures + +55. Pursuant to AICPA QC Section 10 Paragraph 27, an auditor is required to have +adequate policies and procedures for client continuance that are “designed to provide the firm with +reasonable assurance that it will … continue … engagements only when the firm c an comply with +legal and relevant ethical requirements.” + +56. After learning in 2012 of Tradebot’s CBIZ transactions, MHM failed to perform +adequate client acceptance procedures to ensure it was independent when being engaged and +beginning substantive field work. Shortly after internal consultation over the independence question +was initiated but before MHM’s national director of professional standards had provided any +guidance to the engagement shareholder, MHM proceeded with the engagement. By doing so, +MHM entered into an engagement without determining whether it could continue with the audit. + +4. MHM Violated AICPA Professional Standards + +57. Through the conduct described above, MHM violated GAAS provisions AU Sections +150.02 and 220.03, AICPA QC Section 10 Paragraphs 22 and 27 and thereby negligently engaged in +improper professional conduct. + +58. Through its repeated violations of applicable professional standards, MHM +demonstrated a lack of competence to practice before the Commission. + +M. MHM CAUSED TRADEBOT’S VIOLATION OF SECTION 17(a) AND RULE +17a-5 + +59. Under Section 21C of the Exchange Act, a person is a “cause” of another's +primary violation if the person knew or should have known that its act or omission would +contribute to the primary violation. Negligence is sufficient to establish “causing” liability +under Section 21C when a person is alleged to have caused a primary violation that does not +require scienter. In re KPMG Peat Marwick, Exch. Act. Rei. No. 43862 (Jan. 19, 2001), aff'd, +KPMG v. SEC, 289 F.3d I 09 (D.C. Cir. 2002). + +10 + +60. MHM caused Tradebot’s violations of Section 17(a) and Rule 17a -5 by certifying, +as independent public accountant s, Tradebot’s financial statements contained in its Annual +Reports, when, in fact, MHM was not independent of Tradebot. + +61. Further, MHM lacked an adequate system of controls to maintain independence +and failed to inform Tradebot of the proscription against trading in C BIZ stock. Those failures +impaired MHM’s independence and thereby caused Tradebot to file Annual Reports that did not +contain audits by an independent accountant. + +62. MHM was negligent in certifying it was independent of Tradebot and having an +inadequate system of controls and by failing to notify Tradebot of the proscription against trading +in CBIZ stock. + +III. + +In view of the allegations made by the Division of Enforcement and the Office of Chief +Accountant, the Commission deems it appropriate that public administrative and cease-and-desist +proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondent MHM an opp ortunity to establish any defenses to su ch +allegations; + +B. What, if any, remedial action is appropriate against Respondent MHM pursuant to +Section 4C of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice, including, +but not limit ed to, censure or denying, temporarily or permanently, the privilege of appearing or +practicing before the Commission; and + +C. Whether, pursuant to Section 21C of the Exchange Act, Respondent should be +ordered to cease and desist from committing or causing violations of and any future violations of +Exchange Act Section 17(a) and Rule 17a -5 thereunder, whether Respondent should be ordered to +pay a civil penalty pursuant to Section 21B(a) of the Exchange Act, and whether Respondent should +be ordered to pay disgorgement pursuant to Section 21C(e) of the Exchange Act. + +IV. + +IT IS ORDERED that a public hearing for the purpose of taking evidence on the questions +set forth in Section III hereof shall be convened 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 th at Respondent MHM sh all file an answer to the +allegations contained in this O rder within tw enty (20) days after service of this O rder, as +provided by Rule 220 of the Commission’s Rules of Practice, 17 C.F.R. § 201.220. + + 11 +If Respondent MHM fails to file the directed answer, or fails to appear at a h earing after +being du ly noti fied, the Respondent m ay be deemed in d efault and the proceedings m ay be +determined against the Respondent upon consideration of this Order, the allegations of which may +be deemed to be true as provided by Rules 155(a), 220(f), 221(f), and 310 of the Commission’s +Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), 201.221(f), and 201.310. + +This Order shall be served forthwith upon Respondent as provided for in the Commission’s +Rules of Practice. + +IT IS FURTHER ORDERED th at the Administrative Law Judge shall issue an initi al +decision no later than 300 days from the date of service of this Order, pursuant to Rule 360(a)(2) +of the Commission’s Rules of Practice, 17 C.F.R. § 201.360(a)(2). + +In the absence of an appropriate waiver, no o fficer 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 a witness or counsel in proceedings held pursuant to notice. Since this proceeding is not a “rule +making” within the meaning of Section 551 of the Administrative Procedure Act, it is not deemed +subject to the provisions of Section 553 d elaying t he 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/2014/AAER-3588.txt b/raw/aaer/2014/AAER-3588.txt new file mode 100644 index 0000000000000000000000000000000000000000..793ce2c390cf8f2fcc1aeb04da0a1680fd2a3515 --- /dev/null +++ b/raw/aaer/2014/AAER-3588.txt @@ -0,0 +1,362 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73243 / September 29, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3588 / September 29, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16177 + + + +In the Matter of + + BANK OF AMERICA + 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 Bank of America Corporation (“BAC” or +“Respondent”). + + II. + + In anticipation of the institution of these proceedings, BAC 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, BAC consents to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a +Cease-and-Desist Order (the “Order”), as set forth below. + +2 + +III. + + On the basis of this Order and BAC’s Offer, the Commission finds1 that: + +A. Summary + +1. The federal securities laws require public companies to make and keep books and +records in reasonable detail to, among other things, accurately and fairly reflect transactions in +which they engage. The federal securities laws also require public companies 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 preparation of financial +statements in conformity with United States Generally Accepted Accounting Principles (“GAAP”). +These laws seek to ensure the integrity and accuracy of information that is eventually disclosed to +investors. + +2. As part of its acquisition of Merrill Lynch & Co., Inc. (“Merrill”) on January 1, +2009, BAC assumed (or acquired) a $52.5 billion portfolio of structured notes and other financial +instruments (the “Notes”) that Merrill issued.2 At the time of acquisition, BAC recorded the Notes +at fair value, which was a $5.9 billion discount to the Notes’ par value due to an adverse change in +Merrill’s creditworthiness. + +3. As of March 31, 2014, 87 percent of the Notes had either matured or been +repurchased by BAC. Because BAC recorded the Notes at a discount to par when acquired, BAC +realized losses on the Notes upon their maturation or when BAC redeemed them at par. + +4. For purposes of calculating regulatory capital,3 applicable rules required BAC to +deduct the realized losses on the Notes as they occurred. From January 1, 2009 through March 31, +2014, however, BAC failed to deduct certain realized losses on the Notes when it calculated and +reported its regulatory capital. + +5. From the first quarter of 2009 to the fourth quarter of 2013, the realized losses that +BAC incurred on the Notes increased over time as more Notes either matured or were redeemed. +Therefore, with each passing fiscal quarter and year starting in 2009, BAC overstated its Basel I and + +1 The findings herein are made pursuant to BAC’s Offer of Settlement and are not binding on any other +entity or person in this or any other proceeding. +2 Generally, a structured note is a debt obligation where the return typically is not based on an interest rate +like a bank note but instead pays a return based on an embedded derivative component. For example, with a +structured note, the note holder will receive her principal at a fixed maturity but may or may not receive income +based on the performance of a defined security, index or asset class over a period of time. +3 “Regulatory capital” is the amount of capital that a banking organization must maintain as required by, +among others, the Board of Governors of the Federal Reserve System (“FRB”). Regulatory capital requirements +were put into place to ensure that banking organizations have sufficient capital to sustain operating losses while still +honoring withdrawals and so that they do not take on excessive leverage. Regulatory capital typically is expressed +in the form of ratios (certain calculations or categories of regulatory capital over risk-weighted assets). +3 + +Basel III regulatory capital by a greater amount in each of its Form 10-Q and Form 10-K filings +with the Commission.4 + +6. BAC overstated its regulatory capital in all Form 10-Q filings that it made with the +Commission from 2009 to 2013 (15 filings). BAC also overstated its regulatory capital in all Form +10-K filings that it made with the Commission for fiscal years 2009 through 2013 (5 filings). + +7. By year-end 2013, BAC overstated its Basel I regulatory capital by $3.714 billion. +In mid-April 2014, BAC internally discovered the regulatory capital overstatements and, after +analyzing the issue, BAC disclosed the overstatements in a Form 8-K filing that it made with the +Commission, dated April 28, 2014. + +8. To ensure it properly deducted the realized losses that it incurred on the Notes from +its regulatory capital starting in 2009, BAC should have made and kept accurate books and records +and also should have devised and maintained a system of internal accounting controls sufficient to +provide reasonable assurances that transactions were recorded as necessary to permit preparation of +financial statements in conformity with GAAP. + +9. As a result of its failure to do so, BAC violated Sections 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act. + +10. In response to the Commission’s investigation, BAC provided substantial +cooperation to Commission staff. BAC also has voluntarily undertaken steps to remediate and +address, among other things, the inadequate books and records and internal accounting control +deficiencies that are the subject of this proceeding. + + + + + + + + + + + +4 GAAP requires banking organizations to disclose regulatory capital ratios and requirements in notes to the +financial statements. Basel I was the first international uniform framework developed to calculate regulatory capital +and became effective in 1988. Basel III, which became effective for certain banking organizations, including BAC, +beginning with the quarter ended March 31, 2014, is the latest international uniform framework developed to +calculate regulatory capital. Though disclosure and compliance with Basel III regulatory capital ratios only became +effective for these banking organizations effective January 1, 2014, many public banking organizations started +disclosing Basel III figures and ratios much earlier than required in light of investor interest in how banking +organizations’ capital ratios would change under the new requirements. BAC first started disclosing its estimated +Basel III regulatory capital ratios in its Form 10-Q filing for the third quarter of 2012. Under Regulations G and S- +K, these Basel III estimated ratios were considered to be “non-GAAP” measures until BAC was required by +regulatory rules to comply with the Basel III capital ratio minimums. +4 + +B. Respondent + +11. Bank of America Corporation is a bank holding company incorporated in +Delaware and a financial services holding company under the Gramm-Leach-Bliley Act. BAC’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 symbol “BAC.” BAC’s principal offices are +located in Charlotte, North Carolina. + +C. Facts + +The Overstatements + +12. When BAC acquired Merrill on January 1, 2009, it acquired three types of Notes +with a total par value of $52.5 billion. At the time BAC acquired the Notes from Merrill, the Notes +had a fair value below par due to a decline in Merrill’s creditworthiness. Pursuant to GAAP, BAC +recorded the Notes at then-fair value—a $5.9 billion discount to par. + +13. Even though BAC acquired the Notes at a discount to par, BAC assumed liability on +the Notes to redeem them at par upon their maturation or when BAC otherwise repurchased them. +Because BAC acquired the Notes at a discount but redeemed them at par, BAC realized losses on +the Notes upon redemption or maturity. + +14. When calculating regulatory capital, BAC was required to include these realized +losses that were recognized in GAAP equity.5 When calculating its regulatory capital from 2009 +through 2013, however, BAC failed to do so. In other words, BAC improperly excluded certain +realized losses related to the initial $5.9 billion discount when calculating its regulatory capital, +which resulted in the regulatory capital overstatements. + +15. As more Notes matured or BAC repurchased more Notes over time, BAC incurred +more realized losses. Therefore, with each passing fiscal quarter and year starting in 2009, BAC +overstated its regulatory capital by a greater amount in its Form 10-Q and Form 10-K filings.6 + + + + + + + +5 Calculation of regulatory capital begins with total common shareholders’ equity followed by adjustments as +required by the regulatory capital rules and frameworks. +6 As the regulatory capital amounts were only disclosed in the notes to the financial statements, the +overstatements of regulatory capital that BAC made had no effect on the company’s consolidated balance sheet, +consolidated statements of income, comprehensive income, changes in shareholders’ equity or cash flow statements. +5 + +16. As a result of its inaccurate books and records and its deficient internal accounting +controls, BAC overstated its Basel I regulatory capital in its Form 10-Q and Form 10-K filings. At +the end of each year, these overstatements were as follows:7 + +Form 10-K +(for fiscal year) +Overstatement +(in billions) +2009 $0.888 +2010 $1.491 +2011 $2.131 +2012 $2.823 +2013 $3.714 + +17. Correspondingly, by fiscal year end 2013, BAC overstated the following Basel I +ratios by the following percentages in its Form 10-K filing: + +Ratio Overstatement +Tier 1 Common Capital 0.3% +Tier 1 Capital 0.2% +Total Capital 0.3% +Tier 1 Leverage 0.2% + +18. In addition to disclosing its regulatory capital under the Basel I framework, BAC +also first disclosed its regulatory capital under the Basel III framework starting in its Form 10-Q +filing for the third quarter of 2012. Therefore, BAC made additional Basel III regulatory capital +overstatements in four Form 10-Q filings (third quarter of 2012 through third quarter of 2013) and +in two Form 10-K filings (for fiscal years 2012 and 2013). + +19. By fiscal year end 2013, BAC overstated the following Basel III ratios (pro-forma +on a fully phased-in basis) by the following percentages in its Form 10-K filings:8 + +Ratio Overstatement +Common Equity Tier 1 +Capital—Standardized +Approach +0.3% +Common Equity Tier 1 +Capital—Advanced Approach +0.4% + + + + +7 The dollar amounts associated with the regulatory capital overstatement that BAC made in its Form 10-Q +filings are not provided in this Order. +8 BAC overstated its Basel III regulatory capital (pro-forma on a fully phased-in basis) by $4.369 billion in its +Form 10-K filing for fiscal year end 2013. +6 + +How the Overstatements Occurred + +20. A number of groups within BAC had some involvement with regulatory capital +calculation and reporting. Shortly after the acquisition of Merrill, a transition team created a +schedule that tracked cumulative gains and losses on certain liabilities. In creating that schedule, +BAC correctly understood that pre-acquisition declines in fair value on the Notes relating to +Merrill’s own creditworthiness should not be included as an adjustment in BAC’s regulatory capital +calculation. That schedule did not, however, contemplate or account for the fact that those Notes +would mature or otherwise be redeemed over time. + +21. BAC used this schedule each quarter, correctly excluding the difference in value of +the Notes at par and their fair value at the time of acquisition from its regulatory capital calculation. +The flaw in this process was that BAC continued to make this adjustment in BAC’s regulatory +capital calculation even after some of the Notes had matured or otherwise been redeemed, resulting +in a recurring overstatement of regulatory capital. In other words, BAC never recognized and +reflected in its regulatory capital calculations the fact that some of the Notes had matured or were +redeemed, which were events that caused BAC to incur realized losses on the Notes. It was this +oversight that led BAC to incorrectly exclude—or to improperly not include—these realized losses +for purposes of calculating regulatory capital. + +22. In sum, BAC’s regulatory capital overstatements arose from the rote application of +this process—quarter after quarter, year after year—since the acquisition of Merrill in January 2009. + +23. From 2009 through 2013, therefore, BAC did not adequately consider whether its +internal process for computing its regulatory capital was operating as intended or required. As a +result, BAC failed to make and keep accurate books and records, and 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 conformity with GAAP, +over this time period. + +Identification of the Overstatements + +24. BAC released its earnings for the first quarter ending March 31, 2014 on April 16, +2014. In the days that followed, BAC’s Corporate Tax Department was reviewing the earnings +release and made certain inquiries, which led to the identification of the error. Between April 21, +2014 and April 28, 2014, BAC worked to analyze and resolve the issue. + +25. On April 28, 2014, BAC issued a press release announcing a downward revision to +the company’s previously disclosed regulatory capital amounts and ratios, and also filed a Form 8-K +with the Commission disclosing the company’s revised regulatory capital amounts and ratios. In its +press release, BAC explained that at “the FRB’s request, the company is suspending its previously +announced 2014 capital actions, including the $4.0 billion common stock repurchase authorization +and the planned increase in the quarterly common stock dividend from $0.01 per common share to +$0.05 per share.” + + +7 + +26. Since discovery and disclosure of the computation error, BAC is developing +improved documentation and spreadsheet controls, as well as enhanced internal controls around +automation of processes, relating to its calculation and reporting of regulatory capital amounts and +ratios. + +D. Violations + +27. As a result of the conduct described above, BAC violated Section 13(b)(2)(A) of the +Exchange Act, which requires public companies to “make and keep books, records, and accounts, +which, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the +assets of the issuer.” + +28. As a result of the conduct described above, BAC violated Section 13(b)(2)(B) of the +Exchange Act, which requires public companies to “devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that . . . (ii) transactions are recorded +as necessary (I) to permit preparation of financial statements in conformity with generally accepted +accounting principles or any other criteria applicable to such statements, and (II) to maintain +accountability for assets.” + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in BAC’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. BAC 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. BAC shall, within twenty (20) days of the entry of this Order, pay a civil money +penalty in the amount of $7,650,000 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) BAC may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) BAC may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + + + + +8 + +(3) BAC 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 BAC 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 J. Osnato, Chief, Complex Financial Instruments Unit, Division +of Enforcement, Securities and Exchange Commission, 200 Vesey Street, Suite +400, New York, New York 10281. + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3590.pdf b/raw/aaer/2014/AAER-3590.pdf new file mode 100644 index 0000000000000000000000000000000000000000..4d137e3a061a17a23020f2cf009aadd7157f841d Binary files /dev/null and b/raw/aaer/2014/AAER-3590.pdf differ diff --git a/raw/aaer/2014/AAER-3590.txt b/raw/aaer/2014/AAER-3590.txt new file mode 100644 index 0000000000000000000000000000000000000000..960c6741947327ec652d45eee3ed9d9d31124909 --- /dev/null +++ b/raw/aaer/2014/AAER-3590.txt @@ -0,0 +1,74 @@ + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73408 / October 22, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3590 / October 22, 2014 + +ADMINISTRATIVE PROCEEDING +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 : EXTENSION ORDER + PARTNERSHIP), : +DELOITTE TOUCHE TOHMATSU CERTIFIED : + PUBLIC ACCOUNTANTS LTD., and : +PRICEWATERHOUSECOOPERS ZHONG : + TIAN CPAs LIMITED : + : + : + + + On October 20, 2014, Respondents Ernst & Young Hua Ming LLP (“EYHM”), +KPMG Huazhen (Special General Partnership) (“KPMG Huazhen”), Deloitte Touche +Tohmatsu Certified Public Accountants, Ltd. (“DTTC”), Pricewaterhousecoopers Zhong +Tian CPAs Limited (“PwC Shanghai”) (collectively the “Big Four Respondents”), and +the Division of Enforcement (“Division”), jointly requested a 45-day extension to the +briefing schedules set by the Commission by order dated August 14, 2014. +1 The Division +represents that Respondent BDO China Dahua CPA Co. Ltd. (“Dahua”) agrees with the +proposed extension. + + In support of their motion, the Division and the Big Four Respondents state that, +in light of the progress made thus far and current prospects for a potential settlement, it is +worthwhile to continue their discussions, so a 45-day extension is warranted. Absent an +extension, continuing these talks while briefing the appeal would present challenges, +given the breadth, complexity, and sensitivity of the issues involved. + + +1` Extension Order, Exchange Act Release No. 72845 (August 14, 2014). +2 + + Extensions of time are disfavored. It appears appropriate, however, to grant the +requested extension. Therefore, + + It is ORDERED that the briefing schedule is extended as follows: + +December 18, 2014: Big Four Respondents’ consolidated opening brief; the +Division’s opening brief (as to remedies imposed on Dahua). + +February 10, 2015: Division’s principal brief and response to Big Four +Respondents’ opening brief; Dahua’s response brief to the Division’s opening +brief (as to remedies imposed by Dahua). + +March 3, 2015: Big Four Respondents’ single consolidated response and reply +brief. + +March 20, 2015: Division’s reply brief (as to the Division’s Petition for review). + + For the Commission, by its Secretary, pursuant to delegated authority. + + + + + Kevin M. O’Neill +Deputy Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3591.txt b/raw/aaer/2014/AAER-3591.txt new file mode 100644 index 0000000000000000000000000000000000000000..d5179fbe3fa9fb4d3e53efe98984a78afe3b9afc --- /dev/null +++ b/raw/aaer/2014/AAER-3591.txt @@ -0,0 +1,168 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73421 / October 23, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3591 / October 23, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16210 + + : + : + : +In the Matter of : ORDER INSTITUTING ADMINISTRATIVE + : PROCEEDINGS PURSUANT TO RULE + Eugene F. Hovanec, 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 +Eugene F. Hovanec (“Respondent” or “Hovanec”) pursuant to Rule 102(e)(3)(i) of the +Commission’s Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an +Offer of Settlement (the “Offer”) which the Commission has determined to accept. Solely for +the purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over him and the subject matter of +these proceedings, and the findings contained in Section III.3 below, which are admitted, + +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 +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. Hovanec, age 61, of Westlake Village, California, has been a certified public +accountant licensed to practice in the State of New York since 1976; the status of his license is +currently not registered. Hovanec served as Vice President of Finance and Chief Financial +Officer at Vitesse from December 1993 through April 2005. In April 2005, after being promoted +to Executive Vice President he relinquished his role as CFO. Hovanec served as Executive Vice +President until May 17, 2006, when he was terminated by Vitesse’s Board. Between 1994 and +2007, Hovanec served on the board of Interlink Electronics, Inc., a U.S. public company. + + 2. Vitesse Semiconductor Corporation (“Vitesse” or the “Company”) is a major +producer of high-performance integrated circuits for use primarily by systems manufacturers in +the storage and communications industries. Vitesse was incorporated in Delaware in 1987, is +headquartered in Camarillo, California, and maintains a September 30th fiscal year-end. During +the relevant period, the Company’s common stock was registered with the Commission +pursuant to Section 12(b) of the Exchange Act and traded on the Nasdaq National Market under +the symbol VTSS. + +3. On December 10, 2010, the Commission filed a complaint against Hovanec in +Securities and Exchange Commission v. Vitesse Semiconductor Corp. et al, No. 10 Civ. 9239 in +the United States District Court for the Southern District of New York. On August 8, 2014, +the court entered an order permanently enjoining Hovanec by consent from future violations of +Sections 17(a) of the Securities Act of 1933 (“Securities Act”), Sections 10(b), 13(b)(5), and +16(a) of the Securities Exchange Act of 1934 (“Exchange Act”), and Exchange Act Rules 10b- +5, 13a-14, 13b2-1, 13b2-2, and 16a-3, and from aiding and abetting Vitesse’s violations of +Section 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Exchange Act Rules 12b- +20, 13a-1, and 13a-13. The final judgment also ordered him to pay disgorgement of $781,280, +which was deemed satisfied by his prior payment and transfer of, respectively, $250,000 and +458,014 shares of Vitesse stock, to the class action Settlement Fund in Louis Grasso, et.al. v. +Vitesse Semiconductor, et.al., No. CV 06-02639 R (CTx) (C.D. Cal.), and a $50,000 civil +penalty. + +4. The Commission’s complaint alleged, among other things, that starting from +about September 2001 through April 2006, Hovanec participated in a channel stuffing scheme +to improperly record revenue on product shipments. In furtherance of this scheme, Hovanec +failed to timely record customer credits required by large returns of unwanted product, and he +directed the misapplication of cash receipts to obscure aged accounts receivables that resulted +from the failure to timely record credits. The complaint also alleged, that from 1995 to 2006, +Hovanec participated in a scheme to backdate stock option grant dates for his personal benefit + 3 +and the benefit of other Vitesse executives and employees. Hovanec also failed to ensure that +Vitesse properly recorded compensation expense for backdated stock option grants. The +complaint alleges that as a result of these actions, between 1996 and early 2006, Hovanec, +among other violations: engaged in fraudulent accounting practices that materially misstated the +Company’s quarterly and annual financial statements, and that Hovanec knowingly +circumvented or failed to implement Vitesse’s system of internal accounting controls and +falsified Vitesse’s books, records and accounts; and made material misrepresentations to +Vitesse’s independent auditor. The complaint also alleges that as part of his misconduct, +between June 1996 and February 2005, Hovanec signed registration statements and annual and +quarterly reports that contained false and misleading financial statements and disclosures. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanction agreed to in Respondent Hovanec’s Offer. + + Accordingly, it is hereby ORDERED effective immediately, that: + +A. Hovanec is suspended from appearing or practicing before the Commission as +an accountant. + +B. After ten years (or 120 months) from the date of the 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: + + +(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 + 4 +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 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. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3592.txt b/raw/aaer/2014/AAER-3592.txt new file mode 100644 index 0000000000000000000000000000000000000000..785f80920dbc962d27a020e1607fe86dc20ed65b --- /dev/null +++ b/raw/aaer/2014/AAER-3592.txt @@ -0,0 +1,476 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73427 / October 24, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3592 / October 24, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16212 + + +In the Matter of + +BERMAN & COMPANY, P.A., +and ELLIOT BERMAN 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 Elliot +Berman (“Elliot”) and Berman & Company, P.A. (“Berman & Co.”) (collectively, “Respondents”) +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 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 an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents 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 Respondents’ Offer, the Commission finds3 that: + +A. SUMMARY + +Berman & Co. audited the financial statements of Issuer A for the year ended December +31, 2011, as it had done for the prior five years. Berman & Co.’s owner, Elliot Berman (“Elliot”) +had been the lead partner for the Issuer A audit for the previous five years. Accordingly, Elliot +could no longer serve as the lead partner for the fiscal year (“FY”) 2011 audit. + +Elliot appointed an employee at Berman & Co. (“Employee A”) as the nominal lead +partner of the FY 2011 audit of Issuer A. Employee A was not a certified public accountant +(“CPA”). Employee A was not otherwise qualified to be the lead partner. While Berman & Co. +was registered in the State of Florida and with the Public Company Accounting Oversight Board + + + 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 Respondents’ Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. +3 + +(“PCAOB”) to issue audits, relevant Florida statutes governing the practice of accounting in that +state did not permit Employee A to issue an audit opinion and Employee A was not qualified under +the standards of the PCAOB to express an opinion on the financial statements of a public company +in an audit report. + +In addition, despite the Commission’s rule that he rotate off the engagement, Elliot +performed certain services of a lead partner on the audit. Performing these duties violated the +rotation requirements of the Federal securities laws and the rules and regulations thereunder. + +By appointing Employee A as nominal lead partner and by Elliot’s continued performance +of certain lead partner duties, Berman & Co. and Elliot Berman engaged in improper professional +conduct and willfully violated and aided and abetted violations of the Federal securities laws and +the rules and regulations thereunder. + +B. RESPONDENTS + +Berman & Company, P.A. (“Berman & Co.”) is an accounting and auditing firm based +in Boca Raton, Florida. Berman & Co. is registered with the PCAOB. The firm reported having +14 issuer audit clients on its PCAOB Form 2 filed on June 19, 2013. The firm listed six +accountants, two of which are CPAs, and stated two partners have the ability to sign audit +reports. Berman & Co. served as the auditor for Issuer A since 2006. + +Elliot Berman is a CPA licensed to practice in Florida. He has been a CPA in Florida +since 2005 and a CPA since 1998, and has no disciplinary history. Elliot served as the lead +partner on Issuer A’s audits and reviews for the years ended 2006 through 2010. During the +relevant period, Elliot generally served as the lead partner for all of the firm’s issuer clients. +Elliot is the founder and managing director of Berman & Co. + +C. OTHER RELEVANT PARTIES + +Employee A is an accountant in the firm Berman & Co. Employee A served as the +nominal lead partner on the audit of Issuer A for the year ended December 31, 2011. + +Issuer A, a Delaware corporation, is a biotech company. Issuer A’s stock is registered +pursuant to Section 12(b) of the Exchange Act. + +D. FACT SUMMARY + +1. Berman & Co. audited Issuer A for the years ended December 31, 2006 through December +31, 2011. +2. Elliot served as the lead partner for the FY2006 through FY2010 audits. After the audit +for the year ended December 31, 2010, Elliot was required to rotate off as lead partner for +the Issuer A engagement for FYs 2011 through 2015. Elliot was also required not to serve +4 + +as the lead partner for any Form 10-Q reviews during this time. See Rule 2-01(c)(6) of +Regulation S-X [17 C.F.R. 210.2-01(c)(6)]. +3. Elliot, as the managing director of Berman & Co., appointed Employee A as the nominal +lead partner on the Issuer A audit engagement and quarterly reviews for the year ended +December 31, 2011. +4. Employee A was not licensed to practice as a CPA and had never been a CPA. Nor was +Employee A qualified to perform the functions of a lead partner for the audit of a public +company. Employee A had no experience auditing public companies and very little +experience auditing private companies. Nor did Employee A have the requisite +understanding of PCAOB audit standards necessary to perform a public company audit. +5. Through the course of the Issuer A quarterly reviews and audit for the year ended +December 31, 2011, Elliot performed some of the functions of a lead partner. +6. In particular, Elliot continued to serve as the primary contact with Issuer A’s management, +board of directors, and the board’s audit committee. Elliot made the presentation of certain +matters related to the conduct of the audit to Issuer A’s audit committee (via phone). He +also communicated with Issuer A’s management on substantive audit issues. +7. Elliot was the sole contact with the engagement quality review partner for the 2011 Issuer +A audit. +8. Elliot also reviewed and commented on the company’s 2011 Form 10-K, reviewed the +audit work papers for some of the 2011 quarterly reviews and left comments for the audit +team, made staffing decisions concerning the engagement, directed staff regarding audit +documentation, and performed the audit work regarding the company’s discontinued +operations. +9. On March 30, 2012, Berman & Co. issued an audit report in connection with its audit of the +financial statements of Issuer A for the year ended December 31, 2011. In the audit report, +Berman & Co. incorrectly represented that it conducted its audit in accordance with +PCAOB standards. Berman & Co did not, however, conduct its audit of the financial +statements of Issuer A for the year ended December 31, 2011 in accordance with PCAOB +standards, which require Berman & Co. to be independent and require the lead audit +partner to be qualified. See PCAOB Rule 3520. +E. BERMAN & CO. AND ELLIOT BERMAN’S PERFORMANCE OF LEAD +PARTNER SERVICES VIOLATED FEDERAL SECURITIES LAWS AND +CONSTITUTED IMPROPER PROFESSIONAL CONDUCT + +Exchange Act Section 10A(j), Audit Partner Rotation, +and Rule 2-01(c) of Regulation S-X, Partner Rotation +10. Section 10A(j) of the Exchange Act, Audit Partner Rotation, states: +5 + +It shall be unlawful for a registered public accounting firm to provide audit services +to an issuer if the lead (or coordinating) audit partner (having primary responsibility +for the audit), or the audit partner responsible for reviewing the audit, has +performed audit services for that issuer in each of the 5 previous fiscal years of that +issuer. +11. Rule 2-01(c)(6) of Regulation S-X, Partner Rotation, states: +… an accountant is not independent of an audit client when: + (A) Any audit partner … performs: + (1) The services of a lead partner …. or concurring partner … +for more than five consecutive years; +…. + (B) Any audit partner: + (1) Within the five consecutive year period following the +performance of services for the maximum period permitted under +paragraph (c)(6)(A)(1) of this rule, performs for that audit client the +services of a lead partner … or concurring partner … or a +combination of those services. +12. As detailed above, Elliot provided certain services of a lead partner for more than the five +consecutive years permitted. +13. As a result, Berman & Co. was not independent with respect to the audit services provided +in connection with Berman & Co.’s audit and reviews of Issuer A’s financial statements for +the year ended December 31, 2011. +F. BERMAN & CO. AND ELLIOT BERMAN’S APPOINTMENT OF EMPLOYEE A +AS LEAD PARTNER CONSTITUTED IMPROPER PROFESSIONAL CONDUCT + +Florida Statutes Governing the Practice of Accounting +14. The State of Florida defines the practice of public accounting to include the following: +(8) “Practice of,” “practicing public accountancy,” or “public accounting” +means: + (a) Offering to perform or performing for the public one or more types of +services involving the expression of an opinion on financial statements, the +attestation as an expert in accountancy to the reliability or fairness of presentation +of financial information, the utilization of any form of opinion or financial +6 + +statements that provide a level of assurance, the utilization of any form of +disclaimer of opinion which conveys an assurance of reliability as to matters not +specifically disclaimed, or the expression of an opinion on the reliability of an +assertion by one party for the use by a third party; + Fla. Stat. §§ 473.302(8)(a). +15. The State of Florida states that a person may not knowingly +(1) A person may not knowingly: + (a) Practice public accounting unless the person is a certified public +accountant or a public accountant; +.... + (c) Perform or offer to perform any services described in s. 473.302(8)(a) +unless such person holds an active license under this chapter and is a licensed audit +firm, provides such services through a licensed audit firm, or complies with ss. +473.3101 and 473.3141. This paragraph does not prohibit the performance by +persons other than certified public accountants of other services involving the use of +accounting skills, including the preparation of tax returns and the preparation of +financial statements without expression of opinion thereon; +…. + (g) Employ unlicensed persons to practice public accounting…. + Fla. Stat. § 473.322(1). +16. Accordingly, Employee A was not permitted to serve as lead audit partner for the Issuer A +audit under the laws of the State of Florida. +17. Nor were Berman & Co. and its principal Elliot permitted to employ Employee A as the +lead partner for that audit. +18. Accordingly, Berman & Co. and Elliot’s employment of Employee A as the nominal lead +partner of that audit constituted a violation of applicable professional standards. +PCAOB Interim Standards, AU Section 210: +Training and Proficiency of the Independent Auditor +19. PCAOB Interim Standards, AU Section 210.01 requires that an audit “be performed by a +person or persons having adequate technical training and proficiency as an auditor. +7 + +20. AU Section 210.02 makes clear that “however capable a person may be in other fields, +including business and finance, he cannot meet the requirements of the auditing standards +without proper education and experience in the field of auditing.” +21. AU Section 210.03 states, “In the performance of the audit which leads to an opinion, the +independent auditor holds himself out as one who is proficient in accounting and auditing. +The attainment of that proficiency begins with the auditor’s formal education and extends +into his subsequent experience. The independent auditor must undergo training adequate to +meet the requirements of a professional. This training must be adequate in technical scope +and should include a commensurate measure of general education…. The engagement +partner must exercise seasoned judgment in the varying degrees of his supervision and +review of the work done and judgments exercised by his subordinates….” +22. Berman and Co. and Elliot appointed a lead audit partner who did not meet the +requirements of PCAOB AU Section 210. +PCAOB Interim Standards, AU Section 230: +Due Professional Care in the Performance of Work +23. PCAOB Interim Standards, AU Section 230 .06 states, “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. The engagement partner should +know, at a minimum, the relevant professional accounting and auditing standards and +should be knowledgeable about the client.” +24. AU Section 230.03 makes clear that an auditor “assumes the duty to exercise in the +employment such skill as he possesses with reasonable care and diligence. In all these +employments where peculiar skill is requisite, if one offers his services, he is understood as +holding himself out to the public as possessing the degree of skill commonly possessed by +others in the same employment, and if his pretentions are unfounded, he commits a species +of fraud upon every man who employs him in reliance on his public profession.” +25. Berman and Co. and Elliot Berman knowingly appointed a lead audit partner who did not +meet the requirements of PCAOB AU Section 230. +PCAOB Interim Standards, QC Section 40: +The Personnel Management Element of a Firm’s System of Quality Control Competencies +Required by a Practitioner-in-Charge of an Attest Engagement +26. PCAOB Interim Standards, PCAOB QC Section 40.07 states that the “practitioner-in- +charge of an engagement to audit the financial statements of a public company would be +expected to have certain technical proficiency in SEC reporting requirements…. This +would include, for example, experience in the industry and appropriate knowledge of SEC +… rules and regulations, including accounting and independence standards.” +8 + +27. Berman and Co. and Elliot Berman appointed a lead audit partner who did not meet the +requirements of PCAOB QC Section 40. +G. BERMAN & CO.’S AUDIT REPORT DID NOT COMPLY WITH PCAOB +STANDARDS AND THUS VIOLATED RULE 2-02 OF REGULATION S-X +Rule 2-02 of Regulation S-X, Accountants’ Reports and Attestation Reports +28. Rule 2-02(b)(1) of Regulation S-X (Representations as to the Audit included in +Accountants’ Reports) requires an accountant’s report to state “whether the audit was made +in accordance with generally accepted auditing standards. (“GAAS”).” These standards +include the standards of the PCAOB. “[R]eferences in Commission rules and staff +guidance and in the federal securities laws to GAAS or to specific standards under GAAS, +as they related to issuers, should be understood to mean the standards of the PCAOB plus +any applicable rules of the Commission.” SEC Release No. 34-49708. +29. Berman & Co. issued an audit report on Issuer A’s 2011 financial statements stating that +it had conducted its audits in accordance with PCAOB standards. +30. Berman & Co.’s audit, however, was not conducted in accordance with PCAOB auditing +standards and interim standards as described above, and, moreover, was not conducted by +an independent auditor. See PCAOB Rule 3520, Auditor Independence. +31. Accordingly, Berman & Co. violated and Elliot Berman aided and abetted and caused a +violation of Rule 2-02 of Regulation S-X. +H. BERMAN & CO. AND ELLIOT BERMAN’S CONDUCT CAUSED VIOLATIONS +OF EXCHANGE ACT SECTION 13(a) AND RULE 13a-1 THEREUNDER + +32. Exchange Act Section 13(a) and Rule 13a-1 require an issuer to file accurate annual reports +on Form 10-K. +33. Berman & Co. issued an audit report improperly indicating that its audit of Issuer A’s +2011 financial statements had been conducted in accordance with PCAOB standards, +despite the facts that Employee A lacked the requisite technical competence as required by +PCAOB auditing standards. In addition, Berman & Co. was not independent because Elliot +continued to provide lead partner services. +34. The above-described actions by Berman & Co. and Elliot caused Issuer A to violate +Section 13(a) and Rule13a-1 thereunder. Berman & Co. and Elliot caused Issuer A to file +a Form 10-K for the year ended December 31, 2011 that included an audit report that +incorrectly stated it had been conducted by an independent public accounting firm in +accordance with the standards of the PCAOB. To the contrary, Berman & Co. was not +independent and its audit was not conducted pursuant to PCAOB standards. +9 + +I. VIOLATIONS + +35. As a result of the conduct described above, Berman & Co. and Elliot Berman willfully4 +violated Section 10A(j) of the Exchange Act; +36. As a result of the conduct described above, Berman & Co. willfully violated and Elliot +Berman willfully aided and abetted and caused a violation of Rule 2-02 of Regulation S-X. +37. As a result of the conduct described above, Berman & Co. and Elliot Berman caused Issuer +A to violate Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. +38. As a result of the conduct described above, Berman & Co. and Elliot Berman engaged in +improper professional conduct as defined in Rule 102(e)(1)(ii) in that their conduct +constituted a single instance of highly unreasonable conduct resulting in a violation of +applicable professional standards, that indicate a lack of competence to practice before the +Commission. +J. FINDINGS + +39. Based on the foregoing, the Commission finds that Elliot Berman and Berman & Co. +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. +40. Based on the foregoing, the Commission finds that Elliot Berman (a) willfully violated +Section 10A(j) of the Exchange Act and, (b) willfully aided and abetted and caused a +violation of Rule 2-02 of Regulation S-X, and (c) caused Issuer A’s violations of Section +13(a) of the Exchange Act and Rule 13a-1 thereunder. +41. Based on the foregoing, the Commission finds that Berman & Co. (a) willfully violated +Section 10A(j) of the Exchange Act, Rule 2-02 of Regulation S-X, and (b) caused Issuer +A’s violations of Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. +K. RESPONDENTS’ REMEDIAL EFFORTS + In determining to accept the Offer, the Commission considered remedial acts promptly +undertaken by Respondents and cooperation afforded the Commission staff. + + +4 A finding of willfulness does not require intent to violate, but merely intent to do the act which +constitutes a violation. SEC v. K.W. Brown & Co., 555 F. Supp. 2d 1275, 1309 (S.D. Fla.2007), +citing Wonsover v. SEC, 205 F.3d 408, 413-15 (D.C. Cir. 2000); SEC v. Steadman, 603 F.2d +1126, 1135 (5th Cir. 1979); Arthur Lipper Corp. v. SEC, 547 F.2d 171, 180 (2d Cir. 1976). + +10 + +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. Elliot Berman and Berman & Co. shall cease and desist from committing or causing +any violations and any future violations of Section 10A(j) and 13(a) of the Exchange Act, Rule +13a-1 promulgated thereunder, and Rule 2-02 of Regulation S-X. + B. Berman & Co. is censured. + + C. Elliot Berman is denied the privilege of appearing or practicing before the +Commission as an accountant. + + D. After 1 year from the date of this order, Elliot Berman 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 Elliot +Berman’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) Elliot Berman, 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) Elliot Berman, 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 Elliot +Berman’s or the firm’s quality control system that would indicate +that the Elliot Berman will not receive appropriate supervision; + + (c) Elliot Berman has resolved all disciplinary issues with the Board, +and has complied with all terms and conditions of any sanctions +11 + +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Elliot Berman acknowledges his responsibility, as long as Elliot +Berman appears or practices before the Commission as an +independent accountant, to comply with all requirements of the +Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner +reviews and quality control standards. + +E. The Commission will consider an application by Elliot Berman 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 Elliot Berman’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + F. Elliot Berman and Berman & Co. shall jointly and severally pay civil penalties of +$15,000, to the Securities and Exchange Commission. Payment shall be made in the following +installments: + + Within 14 days of the issuance of this Order $3,750 + Within 90 days of the issuance of this Order $3,750 + Within 180 days of the issuance of this Order $3,750 + Within 210 days of the issuance of this Order $3,750 + +If any payment is not made by the date the payment is required by this Order, the entire +outstanding balance of disgorgement, prejudgment interest, and civil penalties, plus any additional +interest accrued pursuant to SEC Rule of Practice 600 or pursuant to 31 U.S.C. 3717, shall be due +and payable immediately, without further application. Payment must be made in one of the +following ways: + + (1) 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 + + (2) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-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 +Elliot Berman and Berman & Co. as a 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 John T. +Dugan, Associate Regional Director, Boston Regional Office, Securities and Exchange +Commission, 33 Arch Street, Boston, MA 02110. + + + + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3593.txt b/raw/aaer/2014/AAER-3593.txt new file mode 100644 index 0000000000000000000000000000000000000000..e0b4085c4155519a5e27ebd1f0b00163bf957e91 --- /dev/null +++ b/raw/aaer/2014/AAER-3593.txt @@ -0,0 +1,358 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73434 / October 27, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3593 / October 27, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16215 + + +In the Matter of + +GREAT LAKES DREDGE +& DOCK 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 AND A CIVIL +PENALTY + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Great Lakes Dredge & Dock Corporation +(“Great Lakes” or “the company” or “Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order 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 a Civil Penalty (“Order”), as set forth +below. + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. During the second and third quarters of 2012, Great Lakes overstated revenue in its +demolition segment. Specifically, the demolition segment recorded revenue for pending change +orders even though it did not have sufficient proof of customer acceptance of the pending change +orders. The company’s inadequate internal controls over revenue recognition with respect to +pending change orders on its demolition projects failed to prevent or detect these misstatements. + +2. The revenue overstatements were discovered during the year-end 2012 audit +process. A material weakness in the company’s system of internal control over financial reporting +failed to prevent or detect misstatements of the company’s financial statements for the quarterly +and year-to-date periods ended June 30, 2012, and September 30, 2012. Specifically, the +company’s controls failed to capture and analyze timely and consistently pending change orders in +its demolition segment, largely as a result of inadequate accounting policies and procedures, +inadequate training of segment personnel, and insufficient monitoring by corporate accounting +staff. + +3. In addition, by recognizing certain pending change order revenue in its demolition +segment without sufficient proof of customer acceptance, the company did not comply with its +accounting policies set forth in its annual Commission filings. Moreover, by overstating revenue +in its demolition segment, Great Lakes also materially overstated its net income for the second and +third quarters of 2012. Accordingly, Great Lakes violated Sections 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 12b-20 and 13a-13 thereunder, the reporting, books- +and-records, and internal controls provisions of the federal securities laws. + +Respondent + +4. Great Lakes Dredge & Dock Corporation is a Delaware corporation, headquartered +in Oak Brook, Illinois, that in 2012 operated in two reportable segments: a dredging segment with +both U.S. and foreign operations, which was responsible for 85% of the company’s revenues; and a +demolition segment with only U.S. operations, which was responsible for the remaining 15% of +revenues. +2 Great Lakes’s common stock is registered with the Commission pursuant to Section +12(b) of the Exchange Act and trades on NASDAQ (Ticker: GLDD). Great Lakes files periodic + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + +2 On April 23, 2014, Great Lakes sold its demolition subsidiary. + + 3 +reports, including Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the +Exchange Act and related rules thereunder. + +Facts + +Great Lakes’s Restatement + +5. On March 14, 2013, Great Lakes filed with the Commission a Form 8-K +announcing that it would restate its demolition segment revenues for the second and third quarters +of 2012. In addition, Great Lakes announced that it had identified a material weakness in its +internal control over financial reporting that failed to prevent or detect accounting errors in its +financial statements. The Form 8-K further stated that Great Lakes would file amended Forms 10- +Q for the quarters ended June 30 and September 30, 2012 and that the filing of its Form 10-K for +the year-ended December 31, 2012 would be delayed. According to the Form 8-K and the +amended filings, the company had recorded revenues from certain pending change orders in the +demolition segment where client acceptance had not been finalized. The revenue recognition was +inconsistent with Great Lakes’s accounting policy and also inconsistent with Generally Accepted +Accounting Principles (GAAP). + Great Lakes filed its Forms 10-Q/A for the restated quarters, as +well as its 2012 Form 10-K, on March 29, 2013. + +Great Lakes’s External Auditor Advised the Company in Prior Periods of Concerns Regarding Its +Accounting for Pending Change Orders + +6. During 2012 and earlier periods, a “pending change order” occurred when Great +Lakes’s demolition subsidiary performed additional work on a project outside the provisions of the +original contract and had not yet received a final written contract amendment approving the scope +and price of the work from the customer. Sometimes, the demolition subsidiary did not yet have +customer acceptance as to the amounts to be paid for the additional work. Great Lakes’s policy for +pending change orders was to immediately recognize the costs, but recognize the related revenue +(up to cost) when the recovery was probable and collectability was reasonably assured. Once the +scope and amount were formally documented in a written contract amendment, it became a +“change order,” and Great Lakes then recognized profit margin for the additional work. Pending +change orders in dispute or unapproved as to both scope and price left Great Lakes with a “claim” +for payment. Under Great Lakes’s accounting policy, revenue associated with a “claim” was not +recognized until such claim was settled. +3 + +3 Under GAAP, accounting for unpriced change orders “depends on their characteristics and the +circumstances in which they occur. For all unpriced change orders, recovery should be deemed probable if the +future event or events necessary for recovery are likely to occur. Some of the factors to consider in evaluating +whether recovery is probable are the customer’s written approval of the scope of the change order, separate +documentation for change order costs that are identifiable and reasonable, and the entit y’s favorable experience in +negotiating change orders, especially as it relates to the specific type of contract and change order being evaluated.” +(ASC 605-35-25-28.) Under GAAP, “change orders in dispute or unapproved as to both scope and price” are +treated as claims (ASC 605-35-25-30). Recognition of revenue relating to claims is permitted under GAAP only if +certain specific conditions are met. However a company may elect, as Great Lakes did, “a practice such as +recording revenues from claims only when the amounts have been received or awarded” (ASC 605-35-25-31). The + + 4 + +7. During the 2010 year-end audit, Great Lakes’s external auditor advised the Audit +Committee and management that it disagreed with the company’s accounting for certain pending +change orders in one demolition project because the pending change orders had not been prepared, +submitted to the customer, or approved. Although the revenue amounts were not material to the +company’s financial statements, the auditor determined that the issue represented a “significant +deficiency” in the company’s internal controls. +4 During the 2011 year-end audit, Great Lakes’s +auditor advised the company that it disagreed with the company’s accounting for certain pending +change orders for a different demolition project, because the pending change orders had not been +submitted to the customer and there was inadequate documentation of customer acceptance. These +revenue amounts were not material to the company’s 2011 financial statements. The auditor also +determined that, as a result of improved internal controls by the company during 2011, the +company had “partially remediated” the “significant deficiency” to a “deficiency” and notified the +Audit Committee and management. + +8. During the 2011 year-end audit, members of the audit team, including the audit +partner, met with Great Lakes’s CFO, the demolition subsidiary president, and one other employee +to discuss the appropriate level of documentation of pending change orders. At the end of the first +quarter of 2012, the audit firm again advised the company about adequate documentation of its +pending change orders. The audit firm further advised, and the company understood, that for +purposes of the year-end audit it would need to have documentation persuasively supporting the +pending change orders. The company’s corporate controller also advised in an e-mail at the +conclusion of the first quarter of 2012 to demolition subsidiary management and the assistant +corporate controller that “we need to continue improving on the quality of evidence” regarding +pending change orders. +5 During the second and third quarters of 2012, demolition subsidiary +personnel gathered evidence supporting pending change orders and provided the evidence to the +audit firm as part of the auditor’s quarterly reviews of Great Lakes’s interim financial statements. + +Discovery of the Misstatements + +9. During the year-end 2012 audit process, an audit confirmation letter was sent to the +customer for the large demolition project that related to the auditor’s 2011 finding of a deficiency +in the company’s internal controls. The confirmation letter response from the customer showed an +approved contract value materially smaller than the amount of revenue Great Lakes had recorded +for the project. + +company’s policy regarding claims, as stated in its Form 10-K for the year ended December 31, 2011, was that, +“Claims for additional compensation due to the Company are not recognized in contract revenues until such claims +are settled.” + +4 Rule 1-02(a)(4) of Regulation S-X defines a “significant deficiency” as a deficiency or combination of +deficiencies in internal control over financial reporting that is less severe than a material weakness, yet important +enough to merit attention by those responsible for oversight of the company’s financial reporting. + +5 The corporate controller left the company in the second quarter of 2012, however, and was not replaced +until December 2012. + 5 + +10. Most of the difference in the contract value was due to several pending change +orders recorded as revenue by Great Lakes during fiscal year 2012. Given the circumstances, +including the existence of certain disputes between the demolition subsidiary and the customer, +Great Lakes did not have sufficient proof of customer acceptance of the specific pending change +orders at issue to support the conclusion that recovery was probable and collectability was +reasonably assured. Therefore, Great Lakes had improperly recorded revenues for those pending +change orders. + +Great Lakes’s Inadequate Internal Controls + +11. A material weakness in Great Lakes’s internal control over financial reporting +failed to prevent or detect the material misstatements. Great Lakes did not have a written +accounting policies and procedures manual during 2012. Moreover, there was inadequate training +of demolition personnel as to the evaluation of pending change orders. In practice, Great Lakes’s +accounting for demolition projects relied heavily on the judgments of a small group of people at +the demolition subsidiary. Finally, formal review of these judgments by accountants at Great +Lakes was insufficient. + +12. At each quarter end during 2012, the determination as to whether revenue should be +recognized on a demolition subsidiary pending change order was made by the subsidiary’s +controller, in consultation with the project manager and the subsidiary’s president and with some +involvement by corporate accounting staff. One of the main factors considered was whether, in the +project manager’s opinion, the revenue was reasonably assured of collection. During the second +and third quarters of 2012, the conclusion to recognize revenue on the pending change orders at +issue was based in part on the project manager’s assurance of customer acceptance of the scope +and of collectability of the pending change order without adequate confirming written +documentation from the customer. + +13. The company had no written policies on how to handle negative change orders at +the demolition subsidiary. +6 On the large demolition project, the project manager received +numerous negative change orders from the customer. The project manager made the +determination, without consulting with any senior manager or accounting personnel, that certain of +the negative change orders from the customer were without merit and should not be recognized in +the accounting records or in the overall project estimate. Neither Great Lakes management nor the +auditor was aware of the existence of certain negative change orders until the year-end 2012 audit +process. + + +6 Negative change orders are not uncommon in the construction industry and represent circumstances where +the general contractor may perform work or provide equipment originally included in the scope of the +subcontractor’s contract or where the general contractor believes it is necessary to correct sub-quality work +performed by the subcontractor. In such circumstances, the general contractor would issue negative change orders +which would reduce the contract value and, thereby, the expected revenue to the subcontr actor. + + 6 +Great Lakes’s Restated Q2 and Q3 2012 Financial Statements + +14. As a result of these errors, Great Lakes restated its second and third quarter 2012 +financial statements. For the second quarter 2012, the company had overstated net income by +approximately $3.2 million or 266% (reducing net income from $4.4 million to $1.2 million), and +had overstated revenue in its demolition segment by approximately $3.9 million or 2.1% +(reported company revenue decreased from $166.5 million to $163.1 million).7 For the third +quarter, the company had understated net loss by $3.2 million or 60% (increasing its net loss for +the quarter from -$2.1 million to -$5.3 million), and overstated revenue in its demolition segment +by $4.3 million or 2.6% (reported company revenue decreased from $166.8 million to $162.5 +million). For the Q2 and Q3 restatements, $3.3 million and $2.8 million, respectively, of +overstated revenues in the demolition segment was from the single, large project, including more +than $468,000 for unrecorded negative change orders. The remainder of the restated revenue +came from three other projects in Q2 and six other projects in Q3, the largest of which was an +error of a little over $500,000. + +Great Lakes’s Remediation Plan + +15. Upon discovering the accounting errors, the company began investigating the +causes. As a result of its investigations, Great Lakes presented, in its year-end 2012 Form 10-K, a +proposed remediation plan to address the material weakness in its internal control over financial +reporting. The remediation plan had five elements: 1) review of the demolition subsidiary +management and resources; 2) direct reporting of the demolition subsidiary finance team to +corporate finance, instead of demolition subsidiary management; 3) more accounting resources at +corporate level; 4) evaluation of information technology resources; and 5) additional accounting +training for the demolition subsidiary and corporate finance personnel. The auditor concurred with +the remediation plan. Among the specific changes made were: 1) hiring a new demolition +subsidiary controller; 2) providing additional IT resources for the accounting function; and 3) +hiring additional accounting staff at the corporate level. In its audit report on the internal control +over financial reporting of Great Lakes as of December 31, 2013, the auditor concluded that the +company maintained, in all material respects, effective internal control over financial reporting. +Ultimately, Great Lakes sold the demolition subsidiary in April 2014. + +Violations + +16. Under Section 21C of the Exchange Act, the Commission may impose a cease-and- +desist order upon any person who is violating, has violated, or is about to violate any provision of +the Act and upon any other person that is, was, or would be a cause of the violation, due to an act +or omission the person knew or should have known would contribute to such violation. +17. Section 13(a) of the Exchange Act requires issuers to file such periodic and other +reports as the Commission may prescribe and in conformity with such rules as the Commission may + +7 A portion of the revenue changes came from other adjustments made by Great Lakes for +the two quarters. + 7 +promulgate. Exchange Act Rule 13a-13 requires the filing of quarterly reports. In addition to the +information expressly required to be included in such reports, Rule 12b-20 of the Exchange Act +requires issuers to add such further material information, if any, as may be necessary to make the +required statements, in light of the circumstances under which they are made, not misleading. “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, Inc., 587 F.2d 1149, +1165 (D.C. Cir. 1978) (citing SEC v. IMC Int’l, 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). +18. Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep books, +records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer.” Section 13(b)(2)(B) of the Exchange Act requires issuers to +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that transactions are recorded as necessary to permit the preparation of financial +statements in conformity with GAAP. +19. By engaging in the conduct above, Great Lakes violated Section 13(a) of the +Exchange Act and Rules 12b-20 and 13a-13 thereunder, and Sections 13(b)(2)(A) and 13(b)(2)(B) +of the Exchange Act. + +Cooperation and Remediation + +20. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Great Lakes and the substantial cooperation provided by the company in connection +with the Commission’s investigation. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Great Lakes’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Great Lakes 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 and 13a-13 thereunder. + +B. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $150,000 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must +be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + + 8 +(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 +Great Lakes 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 20549-5720. + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3594.txt b/raw/aaer/2014/AAER-3594.txt new file mode 100644 index 0000000000000000000000000000000000000000..ac6ec91a5a878ab07825cd90dc99b606ea655ed3 --- /dev/null +++ b/raw/aaer/2014/AAER-3594.txt @@ -0,0 +1,480 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73496 / November 3, 2014 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3594 / November 3, 2014 +ADMINISTRATIVE PROCEEDING +File No. 3-16231 + +In the Matter of +BIO-RAD LABORATORIES, +INC., +Respondent. +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A +CEASE­AND-DESIST ORDER + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease­and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”), against Bio-Rad Laboratories, Inc. (“Bio- +Rad” 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 the Respondent 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. These proceedings arise from violations of the Foreign Corrupt Practices Act of +1977 (the “FCPA”) [15 U.S.C. § 78dd] by Bio-Rad Laboratories, Inc. (“Bio-Rad”) concerning +medical diagnostic and life science equipment sales to government customers in Russia, +Vietnam, and Thailand. +2. From approximately 2005 to 2010, subsidiaries of Bio-Rad made unlawful +payments in Vietnam and Thailand to obtain or retain business. During the same period, Bio- +Rad’s subsidiary paid certain Russian third parties, disregarding the high probability that at least +some of the money would be used to make unlawful payments to government officials in Russia. +With respect to Russia, one of Bio-Rad’s foreign subsidiaries paid three off-shore agents (the +“Russian Agents”) for alleged services in connection with sales of its medical diagnostic and life +science equipment to government agencies. These agents were not legitimate businesses, and +despite receiving large commissions, they did not provide the contracted-for services. In paying +these agents, Bio-Rad’s foreign subsidiary demonstrated a conscious disregard for the high +probability that the Russian Agents were using at least a portion of the commissions to pay +foreign officials to obtain profitable government contracts. The General Manager (“GM”) of +Bio-Rad’s Emerging Markets sub-division and the Emerging Markets Controller, both +employees of the parent company (collectively, “the Emerging Markets managers”) ignored red +flags, which permitted the scheme to continue for years. In Vietnam and Thailand, Bio-Rad’s +foreign subsidiaries used agents and distributors to funnel money to government officials. In +total, Bio-Rad made $35.1 million in illicit profits from these improper payments. +3. In violation of Bio-Rad’s policies, Bio-Rad’s foreign subsidiaries did not record +the payments in their own books in a manner that would accurately or fairly reflect the +transactions. Instead they booked them as commissions, advertising, and training fees. These +subsidiaries’ books were consolidated into the parent company’s books and records. During the +relevant period, Bio-Rad also failed to devise and maintain adequate internal accounting +controls. +Respondent +4. Bio-Rad Laboratories, Inc. (“Bio-Rad”) is a corporation organized under the +laws of the state of Delaware. Bio-Rad’s corporate headquarters is Hercules, California. Bio- +Rad issues and maintains a class of publicly traded securities registered pursuant to Section 12(b) +of the Securities Exchange Act of 1934, which are traded on the New York Stock Exchange. + +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 and Persons +5. Bio-Rad SNC is an indirect wholly-owned subsidiary of Bio-Rad headquartered +in Marnes-La-Coquette, France. Bio-Rad SNC manufactures, sells, and distributes Bio-Rad +products. During the relevant time period, Bio-Rad SNC manufactured the products sold to the +Russian government, contracted with the off-shore agents in Russia, and paid their sales +commissions. Bio-Rad SNC’s books, records, and financial accounts are consolidated into Bio- +Rad’s books and records and reported by Bio-Rad in its financial statements. +6. Bio-Rad Laboratorii OOO (“Bio-Rad Russia”) is a wholly-owned subsidiary of +Bio-Rad located in Moscow, Russia. Bio-Rad Russia’s books, records, and financial accounts +are consolidated into Bio-Rad’s books and records and reported by Bio-Rad in its financial +statements. +7. Agents A, B, and C (collectively, the “Russian Agents”) were incorporated in the +United Kingdom, Belize, and Panama, respectively. They contracted with Bio-Rad SNC to +assist Bio-Rad Russia in the sale of Bio-Rad products to the Russian government. +8. Bio-Rad Laboratories (Singapore) Pte. Limited (“Bio-Rad Singapore”) is +Bio­Rad’s wholly-owned subsidiary, located in Singapore. Bio-Rad Singapore’s books, records, +and financial accounts are consolidated into Bio-Rad’s books and records and reported by Bio- +Rad in its financial statements. +9. Diamed South East Asia Ltd. (“Diamed Thailand”) was a 49%-owned +subsidiary of Diamed AG (Switzerland) that was acquired by Bio-Rad in October 2007. Local +majority owners ran Diamed Thailand’s operations until 2011, when Bio-Rad bought out their +interest in the company. Diamed Thailand’s financial statements are consolidated into those of +Bio-Rad. +Background +10. Bio-Rad is a life science research and clinical diagnostics company that operates +in two industry segments, Life Science and Clinical Diagnostics, in the United States and +internationally. Bio-Rad’s Clinical Diagnostics segment, which designs, manufactures and sells +diagnostic testing kits and systems to clinical laboratories and hospitals, accounts for the +majority of Bio-Rad’s net sales, and almost the entirety of the unlawful payments at issue in this +Order. +11. Bio-Rad’s international sales organization (“ISO”) oversees the company’s +international sales operations; this includes all locations outside the United States and Canada. +In 2009, the ISO consisted of four sub-divisions: (1) Western Europe; (2) Asia Pacific; (3) +Japan; and (4) Emerging Markets. Each sub-division had a general manager, reporting to the +vice-president of ISO. The Asia Pacific sub-division included Vietnam and Thailand. The +Emerging Markets sub-division included Russia and other eastern European countries. Some +countries within the sub-divisions had a country manager who reported to the ISO sub-division +general manager. + +4 + +12. Bio-Rad’s total consolidated net income for the year ended December 31, 2013 +was $77.8 million, with gross revenues of $2.1 billion. +Unlawful Payments in Russia +13. From 2005 to the beginning of 2010, a substantial portion of Bio-Rad Russia’s +business consisted of sales of clinical diagnostic products to the Russian government. Those +sales arose from government contracts awarded to Bio-Rad Russia through a public tender offer +process that required approval from various government officials. Bio-Rad Russia’s largest +contracts with the Russian government were national contracts awarded by the Russian Ministry +of Health for the sale of HIV testing equipment and blood bank equipment. The clinical +diagnostic products sold to the Russian government were manufactured by Bio-Rad SNC, which +in many instances also sold them directly to the Russian government due to certain complexities +with Russian regulations and tax laws. Those sales were recorded on Bio-Rad SNC’s financial +records. Other sales made by Bio-Rad Russia were recorded in the first instance on Bio-Rad +Russia’s financial books. +14. During the relevant time period, Bio-Rad Russia had a country manager, who +reported to the GM of Emerging Markets. From 2005 to 2006, the Emerging Markets GM, along +with the Emerging Markets’ Controller, worked out of Bio-Rad SNC’s offices. After that, they +worked out of Bio-Rad’s corporate offices in the United States. +The Unlawful Payments Scheme +15. From at least 2005 to the beginning of 2010, Bio-Rad SNC paid the Russian +Agents commissions of 15%-30% while demonstrating a conscious disregard for the high +probability that the Russian Agents were passing along at least a portion of their commissions to +Russian government officials to obtain profitable public contracts for the sale of medical +diagnostic equipment. The scheme began prior to 2005, orchestrated by the then country +manager, who used the Russian Agents, primarily for their influence in connection with the +tenders for the government contracts. The Russian Agents were foreign entities with bank +accounts in Latvia and Lithuania, all affiliated with the same individual. The Russian Agents +entered into agreements to provide various services to Bio-Rad Russia including acquiring new +business, creating and disseminating promotional materials to prospective customers, distributing +and installing products and related equipment, and training customers. The Russian Agents, +however, had no offices in Russia, no employees, and therefore, likely no capability to perform +the services outlined in their contracts. One of the Russian Agents even used a phony office +address in Moscow that was actually the office address for a Russian government building. +16. After the country manager died in or about 2007, his successor continued to make +payments to the Russian Agents. He knew from discussions with colleagues in the Russian +health care industry that the Russian Agents’ principal had important contacts at the Russian +Ministry of Health, and could influence the tender offer specifications and selection process. He +performed no additional due diligence on the Russian Agents prior to signing subsequent +agreements with them. Some documents suggest that the Russian Agents may have performed +distribution services in connection with a few of the contracts. The new country manager +estimated in an email to the Emerging Markets GM that Bio-Rad’s distribution costs ranged + +5 + +between 2%-2.5% in one instance. However, Bio-Rad SNC paid the Agents commissions of +15%-30%. +17. Both Russian country managers made extensive efforts to conceal matters relating +to the Russian Agents. For example, no one other than the Russian country managers +communicated with the Russian Agents and the country managers maintained no records of the +Russian Agents. The new country manager used at least ten different personal email addresses +with aliases when communicating about the Russian Agents with the Emerging Markets +managers. He also used code words like “bad debts” when referring to the Russian Agents’ +commissions. The Russian country managers knew or disregarded the high probability that the +Russian Agents were using at least a portion of the sales commission payments to bribe Russian +government officials in exchange for awarding the company profitable government contracts. +18. The Russian Agents received a total of $4.6 million on sales of $38.6 million. +These unlawful payments were made by Bio-Rad SNC and recorded as commission payments on +its books. These payments continued unabated until the beginning of 2010 when Bio-Rad Russia +terminated the services of the Russian Agents. Immediately after that, Bio-Rad Russia lost its +first government contract in Russia. +The Red Flags +19. Throughout the relevant time period, the Emerging Markets managers, who were +employees of Bio-Rad, ignored repeated red flags regarding the high probability that the Russian +Agents were making improper payments to government officials to win public tender offers for +government contracts on behalf of Bio-Rad Russia. Specifically, they knew that the Russian +Agents were foreign companies and that the Agents did not have the resources to perform the +contracted-for services. They also knew that their commissions were excessive and were paid to +banks in Latvia and Lithuania. Additionally, they condoned the secrecy surrounding the Russian +Agents, and even encouraged it. For example, the Emerging Markets Controller sent an email to +a lower-level Bio-Rad SNC employee instructing her to “talk with codes” when communicating +about the Russian Agents’ invoices. +20. Furthermore, the Emerging Markets managers knew that the Russian country +manager often requested approval for the Russian Agents’ commissions in installments of less +than $200,000. These managers should have recognized that this was an attempt to bypass an +additional approval tier by Bio-Rad’s corporate controller, as required by Bio-Rad’s internal +controls. Additionally, the Russian country manager sometimes requested payments to the +Russian Agents even before Bio-Rad Russia had collected on the underlying sales contracts. The +Emerging Markets managers should have known that pre-paying the commission was not +normal, and it suggested the possibility of a bribe payment. The practice also violated the +express terms of the Russian Agents’ contracts. +21. The Emerging Markets managers also knew that many of the contracted-for +services were not necessary to Bio-Rad Russia’s business with the Russian government. Many +of the clinical diagnostic products required limited installation or training; additionally, Bio-Rad +Russia used a separate distributor for several of the same government contracts during the +relevant time period, thereby obviating the need for an additional distributor. Finally, the + +6 + +Emerging Markets managers knew that some of the Russian Agents’ invoices were generated +internally at Bio-Rad Russia. +22. Despite the red flags, which surfaced repeatedly over five years, the Emerging +Markets managers approved all of the payments to the Russian Agents. They also reviewed, +negotiated, and approved the Russian Agents’ contracts. +Other Internal Controls Deficiencies +23. In many instances where the corporate controller’s approval was needed for +payments of over $200,000 to the Russian Agents, the Emerging Markets controller merely sent +an email request for the payment to be approved, without supplying the underlying contracts and +invoices. Nevertheless, the corporate controller approved payments to the Russian Agents, +relying solely on the Emerging Markets controller’s prior review of the supporting documents. +24. The Emerging Markets GM instructed Bio-Rad Russia’s country manager to sign +the consulting agreements with the Russian Agents on behalf of Bio-Rad SNC. He did this in +direct violation of the internal policies and procedures that required Bio-Rad SNC’s GM to sign +such agreements or, alternatively, to grant a power of attorney to the Bio-Rad senior manager to +sign them. +25. The same Emerging Markets GM failed to provide Bio-Rad SNC’s legal and +finance departments with translated copies of the agreements with the Russian Agents in +violation of Bio-Rad’s internal policies and procedures. Nevertheless, for five years Bio-Rad’s +finance department approved the Russian Agents’ sales commission payments. +26. From 2005 to the beginning of 2010, the Emerging Markets managers signed and +submitted sub-certifications to Bio-Rad’s chief financial officer attesting that Bio-Rad Russia’s +balance sheets and income statements were fairly presented in conformity with U.S. GAAP. The +sub-certifications also stated that these managers were responsible for establishing and +maintaining Bio-Rad Russia’s internal controls, which the documents described as “adequate” +and “functioning as needed.” +Facts in Vietnam +27. From at least 2005 to the end of 2009, Bio-Rad maintained a sales representative +office in Vietnam. A country manager supervised the Vietnam Office’s sales activities, and was +authorized to approve contracts up to $100,000 and sales commissions up to $20,000. Vietnam’s +country manager reported to Bio-Rad Singapore’s Southeast Asia regional sales manager +(“RSM”), who in turn reported to the Asia Pacific GM. +28. From 2005 through 2009, the country manager of the Vietnam office authorized +the payment of bribes to government officials to obtain their business. At the direction of the +country manager, the sales representatives made cash payments to officials at government-owned +hospitals and laboratories in exchange for their agreement to buy Bio-Rad’s products. +29. In 2006, the RSM first learned of this practice from a finance employee. She +raised concerns about it to the Vietnam Office’s country manager, who informed her that paying + +7 + +bribes was a customary practice in Vietnam. On or about May 18, 2006, the Vietnamese country +manager wrote in an email to the RSM and the Bio-Rad Singapore finance employee that paying +third party fees “[wa]s outlawed in the Bio-Rad Business Ethics Policy,” but that Bio-Rad would +lose 80% of its Vietnam sales without continuing the practice. In that same email, the country +manager proposed a solution that entailed employing a middleman to pay the bribes to +Vietnamese government officials as a means of insulating Bio-Rad from liability. Under the +proposed scheme, Bio-Rad Singapore would sell Bio-Rad products to a Vietnamese distributor at +a deep discount, which the distributor would then resell to government customers at full price, +and pass through a portion of it as bribes. +30. The RSM and the Asia Pacific GM were aware of and allowed the payments to +continue. Between 2005 and the end of 2009, the Vietnam office made improper payments of +$2.2 million to agents or distributors, which was funneled to Vietnamese government officials. +These bribes, recorded as “commissions,” “advertising fees,” and “training fees,” generated +gross sales revenues of $23.7 million to Bio-Rad Singapore. The payment scheme did not +involve the use of interstate commerce, and no United States national was involved in the +misconduct. +Facts in Thailand +31. Bio-Rad acquired a 49% interest in Diamed Thailand as part of its acquisition of +Diamed AG (Switzerland) in October 2007. Bio-Rad performed very little due diligence on +Diamed Thailand prior to the acquisition. +32. Diamed Thailand’s local majority owners managed the subsidiary. Bio-Rad’s +Asia Pacific GM was responsible for working and communicating with Diamed Thailand’s +majority owners and distributors. +33. Prior to the October 2007 acquisition, Diamed Thailand had an established +bribery scheme, whereby Diamed Thailand used a Thai agent to sell diagnostic products to +government customers. The agent received an inflated 13% commission, of which it retained +4%, and paid 9% to Thai government officials in exchange for profitable business contracts. +34. The scheme continued even after Bio-Rad acquired Diamed Thailand. Diamed +Thailand renewed the contract with the distributor in June 2008, but unbeknownst to Bio-Rad, +the distributor was partially owned by one of Diamed Thailand’s local Thai owners. +35. Bio-Rad’s Asia Pacific GM learned of Diamed Thailand’s bribery scheme while +attending a distributor’s conference in Bangkok in March 2008. At the conference, Diamed +Thailand’s local manager informed him that some of Diamed Thailand’s customers received +payments, which the Asia Pacific GM understood to mean kickbacks. The Asia Pacific GM +instructed Bio-Rad Singapore’s controller to investigate the matter. The controller confirmed to +the Asia Pacific GM that Diamed Thailand was bribing government officials through the +distributor. Despite these findings, the Asia Pacific GM did not instruct Diamed Thailand to stop +making the improper payments to the distributor. +36. From 2007 to early 2010, Diamed Thailand improperly paid a total of $708,608 to +the distributor, generating gross sales revenues of $5.5 million to Diamed Thailand. These + +8 + +payments were recorded as sales commissions. The payment scheme did not involve the use of +interstate commerce, and no United States national was involved in the misconduct. +Legal Standards and Violations +A. Under Section 21C(a) of the Exchange Act, the Commission may impose a +cease­and-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. +FCPA Violations +B. Under Section 30A(a) of the Exchange Act it is unlawful for any issuer, officer, +director, employee, or agent of such issuer or any stockholder thereof acting on behalf of the +issuer, 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, promise to give, or authorization of the giving of anything of value to any +foreign official or any person, while knowing that all or a portion of such money or thing of +value will be offered, given, or promised, directly or indirectly, to any foreign official for the +purposes of (i) influencing any act or decision of such foreign official in his official capacity, (ii) +inducing such foreign official to do or omit to do any act in violation of the lawful duty of such +official, or (iii) securing any improper advantage in order to assist such issuer in obtaining or +retaining business for or with, or directing business to, any person. [15 U.S.C. § 78dd-1]. +C. Additionally, under Section 30A(f)(2), a “knowing” state of mind as to a +circumstance may be established “if a person is aware of a high probability of the existence of +such circumstance, unless the person actually believes that such circumstance does not exist.” +D. As described above, Bio-Rad violated Section 30A of the Exchange Act because +Bio-Rad’s Emerging Markets managers demonstrated a conscious disregard for the high +probability that the Russian Agents were using at least a portion of Bio-Rad Russia’s sales +commission payments to bribe Russian government officials in exchange for awarding the +company profitable government contracts. These managers knew the Russian Agents operated +as mere shell entities. They also knew that, among other things, the commissions were large, and +that the Russian Agents did not have the resources to perform any of the contracted-for services +set forth in their agreements. Nevertheless, the managers approved all of their agreements, and +authorized $4.6 million in payments to the Russian Agents’ off-shore accounts even though +many of the payment requests and invoices raised substantial questions as to their legitimacy. +Finally, the same Emerging Markets managers communicated about the Russian Agents under +cover of secrecy, which further calls in question their legitimacy. These red flags surfaced +repeatedly over a five year period. +E. Under Section 13(b)(2)(A) of the Exchange Act issuers are required 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)]. + +9 + +F. As described above, Bio-Rad violated Section 13(b)(2)(A) of the Exchange Act. +Its subsidiaries falsely recorded the payments to the agents/distributors as payments for +legitimate services or commissions, when the true purpose of these payments was to make +corrupt payments to government officials to obtain business. The false entries were then +consolidated and reported by Bio-Rad in its consolidated financial statements. +G. Under Section 13(b)(2)(B) of the Exchange Act issuers are required to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +(i) transactions are executed in accordance with management’s general or specific authorization; +(ii) transactions are recorded as necessary (I) to permit 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)]. +H. Bio-Rad violated Section 13(b)(2)(B) because although it had an ethics policy +prohibiting the payment of bribes and various policies and procedures requiring accurate books +and records, its systems of internal controls proved insufficient to provide reasonable assurances +that such payments would be detected and prevented. +Bio-Rad’s Self-Disclosure, Cooperation, and Remedial Efforts +I. Bio-Rad made an initial voluntary self-disclosure of potential FCPA violations to +the Commission staff and the Department of Justice in May 2010, and immediately thereafter +Bio-Rad’s audit committee retained independent counsel to conduct an investigation of the +alleged violations. The audit committee conducted a thorough internal investigation, and +subsequently expanded it voluntarily to cover a large number of additional potentially high-risk +countries. The investigation included over 100 in-person interviews, the collection of millions of +documents, the production of tens of thousands of documents, and forensic auditing. Bio-Rad’s +cooperation was extensive, including voluntarily producing documents from overseas, +summarizing its findings, translating numerous key documents, producing witnesses from +foreign jurisdictions, providing timely reports on witness interviews, and making employees +available to the Commission staff to interview. +J. Bio-Rad also undertook significant and extensive remedial actions including: +terminating problematic practices; terminating Bio-Rad employees who were involved in the +misconduct; comprehensively re-evaluating and supplementing its anti­corruption policies and +procedures on a world-wide basis, including its relationship with intermediaries; enhancing its +internal controls and compliance functions; developing and implementing FCPA compliance +procedures, including the further development and implementation of policies and procedures +such as the due diligence and contracting procedure for intermediaries and policies concerning +hospitality, entertainment, travel, and other business courtesies; and conducting extensive +anti­corruption training throughout the organization world-wide. + +10 + +Criminal Disposition +K. Bio-Rad has agreed, with the United States Department of Justice, Criminal +Division, Fraud Section, to enter into a Non-Prosecution Agreement to resolve potential criminal +liability for conduct relating to certain of the findings in the Order. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Bio-Rad’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent Bio-Rad cease and +desist from committing or causing any violations and any future violations of Sections 30A, +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act; +B. Respondent shall pay, within 10 days of the entry of this Order, disgorgement of +$35,100,000 and prejudgment interest of $5,600,000 to the Securities and Exchange +Commission. If timely payment of disgorgement 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 +Bio-Rad Laboratories, 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 Alka N. Patel, +Assistant Regional Director, Division of Enforcement, Securities and Exchange Commission, +5670 Wilshire Boulevard, Eleventh Floor, Los Angeles, CA 90036. +C. Respondent shall report to the Commission staff periodically, at no less than +twelve-month intervals during a two-year term, the status of its remediation and implementation +of compliance measures. Should Respondent discover credible evidence, not already reported to + +11 + +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 promptly report such conduct to +the Commission staff. During this two-year period, Respondent shall: (1) conduct an initial +review and submit an initial report, and (2) conduct and prepare at least one (1) follow-up review +and report, as described below: +(1) Respondent shall submit to the Commission staff a written report within +one (1) year 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 anti-corruption laws, and the parameters of +the subsequent reviews (the “Initial Report”). The Initial Report shall be +transmitted to Alka N. Patel, Assistant Director, Division of Enforcement, +United States Securities and Exchange Commission, 5670 Wilshire Blvd., +11th floor, Los Angeles, CA 90036. Respondent may extend the time +period for issuance of the Initial Report with prior written approval of the +Commission staff. +(2) Respondent shall undertake at least one (1) follow-up review, +incorporating any comments provided by the Commission staff on the +previous report, to further monitor and assess whether the policies and +procedures of Respondent are reasonably designed to detect and prevent +violations of the FCPA and other applicable anti-corruption laws (the +“Follow-up Report”). +(3) The Follow-up Report shall be completed by no later than one (1) year +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. +(4) Respondent’s reporting obligations pursuant to the Order, and its +concurrent reporting obligations pursuant to the resolutions of certain of +its subsidiaries with the U.S. Department of Justice, shall each be satisfied +by the simultaneous submission of the same reports to both the +Commission staff and the Department of Justice. +(5) 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 or +undermine the objectives of the reporting requirement. For these reasons, +among others, the reports and the contents thereof are intended to remain +and shall remain non-public, except (1) pursuant to court order, (2) as +agreed by the parties in writing, (3) to the extent that the Commission staff + +12 + +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. + +By the Commission. + + +Brent J. Fields +Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3595.pdf b/raw/aaer/2014/AAER-3595.pdf new file mode 100644 index 0000000000000000000000000000000000000000..ac269c0d6935146bfe1d9b9d3b60d0e1e0e1d0ea Binary files /dev/null and b/raw/aaer/2014/AAER-3595.pdf differ diff --git a/raw/aaer/2014/AAER-3595.txt b/raw/aaer/2014/AAER-3595.txt new file mode 100644 index 0000000000000000000000000000000000000000..8cdd408f38818c7800a76fb7478b0187b4db5f36 --- /dev/null +++ b/raw/aaer/2014/AAER-3595.txt @@ -0,0 +1,103 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73532 / November 5, 2014 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3595 / November 5, 2014 +ADMINISTRATIVE PROCEEDING +File No. 3-13226 + +In the Matter of +David Blain, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT + +On September 19, 2008, David Blain, CPA (“Blain”) was denied the privilege of +appearing or practicing as an accountant before the Commission as a result of settled public +administrative proceedings instituted by the Commission against Blain pursuant to Rule +102(e)(1)(iii) of the Commission's Rules of Practice.1 This order is issued in response to Blain’s +application for reinstatement to practice before the Commission as an accountant. + +In May 2007, The BISYS Group, Inc. (“BISYS”) was the subject of a settled +Commission enforcement action charging BISYS with violations of the financial reporting, +books-and-records, and internal control provisions of the Securities Exchange Act of 1934 +(“Exchange Act”). In the September 19, 2008 order the Commission found that from at least +July 2000 until at least March 2002, while serving as a director of finance of the Insurance +Services division of BISYS, Blain participated in a variety of improper accounting practices that +had the purpose and effect of materially overstating BISYS’s income and revenue in the +company’s reported financial results and rendering its books and records inaccurate. By virtue +of this conduct, Blain willfully aided and abetted, and was a cause of, BISYS’s violations of +Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1 and +13a-13 thereunder. + +Blain has met all of the conditions set forth in the original order and, in his capacity as an +independent accountant, has stated that he will comply with all requirements of the Commission + +1 See Accounting and Auditing Enforcement Release No. 2882 dated September 19, 2008. Blain was permitted, +pursuant to the order, to apply for reinstatement after one year upon making certain showings. +and the Public Company Accounting Oversight Board, including, but not limited to all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. In his capacity as a preparer or reviewer, or as a person responsible for the +preparation or review, of financial statements of a public company to be filed with the +Commission, Blain 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. + +Blain is currently subject to probation under the Pennsylvania State Board of +Accountancy. Failure to abide by the terms of his probation could result in the suspension of +Blain’s CPA license. Blain has attested that he will notify the Commission if he is found to have +violated the terms of the probation. He also has attested that he understands that the suspension +of his CPA license could result in the revocation of the reinstatement of his privilege to appear or +practice before the Commission as an accountant. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + + On the basis of the information supplied, representations made, and undertakings agreed +to by Blain, it appears that he has complied with the terms of the September 19, 2008 order +denying him the privilege of appearing or practicing before the Commission as an accountant, +that no information has come to the attention of the Commission relating to his character, +integrity, professional conduct or qualifications to practice before the Commission that would be +a basis for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of +Practice, and that Blain, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, and that Blain, by undertaking to comply +with all requirements of the Commission and the Public Company Accounting Oversight Board, +including, but not limited to, all requirements relating to registration, inspections, concurring +partner reviews and quality control standards, in his practice before the Commission as an +independent accountant has shown good cause for reinstatement. Therefore, it is accordingly, + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this section may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a +hearing; however, the suspension or disqualification shall continue unless and until the applicant has been reinstated +by the Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission's Rules of Practice that +David Blain, CPA is hereby reinstated to appear and practice before the Commission as an +accountant. + +By the Commission. + + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3596.pdf b/raw/aaer/2014/AAER-3596.pdf new file mode 100644 index 0000000000000000000000000000000000000000..48731ede350fe46ae2e07d277eefd6da3c12d477 Binary files /dev/null and b/raw/aaer/2014/AAER-3596.pdf differ diff --git a/raw/aaer/2014/AAER-3596.txt b/raw/aaer/2014/AAER-3596.txt new file mode 100644 index 0000000000000000000000000000000000000000..3a346a911a35e9998493235e0a9ce90d3af5d5c2 --- /dev/null +++ b/raw/aaer/2014/AAER-3596.txt @@ -0,0 +1,136 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73582 / November 12, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3596 / November 12, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16270 + + : +In the Matter of : ORDER INSTITUTING CEASE-AND- + : DESIST PROCEEDINGS PURSUANT TO + DR. L.S. SMITH, : SECTION 21C OF THE SECURITIES + : EXCHANGE ACT OF 1934, MAKING + Respondent. : 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 Dr. L.S. Smith (“Smith” 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. + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +A. Summary + + This case arises out of financial reporting, books and records, and internal controls +violations by DGSE Companies Inc. (“DGSE”) and its former Chief Financial Officer, I. John +Benson (“Benson”), that occurred during Smith’s tenure as DGSE’s Chief Executive Officer. These +violations led to a number of accounting misstatements in DGSE’s publicly -filed annual and +quarterly reports, which were caused by fraudulent accounting entries made or directed by Benson. +As a result, DGSE was required to restate its financial statements. The Commission does not allege +that Smith participated in the wrongful conduct. Smith has not, however, reimbursed DGSE for +incentive compensation and stock sale profits he received during the relevant period, as required by +Section 304(a) of the Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”). + +B. Respondent + +1. Smith, age 67, was the Chairman of the Board of Directors and Chief Executive +Officer of DGSE from 1980 until 2011. + +C. Other Relevant Entity + +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 +Exchange Act and is traded on the NYSE MKT under the symbol “DGSE.” + +D. Facts + +3. On June 2, 2014, final judgments were entered against DGSE and Benson 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. + +4. The judgments were based on significant accounting irregularities that occurred at +DGSE between 2009 and 2011. The accounting irregularities were caused by fraudulent +accounting entries made or directed by Benson, which materially overstated inventory and went +undetected as a result of DGSE’s failure to maintain appropriate accounting systems, policies, +procedures, and controls. As a result, DGSE filed Forms 10-Q and 10-K for the fiscal years 2009 +and 2010 that were in material non-compliance with its financial reporting requirements under the +federal securities laws. + +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. Due to DGSE’s material non-compliance with its financial reporting requirements +under the federal securities laws, and as a result of its misconduct that improperly inflated +DGSE’s inventory accounts, DGSE restated its financial statements for the fiscal years ended +2009 and 2010 (and the quarters in those years). + +6. During the 12-month periods following DGSE’s filing of its inaccurate financial +statements, and before any restatement or correcting disclosure, Smith received, from DGSE, +incentive bonuses as part of his employment with DGSE. During the same period, he also +profited from the sale of DGSE stock. + +7. Under Sarbanes-Oxley Section 304(a), “any bonus or other incentive-based or +equity-based compensation” Smith received from DGSE and “any profits realized from the sale of +[DGSE] securities” during the relevant period are subject to reimbursement to DGSE. However, +Smith has not reimbursed DGSE as required by the statute. + +8. The Commission has not exempted Smith, pursuant to Sarbanes-Oxley Section +304(b), from the application of Sarbanes-Oxley Section 304(a). + +9. As a result of the conduct described above, Smith violated Sarbanes-Oxley +Section 304(a). + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Smith’s Offer. + +Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent Smith cease and desist +from committing or causing any violations and any future violations of Sarbanes-Oxley Section +304(a). + + 4 +B. Respondent shall, within thirty (30) days of the entry of this Order, reimburse +DGSE a total of $106,250 and 59,738 shares of DGSE stock pursuant to Section 304(a) of the +Sarbanes-Oxley Act, 15 U.S.C. § 7243. Respondent shall simultaneously deliver proof of +satisfying this reimbursement obligation to: Chris Davis, Division of Enforcement, U.S. Securities +and Exchange Commission, Burnett Plaza, Suite 1900, 801 Cherry Street, Unit 18, Fort Worth, +TX 76102. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3597.txt b/raw/aaer/2014/AAER-3597.txt new file mode 100644 index 0000000000000000000000000000000000000000..c44ad2854967621e0544795f7921733d3a025594 --- /dev/null +++ b/raw/aaer/2014/AAER-3597.txt @@ -0,0 +1,131 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73603 / November 14, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3597 / November 14, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16275 + + +In the Matter of + + LINDEN BOYNE, + + 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 Linden Boyne ( “Respondent” or +“Boyne”). + +II. + +The Commission finds that: + +A. RESPONDENT + +1. Linden Boyne, age 71, is a British citizen and resident of Surrey, England. +Beginning in 2003, he served as the chief financial officer (“CFO”), secretary, and director of +Electronic Game Card, Inc. (“EGMI”), a company that purported to be a seller of credit-card sized + +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, temporarily suspend from appearing or practicing before it any attorney, +accountant, engineer, or other professional or expert who has been by name . . . [p]ermanently +enjoined by any court of competent jurisdiction, by reason of his or her misco nduct 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 +electronic games and that had common stock registered with the Commission pursuant to Section +12(g) of the Securities Exchange Act of 1934 (“Exchange Act”) during the relevant period. On +September 1, 2009, Boyne was replaced as CFO and secretary. Between October 2009 and March +25, 2010, he served as EGMI’s interim CFO and secretary. + +2. As EGMI’s CFO, Boyne oversaw the company’s financial operations, +participated in the preparation of its financial statements and the filing of its annual and quarterly +reports with the Commission, and certified the accuracy of those reports. Boyne is not licensed as a +certified public accountant and is not registered with the Commission in any capacity. + + B. CIVIL INJUNCTION + +3. On October 8, 2014, the U.S. District Court for the Southern District of +New York entered a final judgment against Boyne, permanently enjoining him from future +violations, direct or indirect, of Sections 5 and 17(a) of the Securities Act of 1933, Sections 10(b), +13(a), 13(b)(2)(A), 13(b)(5), 13(d), and 16(a) of the Exchange Act, Exchange Act Rules 10b-5, +12b-20, 13a-1, 13a-13, 13a-14, 13b2-1, 13b2-2, 13d-1, 13d-2, 16a-2, and 16a-3, and Section 304 of +the Sarbanes-Oxley Act of 2002. Securities and Exchange Commission v. Cole et al., Civil Action +Number 12-CV-8167 (RJS), Doc. No. 141. + +4. The Commission’s complaint alleged that Boyne and others engaged in a +fraudulent scheme through EGMI to reap approxima tely $12 million in unlawful gains between +2006 and 2009. Throughout that period, Boyne – while serving as EGMI’s chief financial officer – +repeatedly misled the investing public about the company’s operations and financial status. For +example, he artificially inflated EGMI’s stock price by preparing and certifying materially false +quarterly and annual financial statements that were filed with the Commission and distributed to +the investing public. Those filings overstated the value of , or omitted material facts concerning, +EGMI’s assets, revenues, and investments and understated the number of common shares the +company had outstanding. While in control of EGMI’s business and financial records, Boyne +repeatedly provided false information and falsified documents to EGMI’s outside auditors. + +5. The Commission’s complaint further alleges that, while Boyne and EGMI’s +chief executive officer were making material misstatements to elevate EGMI’s stock price, they +were also secretly and improperly funneling millions of shares of EGMI stock to Gibraltar -based +entities they controlled. While he was a director and officer of EGMI who controlled more than +5% of the company’s common stock, Boyne failed to file Schedules 13D and Forms 4 with the +Commission that accurately reported his holdings and transactions in EGMI securities. + +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined Boyne 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 Boyne be temporarily suspended from +appearing or practicing before the Commission. + + 3 + IT IS HEREBY O RDERED that Boyne 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 Boyne may within thirty days after service of this Order +file a petition with the Commission to lift the temporary suspension. If the Commission within +thirty days after service of the Order receives no petition, the suspension shall become permanent +pursuant to Rule 102(e)(3)(ii). + + If a petition is received within thirty days after service of this Order, the Commission shall, +within thirty days after the filing of the petition, either lift the temporary suspension, or set the +matter down for hearing at a time and place to be designated by the Commission, or both. If a +hearing is ordered, following the hearing, the Commission may lift the suspension, censure the +petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a +period of time, or permanently, pursuant to Rule 102(e)(3)(iii). + +This Order shall be served upon Boyne personally, by certified mail at his last known +address, or, if in a foreign country, by any other method reasonably calculated to give notice, +provided that the method of service used is not prohibited by the law of the foreign country. + + By the Commission. + + + + Brent J. Fields + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3598.txt b/raw/aaer/2014/AAER-3598.txt new file mode 100644 index 0000000000000000000000000000000000000000..c18fbed6dd5bebf09740aec630b2e3a57b215085 --- /dev/null +++ b/raw/aaer/2014/AAER-3598.txt @@ -0,0 +1,190 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73609 / November 14, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3598 / November 14, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16278 + + + +In the Matter of + +CHARLES ELLIOT SMITH, CPA + +Respondent. + + + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 15(b) OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Section 15(b) of the Securities Exchange Act of 1934 (“Exchange Act”) [15 U.S.C. §§ 78o(b)] and +Rule 102(e)(3) of the Commission’s Rules of Practice [17 C.F.R. § 201.102(e)(3)]1 against Charles +Elliot Smith (“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 + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently +enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the +Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of +the rules and regulations thereunder. + 2 +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings and the findings contained in Section III.2 below, which are admitted, Respondent +consents to the entry of this Order Instituting Administrative Proceedings Pursuant to Section 15(b) +of the Exchange Act and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, +and Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Smith, 57 years old, is a resident of Rockwall, Texas. He is the founder and co- +principal of Yorkdale Capital, LLC (“Yorkdale”), along with his brother Mark Smith. From 1983 +to the present, Smith has also been a self-employed accountant, doing business as Charles E. +Smith, CPA. Smith obtained his CPA certificate in Massachusetts. He transferred it to Texas in +1982. Smith previously held securities licenses, which are now expired. Smith has also served as +an officer and/or director of various penny stock issuers, and has participated in offerings of penny +stocks. + +2. On October 31, 2014, the Commission filed a complaint against Smith and his +brother Mark Smith in Securities and Exchange Commission v. Charles Elliot Smith, et al., Civil +Action Number 3:14-cv-03874-D in the United States District Court for the Northern District of +Texas. On October 31, 2014, the court entered an order permanently enjoining Smith, by consent, +from future violations of Section 17(a) of the Securities Act of 1933 (“Securities Act”) [15 U.S.C. +§§ 77q(a)] and Sections 10(b), 13(b)(5), and 15(a) of the Exchange Act [15 U.S.C. §§ 78j(b), +78m(b)(5), and 78o(a)] and Rules 10b-5 and 13b2-1 thereunder [17 C.F.R. §§ 240.10b-1and +240.13b2-1], and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 15(d) of +the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A), and 78o(d)] and Rules 12b-20, 13a-1, 13a- +11, 13a-13, 13b2-2, 15d-1, and 15d-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1, 240.13a- +11, 240.13a-13, 240.13b2-2, 240.15d-1, and 240.15d-13], ordering him to pay, jointly and +severally with Mark Smith, disgorgement with prejudgment interest of $78,750.52, to pay a civil +penalty of $150,000, and imposing five-year penny stock and officer and director bars. + +3. The Commission’s complaint alleged that, among other things, since at least 2006, +Smith, along with his brother Mark Smith, Yorkdale and other affiliates, formed and operated at +least eight publicly-traded shell companies, caused four of those shell companies to make offerings +of penny stocks, and caused each of the shell companies to be sold through reverse merger +transactions, all without complying with the Commission’s rules and regulations applicable to shell +company registration and reporting. The complaint further alleged that in connection with the +offer, purchase and sale of securities of the shell companies, Smith engaged in a fraudulent scheme +and made and caused to be made various materially false and misleading statements that, among +other things, hid his, his brother Mark Smith’s, Yorkdale’s and/or various affiliates’ control of the +shell companies, misstated the intended uses of proceeds from the securities offerings, misstated +the role of the named officers and directors of the companies and failed to disclose various + 3 +compensation to be paid to Smith, Mark Smith, Yorkdale and their affiliates. The complaint +further alleged that Charles Smith falsely applied the signature of one of the shell companies’ chief +executive officers to two Commission filings, without that officer’s consent or knowledge. The +complaint further alleged that, in connection with the offer and sale of the shell companies’ +securities, Smith acted as an unregistered broker and as an unregistered dealer. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Smith’s Offer. + +A. Accordingly, it is hereby ORDERED pursuant Section 15(b)(6) of the Exchange +Act, Respondent Smith be, and hereby is barred from association with any broker, dealer, +investment adviser, municipal securities dealer, municipal advisor, transfer agent, or nationally +recognized statistical rating organization with the right to apply for reentry after five years to the +appropriate self-regulatory organization, or if there is none, to the Commission. + +Any reapplication for association by the Respondent will be subject to the applicable laws +and regulations governing the reentry process, and reentry may be conditioned upon a number of +factors, including, but not limited to, the satisfaction of any or all of the following: (a) any +disgorgement ordered against the Respondent, whether or not the Commission has fully or partially +waived payment of such disgorgement; (b) any arbitration award related to the conduct that served +as the basis for the Commission order; (c) any self-regulatory organization arbitration award to a +customer, whether or not related to the conduct that served as the basis for the Commission order; +and (d) any restitution order by a self-regulatory organization, whether or not related to the conduct +that served as the basis for the Commission order. + +B. It is further ORDERED pursuant to Rule 102(e)(3) of the Commission’s Rules of +Practice, + +1. Respondent is suspended from appearing or practicing before the +Commission as an accountant. + +2. After five 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: + +a. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the +Commission. Such an application must satisfy the Commission that Respondent’s +work in his/her practice before the Commission will be reviewed either by the +independent audit committee of the public company for which he/she works or in +some other acceptable manner, as long as he/she practices before the Commission +in this capacity; and/or + + 4 +b. an independent accountant. Such an application must satisfy the +Commission that: + +i. 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; + +ii. 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; + +iii. 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 + +iv. 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. + +The Commission will consider an application by Respondent to resume appearing or +practicing before the Commission provided that his/her state CPA license is current and he/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. + + By the Commission. + + + + + Brent J. Fields + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3599.txt b/raw/aaer/2014/AAER-3599.txt new file mode 100644 index 0000000000000000000000000000000000000000..0f4ee28ba40295b1b077a8662c8c132d09617a5e --- /dev/null +++ b/raw/aaer/2014/AAER-3599.txt @@ -0,0 +1,171 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73610 / November 14, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3599 / November 14, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16279 + + +In the Matter of + +MARK SMITH, CPA + +Respondent. + + + + + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Rule 102(e)(3) of the Commission’s Rules of Practice [17 C.F.R. § 201.102(e)(3)]1 against Mark +Smith (“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 + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently +enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the +Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of +the rules and regulations thereunder. + 2 +proceedings and the findings contained in Section III.2 below, which are admitted, Respondent +consents to the entry of this Order Instituting 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. Smith, 50 years old, is a resident of Allen, Texas. Since 2006, he has been a co- +principal of Yorkdale Capital, LLC (“Yorkdale”) with his brother Charles Elliot Smith. From at +least 2006 to the present, Smith has also been a self-employed accountant, doing business under +the name AM Group. Smith obtained his CPA certificate in Massachusetts in 1989, which he kept +current until 1991. He does not hold a CPA certificate or license in Texas. + +2. On October 31, 2014, the Commission filed a complaint against Smith and his +brother in Securities and Exchange Commission v. Charles Elliot Smith, et al., Civil Action +Number 3:14-cv-03874-D, in the United States District Court for the Northern District of Texas. +On October 31, 2014, the court entered an order permanently enjoining Smith, by consent, from +future violations of Section 17(a)(2) and (3) of the Securities Act of 1933 (“Securities Act”) [15 +U.S.C. §§ 77q(a)(2) and (3)] and Rule 13b2-1 under the Securities Exchange Act of 1934 +(“Exchange Act”) [17 C.F.R. § 240.13b2-1], and from aiding and abetting violations of Sections +13(a), 13(b)(2)(A) and 15(d) of the Exchange Act [15 U.S.C. §§ 78m(a), 78m(b)(2)(A) and 78o(d)] +and Rules 12b-20, 13a-1, 13a-11, 13a-13, 13b2-2, 15d-1, and 15d-13 thereunder [17 C.F.R. §§ +240.12b-20, 240.13a-1, 240.13a-11, 240.13a-13, 240.13b2-2, 240.15d-1, and 240.15d-13], +ordering him to pay, jointly and severally with Charles Smith, disgorgement with prejudgment +interest of $78,750.52, to pay a civil penalty of $50,000, and imposing a three-year penny stock +bar. + +3. The Commission’s complaint alleged that, among other things, since at least 2006, +Smith, along with his brother Charles Smith, Yorkdale and other affiliates, formed and operated at +least eight publicly-traded shell companies and caused four of the shell companies to be sold +through reverse merger transactions, all without complying with the Commission’s rules and +regulations applicable to shell company registration and reporting. The complaint further alleged +that Smith prepared filings with the Commission, financial statements and communications to +auditors that contained materially false or misleading statements or omissions, including, among +other things, fraudulent statements or omissions concerning control of the shell companies by +Smith, his brother Charles Smith, Yorkdale and/or their affiliates, misstatements about the intended +uses of proceeds from the securities offerings, misstatements about the role of the named officers +and directors of the companies, and omissions concerning the compensation to be paid to Smith, +Charles Smith, Yorkdale and their affiliates. + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Smith’s Offer. + +Accordingly, it is hereby ORDERED pursuant to Rule 102(e)(3) of the Commission’s +Rules of Practice, + +A. Respondent is suspended from appearing or practicing before the +Commission as an accountant. + +B. After three years from the date of this order, Respondent may request that +the Commission consider his reinstatement by submitting an application (attention: Office +of the Chief Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the +Commission. Such an application must satisfy the Commission that Respondent’s +work in his/her practice before the Commission will be reviewed either by the +independent audit committee of the public company for which he/she works or in +some other acceptable manner, as long as he/she practices before the Commission +in this capacity; and/or + +2. an independent accountant. Such an application must satisfy the +Commission that: + +a. Respondent, or the 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 + 4 +Board, including, but not limited to, all requirements relating to registration, +inspections, concurring partner reviews and quality control standards. + +The Commission will consider an application by Respondent to resume appearing or +practicing before the Commission provided that his/her state CPA license is current and he/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. + + By the Commission. + + + + + Brent J. Fields + Secretary + + + + + + + + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3600.txt b/raw/aaer/2014/AAER-3600.txt new file mode 100644 index 0000000000000000000000000000000000000000..e2b22422355ea71478c00ba178652500dbf6f831 --- /dev/null +++ b/raw/aaer/2014/AAER-3600.txt @@ -0,0 +1,414 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73750 / December 5, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3600 / December 5, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16296 + + + +In the Matter of + +HAMPTON ROADS +BANKSHARES, INC., + +Respondent. + + + + +ORDER INSTITUTING ADMINISTRATIVE +AND CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER AND CIVIL +PENALTIES + + +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 +21C of the Securities Exchange Act of 1934 (“Exchange Act”) against Hampton Roads +Bankshares, Inc. (“HRBS,” “Respondent” or the “Company”). + + +II. + + In anticipation of the institution of these proceedings, HRBS 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 HRBS and the subject matter of these proceedings, which +are admitted, HRBS consents to the entry of this Order Instituting Administrative and Cease-and- +Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making + + 2 +Findings, and Imposing a Cease-and-Desist Order and Civil Penalties (“Order”), as set forth +below. + + +III. + + On the basis of this Order and HRBS’s Offer, the Commission finds1 that: + +Summary + + This matter involves HRBS’s accounting treatment in connection with the recording of its +deferred tax asset (“DTA”) in 2009 and 2010. During 2009 and the first quarter of 2010, HRBS +recorded a large DTA without taking a significant valuation allowance against it. 2 HRBS +concluded that based on anticipated future earnings, the Company was “more likely than not” to +realize its DTA within the applicable carry-forward period. This conclusion was unreasonable +because the financial projections underlying HRBS’s projections of future earnings were not +supportable based on the Company’s financial condition, including in particular the ongoing +deterioration of its loan portfolio. + +HRBS’s financial condition was deteriorating by early 2010, and the Company was +discussing remedial measures to address its problems. HRBS was facing possible adverse +regulatory consequences. In August 2010, HRBS amended its 2009 Form 10-K and first quarter +2010 Form 10-Q to include restated financial statements, reflecting a valuation allowance against +the DTA, reducing the reported DTA for 2009 from over $56 million to less than $400,000, and to +$0 thereafter. In its restated Form 10-K for 2009, HRBS reported that it was “undercapitalized” as +of December 31, 2009, as opposed to “adequately capitalized,” as originally reported. Similarly, in +its restated Form 10-Q for the first quarter of 2010, HRBS reported that it was “significantly +undercapitalized,” rather than “undercapitalized” as originally reported. + +Accordingly, HRBS violated the reporting, books and records and internal controls +provisions of the Exchange Act. + +Respondent + +1. Hampton Roads Bankshares, Inc., a Virginia corporation with its principal place of +business in Virginia Beach, Virginia, is a bank holding company for Bank of Hampton Roads +(“BOHR”) and Shore Bank (“Shore”), its primary subsidiaries. At all relevant times, HRBS’s +common stock was registered with the Commission under Section 12(b) of the Securities Exchange + +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 HRBS did establish a $1 million valuation allowance in 2009 related to capital losses realized, against the +$2.8 million in capital loss carryforwards. However, HRBS recorded a net DTA of $56.38 million in its 2009 Form +10-K, the vast majority of which related to its loan losses. + + 3 +Act of 1934 (the “Exchange Act”) and was listed on the NASDAQ Global Select Market +(“NASDAQ”). HRBS was subject to periodic examinations by the Virginia State Corporation +Commission’s Bureau of Financial Institutions (the “SCC”) and the Federal Reserve Bank of +Richmond (the “FRB”) in 2009 and 2010. +Facts + +HRBS History: 2008-09 Mergers and Subsequent Loan Losses + +2. HRBS’s two primary subsidiaries, BOHR and Shore, provide community and +commercial banking services to individuals and small-to-medium-sized businesses in the +Hampton Roads region of southeastern Virginia; Richmond, Virginia; the Northeastern and +Research Triangle regions of North Carolina; and the Eastern Shore of Virginia and Maryland. +HRBS acquired Shore on June 1, 2008. On December 31, 2008, HRBS acquired all outstanding +shares of Gateway Financial Holdings, Inc. (“Gateway”). At the time of the acquisition, +Gateway’s subsidiaries, including Gateway Bank & Trust Co. (“Gateway Bank”), became +wholly owned subsidiaries of HRBS. On May 8, 2009, Gateway Bank merged into BOHR, with +BOHR being the surviving entity. The acquisition of Gateway increased HRBS’s assets from +slightly under $1 billion to approximately $3.1 billion. +3. The performance of HRBS’s loan portfolio deteriorated during 2009, leading to +losses. The Company disclosed in its 2009 Form 10-K that “our problem loans increased +significantly in 2009; loans acquired from [Gateway] have been the primary source of that +increase. Deteriorating economic conditions, difficulties in loan administration, and insufficient +loan collection resources contributed to the credit quality problems.” Prior to restating its +financials in August 2010, HRBS reported a net loss of $60.7 million for fiscal year 2009, +excluding the write down of goodwill of $84.8 million. The company’s restated financials +reflected a net loss of $116.65 million, excluding the goodwill write-downs. +4. On August 10, 2010, HRBS announced that its financial statements for fiscal year +ended December 31, 2009, as included in its 2009 Form 10-K, and the financial statements for the +fiscal quarter ended March 31, 2010, as included in its first quarter 2010 Form 10-Q, should no +longer be relied upon because HRBS had determined that restatements were necessary to provide +for an increase in the valuation allowance against the Company’s deferred tax asset. On August 13, +2010, HRBS filed restated annual financial statements for 2009 in an amended Form 10-K for 2009, +and restated quarterly financial statements for the quarter ending March 31, 2010, in an amended +Form 10-Q. The restated financial statements included a valuation allowance of approximately $56 +million for the year ended December 31, 2009, and of an additional $14.3 million for the first +quarter of 2010. These valuation allowances reduced HRBS’s reported DTA as of year-end 2009 +from $56.4 million to $397,000, and as of March 31, 2010 from $70.3 million to $0. +Deferred Tax Assets: Description and Accounting Guidance + +5. Accounting Standard Codification (ASC) 740 (formerly FASB statement 109) +establishes standards for companies to account for and report the effects of income taxes. A + + 4 +deferred tax asset is an asset on a company’s balance sheet that represents the right to offset a +future tax expense or obligation with a future tax benefit or refund. These assets arise as a result of +timing differences that occur between reporting the effect of taxes accounted for under U.S. GAAP +and calculating tax benefits and liabilities under the enacted tax law. For example, due to +differences between tax laws and accounting standards for financial statement purposes, some +events are recognized for financial reporting purposes and for tax purposes in different years. This +can give rise to differences between the tax bases of assets or liabilities and their reported amounts +in financial statements. These differences are temporary because the event will become taxable or +deductible in the future. A deferred tax asset, or DTA, exists when temporary timing differences +are more likely than not to result in deductible amounts in future years. Deferred tax assets can +arise in connection with a company’s allowance for loan and lease losses (ALLL), which was the +case for the vast majority of HRBS’s DTA. +6. A DTA is recorded on the balance sheet when it is more likely than not that the +DTA will be realized in a future period. However, ASC 740-10-30 requires a company to +“[r]educe deferred tax assets by a valuation allowance if, based on the weight of available +evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all +of the deferred tax assets will not be realized. The valuation allowance shall be sufficient to reduce +the deferred tax asset to the amount that is more likely than not to be realized.” The company must +weigh all positive and negative evidence in determining whether a valuation allowance is +necessary. +7. When considering the weighing of positive and negative evidence, the accounting +guidance under ASC 740-10-30-21 and -23 states: “[f]orming a conclusion that a valuation +allowance is not needed is difficult when there is negative evidence such as cumulative losses in +recent years,” and “[a] cumulative loss in recent years is a significant piece of negative evidence +that is difficult to overcome.” ASC 740-10-30-21 provides other examples of negative evidence, +including “losses expected in early future years (by a presently profitable entity)” and “unsettled +circumstances that, if unfavorably resolved, would adversely affect future operations and profit +levels on a continuing basis in future years.” The realizability of DTAs must be evaluated in each +reporting period. +HRBS’s Loan Losses and Increasing DTA + +8. Prior to 2008, HRBS did not record a significant DTA. As of the end of 2007, the +Company recorded a net DTA of $2.66 million, and that number decreased through the first three +quarters of 2008. Gateway, however, had seen an increase in its DTA during 2008 due to a +deteriorating loan portfolio and a corresponding increase in loan losses. As of the end of 2008 – +following the merger with Gateway – HRBS recorded a DTA of $32.6 million. +9. As HRBS disclosed in its Form 10-K for 2009, “our problem loans increased +significantly in 2009; loans acquired from [Gateway] have been the primary source of that +increase. Deteriorating economic conditions, difficulties in loan administration, and insufficient +loan collection resources contributed to the credit quality problems.” Prior to its restatement, +HRBS reported $60.7 million in losses for 2009 (exclusive of its goodwill write-downs), and + + 5 +recorded provisions for loan losses of $33.71 million, $33.66 million, $65.67 million, and $45.61 +million for the second, third and fourth quarters of 2009 and the first quarter of 2010, respectively. +10. Consequently, after a slight dip in the first quarter of 2009 from $32.62 million to +$31.28 million, HRBS’S DTA increased through the end of the first quarter of 2010 along with the +company’s loan losses. HRBS recorded a DTA of $44.22 million for the second quarter of 2009, +$37.00 million for the third quarter of 2009, and $56.38 million for the fourth quarter and year-end +of 2009, and $70.32 million in the first quarter of 2010. +11. The vast majority of the DTA recorded by HRBS for 2009 and the first quarter of +2010 related to the Company’s loan losses. Prior to its restatement in August 2010, HRBS did not +establish a valuation allowance against its DTA relating to its loan losses. The only valuation +allowance HRBS established against its DTA in this period was a $1 million allowance relating to +capital losses realized, against the Company’s $2.8 million in capital loss carryforwards. +HRBS’s DTA Analysis + +12. In November 2009, HRBS undertook an analysis of “whether we can continue to +justify carrying [the deferred tax assets] at the amount they are recorded in the general ledger.” +The resulting memorandum concluded no valuation allowance was required. The memorandum +was based in part on capital projections forecasting loan performance through the end of 2010, +which assumed the Company would work through existing non-performing loans (“NPLs”) in 24- +36 months and would earn a consistent $8.4 million in quarterly pre-tax, pre-provision income +($33.6 million annually). These conclusions were not reasonable. The projections underlying the +analysis assumed that the Company’s provision for loan losses would drop from over $33 million +in third quarter 2009 to $2.35 million by the end of 2010. However, at the same time, internal +company reports reflected that as of November 2009, the company’s total delinquent and non- +accruing loans had reached nearly $350 million, or 13.4% of total loans, an increase over the +quarter-end totals for each of the first through third quarters of 2009. Likewise, non-performing +assets had increased 11% from September to October 2009, continuing a trend of increases in +problem loans since late 2008. HRBS reported a provision for loan losses for the third quarter of +2009 of $33.7 million, and for fourth quarter 2009 of $65.7 million. Further, HRBS’s DTA +analysis relied on “pre-tax, pre-provision” income, and did not address the fact that the existing +loan loss provisions were the single greatest driver of the Company’s losses at the time, and that +loan losses would be based on the trends noted above indicating that these losses would likely +continue. +13. From December 2009 through July 2010, HRBS provided materials to the SEC’s +Division of Corporation Finance (“Corp Fin”) and Office of the Chief Accountant (“OCA”) +concerning its conclusions that a valuation allowance was not required on its DTA, and that the +financial projections supporting its analysis were supportable, notwithstanding the fact that the +Company’s loan losses in 2009 had exceeded the aggregate taxable income for the prior three +years, and were continuing. + + 6 +14. In March of 2010, the Company drafted an internal memorandum setting forth an +analysis of the necessity of a valuation allowance against the DTA as of year-end 2009. HRBS +retained an outside accounting consultant to provide limited assistance in directing the Company to +the appropriate accounting guidance and memorializing the Company’s conclusions.3 The March +2010 memorandum concluded that HRBS would more likely than not earn the necessary $8 +million future taxable income per year ($150-160 million total) necessary to fully utilize the DTA +over the applicable carry-forward period. The analysis relied, in part, on the Company’s historical +pre-Gateway earnings over the prior four years ($5.5 million, $6.0 million, $6.8 million, and $7.2 +million for 2005-08, respectively), concluding that the Company would more likely than not earn +the necessary $8 million future taxable income per year. The memorandum recognized that +excluding non-recurring write-offs of goodwill associated with Shore Bank and Gateway, HRBS +had suffered $64 million in pre-tax losses in 2009, which was “approximately double the income +earned over the prior 5 years,” but noted that HRBS “do[es] not expect losses to continue past +2011.” At the time HRBS drafted this analysis, total loans past due had trended upward since the +beginning of 2009, and total delinquent and nonaccrual loans, while slightly lower than in February +2010, remained at historically high levels. +15. On April 23, 2010, HRBS filed its Form 10-K for 2009, which incorporated +financial statements recording a DTA of $56.38 million, including a valuation allowance of $1.0 +million established against the Company’s $2.8 million in capital loss carryforwards, but no +valuation allowance relating to the remainder of the DTA, including the portion of the DTA +attributable to loan losses. The March 2010 DTA memorandum reflecting HRBS’s rationale for +this accounting decision was substantially reproduced in the footnotes to the financial statements +included in the Company’s 2009 Form 10-K. +16. In May 2010, HRBS updated its analysis of whether a valuation allowance was +required on the DTA for purposes of HRBS’s first quarter 2010 financial statements. The +identification and weighing of positive and negative evidence remained substantively unchanged +from the March 2010 memorandum, though the updated memorandum noted that the required +annual taxable income to fully utilize the Company’s DTA was now an average of $9 million, +rather than $8 million. The May 2010 memorandum supported its conclusion that this level would +likely be reached by, in part, noting that HRBS, Gateway and Shore Bank had earned a combined +$31 million in 2007, the last full year prior to the mergers. The memorandum predicted that HRBS +would become profitable in 2011, and attached bank-level capital projections forecasting a slight +profit as of third quarter of 2011, notwithstanding HRBS’s internal consolidated projections less +than two months prior that projected quarterly losses of at least $7 million through 2011. Internal +Company reports as of late May 2010 reflected continuing deterioration of HRBS’s loan portfolio +through increasing levels of classified loans, past due loans, delinquent and nonaccrual loans, and +nonperforming loans as a percentage of total loans. +17. On May 17, 2010, HRBS filed its Form 10-Q for the quarterly period ended March +31, 2010. The Form 10-Q incorporated financial statements recording a DTA of $70.32 million, + +3 The outside accounting consultant did not provide an opinion on the validity of the company’s conclusions +and relied on the projections and assumptions that HRBS used in performing its DTA analysis. + + 7 +including the previously-established a valuation allowance of $1.0 million against HRBS’s $2.8 +million in capital loss carryforwards. The financial statements again established no valuation +allowance relating to the remainder of the DTA, including the portion of the DTA attributable to +loan losses. +18. HRBS continued to contend, following the filing of its Form 10-Q for the first +quarter of 2010, that no valuation allowance was required on its DTA. In June and July 2010, +HRBS presented new financial projections to support its position, forecasting a net loss in 2010 of +$68 million, but profits in 2011 and 2012 of $26 million and $50 million, respectively. To explain +this projected return to profitability, HRBS noted in a June 2010 submission to Corp Fin that “[t]he +rate of deterioration in the portfolio has slowed, as evidenced by the reduction in growth of NPLs +from December 31, 2009 to March 31, 2010, a stabilization in the pace of credit downgrades +within the Company’s risk rating system and a stabilization in delinquency levels from the end of +2009.” At that time, HRBS’s internal reports showed that as of May 2010, total loans past due as a +percentage of total loans topped 14% for the first time, having increased steadily since being 4% as +of December 2008. At the same time, Special Mention loans4 increased above $300 million to +their highest level ever to that point, and classified loans5 increased $6.4 million to $591.2 million, +also their highest level ever. While non-performing loans decreased $3.9 million from April 2010 +to May 2010, or by 0.1% to 12.7% of total loans, non-performing loans increased in June by $32.5 +million, from 12.7% to 14.4% of total loans, compared to approximately 10% as of December +2009. +19. The financial projections HRBS used in June and July 2010 to support its position +on the DTA forecasted a dramatic decrease in the provision for loan losses for the remainder of +2010 after the second quarter. The Company projected a $46.5 million provision for the second +quarter, $8 million in the third quarter, and a provision of $0 in the fourth quarter. +Notwithstanding the fact that HRBS was already into its third quarter of 2010 when it used these +projections in July 2010, the projections contrasted with the Company’s actual reported loan loss +provisions for those same periods. Indeed, the Company reported loan loss provisions of $54.6 +million, $83.7 million and $27.9 million for the second, third and fourth quarters of 2010 +respectively. +20. On August 13, 2010, HRBS issued an amended Form 10-K/A for 2009 and an +amended Form 10-Q/A for the first quarter of 2010, restating the financial results for those periods +to reflect a valuation allowance against the entire DTA. + +4 HRBS’s internal reports describe “Special Mention” as loans on the “watch list.” Bank regulators define a +“Special Mention” asset as an asset that “has potential weaknesses that deserve management’s close attention” and +that “[i]f left uncorrected… may result in deterioration of the repayment prospects for the asset or in the institution’s +credit position at some future date.” +5 HRBS’s internal reports defined “classified” loans as including (i) “substandard” loans that were +“inadequately protected by the current sound net worth and paying capacity of the obligor or of the collateral +pledged, if any”; (ii) “doubtful” loans with “weaknesses [that] make collection or liquidation in full on the basis of +currently existing facts, conditions, and values highly questionable and improbable”; and (iii) “loss” loans that were +“considered uncollectable and of such little value that their continuance as bankable assets is not warranted.” + + 8 +The Effects of HRBS’s DTA On Its Reported Capitalization Levels +21. The valuation allowance against HRBS’s DTA played a role in determining the +company’s capitalization level, a measure that banks are required to report quarterly under bank +regulations. A portion of a bank’s DTA is included in its Tier 1 capital calculation. Prior to its +restatement, HRBS reported that it was “adequately capitalized” as of December 31, 2009, and +“undercapitalized” as of March 31, 2010. Following the restatement, HRBS changed this +statement to report that it was “undercapitalized” as of December 31, 2009, and “significantly +undercapitalized” as of March 31, 2010. +22. Changes in regulatory classification are material information to investors. A bank +that falls below certain regulatory capital classifications can be subject to adverse regulatory +actions by bank regulators that severely restrict its activities. Such activities can include the +requirement that a bank that becomes “undercapitalized” submit and obtain approval of a “capital +restoration plan,” and may also include requiring the institution to be recapitalized, prohibiting +asset growth, restricting interest rates paid, requiring prior approval of capital distributions by a +controlling bank holding company, requiring new election of directors or dismissal of directors and +officers, and requiring regulatory approval of proposed dividends or consent to consolidation or +divestiture of the institution or its affiliates. In HRBS’s case, the Company and its banking +regulators entered into a written agreement imposing certain operational and transactional +limitations, which has recently been lifted. +Violations +23. As a result of the conduct described above, HRBS violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, which require every issuer 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 and quarterly reports on Form +10-Q, and mandate that the required reports must contain any further material information +necessary to make the required statements made in the reports not misleading. +24. As a result of the conduct described above, HRBS 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. +25. As a result of the conduct described above, HRBS violated Section 13(b)(2)(B) of +the Exchange Act, which requires issuers of securities registered pursuant to Section 12 of the +Exchange Act to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that transactions are recorded as necessary to permit preparation +of financial statements in accordance with generally accepted accounting principles. + + 9 +HRBS’s Remedial Efforts + +26. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent, including improvements to HRBS’s policies and procedures +relating to internal controls over financial reporting. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Offer. + +Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + +A. HRBS cease and desist from committing or causing any violations and any future +violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, +13a-1 and 13a-13 thereunder. +B. HRBS 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. 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) HRBS may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) HRBS 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) HRBS 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 + +C. Payments by check or money order must be accompanied by a cover letter +identifying Hampton Roads Bankshares, Inc. as a Respondent in these proceedings, and the file +number of these proceedings; a copy of the cover letter and check or money order must be sent to +Scott Friestad, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5010. + + + 10 + 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, HRBS 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 HRBS’s payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +HRBS 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 HRBS 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/2014/AAER-3601.txt b/raw/aaer/2014/AAER-3601.txt new file mode 100644 index 0000000000000000000000000000000000000000..d73144a3831ed15ac579a6b19e794714238c0cf5 --- /dev/null +++ b/raw/aaer/2014/AAER-3601.txt @@ -0,0 +1,366 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73751 / December 5, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3601 / December 5, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16297 + + +In the Matter of + +NEAL A. PETROVICH, CPA, + +Respondent. + + + + +ORDER INSTITUTING ADMINISTRATIVE +AND 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 public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Section +21C of the Securities Exchange Act of 1934 (“Exchange Act”) against Neal A. Petrovich, CPA +(“Petrovich” or “Respondent”). + + +II. + + In anticipation of the institution of these proceedings, Petrovich 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 Petrovich and the subject matter of these proceedings, which +are admitted, Petrovich consents to the entry of this Order Instituting Administrative and 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 Petrovich’s Offer, the Commission finds1 that: + +Summary + + This matter involves the accounting treatment by Hampton Roads Bankshares, Inc. +(“HRBS” or the “Company”) in connection with the recording of its deferred tax asset (“DTA”) in +2009 and 2010. Petrovich was the Chief Financial Officer of HRBS from February 2009 through +May 2010. During 2009 and the first quarter of 2010, HRBS recorded a large DTA without taking +a significant valuation allowance against it. 2 HRBS, relying on an analysis performed under +Petrovich’s direction, concluded that based on anticipated future earnings, the Company was +“more likely than not” to realize its DTA within the applicable carry-forward period. This +conclusion was unreasonable because the financial projections underlying HRBS’s projections of +future earnings were not supportable based on the Company’s financial condition, including in +particular the ongoing deterioration of its loan portfolio. + +HRBS’s financial condition was deteriorating by early 2010, and the Company was +discussing remedial measures to address its problems. HRBS was facing possible adverse +regulatory consequences. In August 2010, HRBS amended its 2009 Form 10-K and first quarter +2010 Form 10-Q to include restated financial statements, reflecting a valuation allowance against +the DTA, reducing the reported DTA for 2009 from over $56 million to less than $400,000, and to +$0 thereafter. In its restated Form 10-K for 2009, HRBS reported that it was “undercapitalized” as +of December 31, 2009, as opposed to “adequately capitalized,” as originally reported. Similarly, in +its restated Form 10-Q for the first quarter of 2010, HRBS reported that it was “significantly +undercapitalized,” rather than “undercapitalized” as originally reported. + +Accordingly, Petrovich was a cause of HRBS’s violations of the reporting, books and +records and internal controls provisions of the Exchange Act. + +Respondent + +1. Neal Petrovich, 52, is a resident of Chesapeake, Virginia, and was HRBS’s +Executive Vice President and CFO from February 2009 through May 2010. On May 13, 2010, +Petrovich informed HRBS of his intention to end his employment with HRBS effective June 4, +2010, and he left the company on that date. Petrovich is currently employed as Senior Vice +President – Finance with a publicly traded financial services company in the area. He is a licensed +CPA in Virginia. + +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 HRBS did establish a $1 million valuation allowance in 2009 related to capital losses realized, against the +$2.8 million in capital loss carryforwards. However, HRBS recorded a net DTA of $56.38 million in its 2009 Form +10-K, the vast majority of which related to its loan losses. + 3 +Other Relevant Entity +2. Hampton Roads Bankshares, Inc., a Virginia corporation with its principal place of +business in Virginia Beach, Virginia, is a bank holding company for Bank of Hampton Roads +(“BOHR”) and Shore Bank (“Shore”), its primary subsidiaries. At all relevant times, HRBS’s +common stock was registered with the Commission under Section 12(b) of the Securities Exchange +Act of 1934 (the “Exchange Act”) and was listed on the NASDAQ Global Select Market +(“NASDAQ”). HRBS was subject to periodic examinations by the Virginia State Corporation +Commission’s Bureau of Financial Institutions (the “SCC”) and the Federal Reserve Bank of +Richmond (the “FRB”) in 2009 and 2010. +Facts + +HRBS History: 2008-09 Mergers and Subsequent Loan Losses + +3. HRBS’s two primary subsidiaries, BOHR and Shore, provide community and +commercial banking services to individuals and small-to-medium-sized businesses in the +Hampton Roads region of southeastern Virginia; Richmond, Virginia; the Northeastern and +Research Triangle regions of North Carolina; and the Eastern Shore of Virginia and Maryland. +HRBS acquired Shore on June 1, 2008. On December 31, 2008, HRBS acquired all outstanding +shares of Gateway Financial Holdings, Inc. (“Gateway”). At the time of the acquisition, +Gateway’s subsidiaries, including Gateway Bank & Trust Co. (“Gateway Bank”), became +wholly owned subsidiaries of HRBS. On May 8, 2009, Gateway Bank merged into BOHR, with +BOHR being the surviving entity. The acquisition of Gateway increased HRBS’s assets from +slightly under $1 billion to approximately $3.1 billion. +4. The performance of HRBS’s loan portfolio deteriorated during 2009, leading to +losses. The Company disclosed in its 2009 Form 10-K that “our problem loans increased +significantly in 2009; loans acquired from [Gateway] have been the primary source of that +increase. Deteriorating economic conditions, difficulties in loan administration, and insufficient +loan collection resources contributed to the credit quality problems.” Prior to restating its +financials in August 2010, HRBS reported a net loss of $60.7 million for fiscal year 2009, +excluding the write down of goodwill of $84.8 million. The company’s restated financials +reflected a net loss of $116.65 million, excluding the goodwill write-downs. +5. On August 10, 2010, HRBS announced that its financial statements for fiscal year +ended December 31, 2009, as included in its 2009 Form 10-K, and the financial statements for the +fiscal quarter ended March 31, 2010, as included in its first quarter 2010 Form 10-Q, should no +longer be relied upon because HRBS had determined that restatements were necessary to provide +for an increase in the valuation allowance against the Company’s deferred tax asset. On August 13, +2010, HRBS filed restated annual financial statements for 2009 in an amended Form 10-K for 2009, +and restated quarterly financial statements for the quarter ended March 31, 2010, in an amended +Form 10-Q. The restated financial statements included a valuation allowance of approximately $56 +million for the year ended December 31, 2009, and of an additional $14.3 million for the first +quarter of 2010. These valuation allowances reduced HRBS’s reported DTA as of year-end 2009 +from $56.4 million to $397,000, and as of March 31, 2010 from $70.3 million to $0. + 4 +Deferred Tax Assets: Description and Accounting Guidance + +6. Accounting Standard Codification (ASC) 740 (formerly FASB statement 109) +establishes standards for companies to account for and report the effects of income taxes. A +deferred tax asset is an asset on a company’s balance sheet that represents the right to offset a +future tax expense or obligation with a future tax benefit or refund. These assets arise as a result of +timing differences that occur between reporting the effect of taxes accounted for under U.S. GAAP +and calculating tax benefits and liabilities under the enacted tax law. For example, due to +differences between tax laws and accounting standards for financial statement purposes, some +events are recognized for financial reporting purposes and for tax purposes in different years. This +can give rise to differences between the tax bases of assets or liabilities and their reported amounts +in financial statements. These differences are temporary because the event will become taxable or +deductible in the future. A deferred tax asset, or DTA, exists when temporary timing differences +are more likely than not to result in deductible amounts in future years. Deferred tax assets can +arise in connection with a company’s allowance for loan and lease losses (ALLL), which was the +case for the vast majority of HRBS’s DTA. +7. A DTA is recorded on the balance sheet when it is more likely than not that the +DTA will be realized in a future period. However, ASC 740-10-30 requires a company to +“[r]educe deferred tax assets by a valuation allowance if, based on the weight of available +evidence, it is more likely than not (a likelihood of more than 50 percent) that some portion or all +of the deferred tax assets will not be realized. The valuation allowance shall be sufficient to reduce +the deferred tax asset to the amount that is more likely than not to be realized.” The company must +weigh all positive and negative evidence in determining whether a valuation allowance is +necessary. +8. When considering the weighing of positive and negative evidence, the accounting +guidance under ASC 740-10-30-21 and -23 states: “[f]orming a conclusion that a valuation +allowance is not needed is difficult when there is negative evidence such as cumulative losses in +recent years,” and “[a] cumulative loss in recent years is a significant piece of negative evidence +that is difficult to overcome.” ASC 740-10-30-21 provides other examples of negative evidence, +including “losses expected in early future years (by a presently profitable entity)” and “unsettled +circumstances that, if unfavorably resolved, would adversely affect future operations and profit +levels on a continuing basis in future years.” The realizability of DTAs must be evaluated in each +reporting period. +HRBS’s Loan Losses and Increasing DTA + +9. Prior to 2008, HRBS did not record a significant DTA. As of the end of 2007, the +Company recorded a net DTA of $2.66 million, and that number decreased through the first three +quarters of 2008. Gateway, however, had seen an increase in its DTA during 2008 due to a +deteriorating loan portfolio and a corresponding increase in loan losses. As of the end of 2008 – +following the merger with Gateway – HRBS recorded a DTA of $32.6 million. +10. As HRBS disclosed in its Form 10-K for 2009, “our problem loans increased +significantly in 2009; loans acquired from [Gateway] have been the primary source of that + 5 +increase. Deteriorating economic conditions, difficulties in loan administration, and insufficient +loan collection resources contributed to the credit quality problems.” Prior to its restatement, +HRBS reported $60.7 million in losses for 2009 (exclusive of its goodwill write-downs), and +recorded provisions for loan losses of $33.71 million, $33.66 million, $65.67 million, and $45.61 +million for the second, third and fourth quarters of 2009 and the first quarter of 2010, respectively. +11. Consequently, after a slight dip in the first quarter of 2009 from $32.62 million to +$31.28 million, HRBS’S DTA increased through the end of the first quarter of 2010 along with the +company’s loan losses. HRBS recorded a DTA of $44.22 million for the second quarter of 2009, +$37.00 million for the third quarter of 2009, $56.38 million for the fourth quarter and year-end of +2009, and $70.32 million in the first quarter of 2010. +12. The vast majority of the DTA recorded by HRBS for 2009 and the first quarter of +2010 related to the Company’s loan losses. Prior to its restatement in August 2010, HRBS did not +establish a valuation against its DTA relating to its loan losses. The only valuation allowance +HRBS established against its DTA in this period was a $1 million allowance relating to capital +losses realized, against the Company’s $2.8 million in capital loss carryforwards. +HRBS’s DTA Analysis + +13. In November 2009, HRBS, under Petrovich’s direction, conducted an analysis of +“whether [HRBS] can continue to justify carrying [the deferred tax assets] at the amount they are +recorded in the general ledger.” The resulting memorandum concluded no valuation allowance +was required. The memorandum was based in part on capital projections forecasting loan +performance through the end of 2010, prepared by Petrovich and others under his direction, which +assumed the Company would work through existing non-performing loans (“NPLs”) in 24-36 +months and would earn a consistent $8.4 million in quarterly pre-tax, pre-provision income ($33.6 +million annually). Petrovich knew or should have known that these conclusions were not +reasonable. The projections underlying the analysis assumed that the provision for loan losses +would drop from over $33 million in third quarter 2009 to $2.35 million by the end of 2010. +However, at the same time, internal company reports that were circulated to Petrovich reflected +that as of November 2009, the company’s total delinquent and non-accruing loans had reached +nearly $350 million, or 13.4% of total loans, an increase over the quarter-end totals for each of the +first through third quarters of 2009. Likewise, non-performing assets had increased 11% from +September to October 2009, continuing a trend of increases in problem loans since late 2008. +HRBS reported a provision for loan losses for the third quarter of 2009 of $33.7 million, and for +fourth quarter 2009 of $65.7 million. Further, HRBS’s DTA analysis relied on “pre-tax, pre- +provision” income, and did not address the fact that the existing loan loss provisions were the +single greatest driver of the Company’s losses at the time, and that loan losses would be based on +the trends noted above indicating that these losses would likely continue. +14. From December 2009 through July 2010, HRBS provided materials to the SEC’s +Division of Corporation Finance (“Corp Fin”) and Office of the Chief Accountant (“OCA”) +concerning its conclusions that a valuation allowance was not required on its DTA, and that the +financial projections supporting its analysis were supportable, notwithstanding the fact that the + 6 +Company’s loan losses in 2009 had exceeded the aggregate taxable income for the prior three +years, and were continuing. +15. In March of 2010, Petrovich and others under his direction prepared an internal +memorandum setting forth an analysis of the necessity of a valuation allowance against the DTA as +of year-end 2009. HRBS retained an outside accounting consultant to provide limited assistance in +directing the Company to the appropriate accounting guidance and memorializing the Company’s +conclusions.3 The March 2010 memorandum concluded that HRBS would more likely than not +earn the necessary $8 million future taxable income per year ($150-160 million total) necessary to +fully utilize the DTA over the applicable carry-forward period. The analysis relied, in part, on the +Company’s historical pre-Gateway earnings over the prior four years ($5.5 million, $6.0 million, +$6.8 million, and $7.2 million for 2005-08, respectively), concluding that the Company would +more likely than not earn the necessary $8 million future taxable income per year. The +memorandum recognized that excluding non-recurring write-offs of goodwill associated with +Shore Bank and Gateway, HRBS had suffered $64 million in pre-tax losses in 2009, which was +“approximately double the income earned over the prior 5 years,” but noted that HRBS “do[es] not +expect losses to continue past 2011.” Petrovich knew or should have known that the conclusions +in the March 2010 memorandum were not reasonable. At the time this analysis was drafted, total +loans past due had trended upward since the beginning of 2009, and total delinquent and +nonaccrual loans, while slightly lower than in February 2010, remained at historically high levels. +16. On April 23, 2010, HRBS filed its Form 10-K for 2009, signed by Petrovich, which +incorporated financial statements recording a DTA of $56.38 million, including a valuation +allowance of $1.0 million established against the Company’s $2.8 million in capital loss +carryforwards, but no valuation allowance relating to the remainder of the DTA, including the +portion of the DTA attributable to loan losses. The March 2010 DTA memorandum reflecting +HRBS’s rationale for this accounting decision was substantially reproduced in the footnotes to the +financial statements included in the Company’s 2009 Form 10-K. +17. In May 2010, HRBS, under Petrovich’s direction, updated the analysis of whether a +valuation allowance was required on the DTA for purposes of HRBS’s first quarter 2010 financial +statements. The identification and weighing of positive and negative evidence remained +substantively unchanged from the March 2010 memorandum, though the updated memorandum +noted that the required annual taxable income to fully utilize the Company’s DTA was now an +average of $9 million, rather than $8 million. The May 2010 memorandum supported its +conclusion that this level would likely be reached by, in part, noting that HRBS, Gateway and +Shore Bank had earned a combined $31 million in 2007, the last full year prior to the mergers. The +memorandum predicted that HRBS would become profitable in 2011, and attached bank-level +capital projections, also drafted by Petrovich and others under his direction, that forecasted a slight +profit as of third quarter of 2011, notwithstanding the Company’s internal consolidated projections +less than two months prior that projected quarterly losses of at least $7 million through 2011. +Petrovich knew or should have known that the conclusions in the May 2010 memorandum were +not reasonable. Internal Company reports as of late May 2010 reflected continuing deterioration of + +3 The outside accounting consultant did not provide an opinion on the validity of the company’s conclusions +and relied on the projections and assumptions that HRBS used in performing the DTA analysis. + 7 +HRBS’s loan portfolio through increasing levels of classified loans, past due loans, delinquent and +nonaccrual loans, and nonperforming loans as a percentage of total loans. +18. On May 17, 2010, HRBS filed its Form 10-Q for the quarterly period ended March +31, 2010. The Form 10-Q incorporated financial statements recording a DTA of $70.32 million, +including the previously-established a valuation allowance of $1.0 million against HRBS’s $2.8 +million in capital loss carryforwards. The financial statements again established no valuation +allowance relating to the remainder of the DTA, including the portion of the DTA attributable to +loan losses. +19. On May 13, 2010, Petrovich informed HRBS’s Board of Directors and senior +management of his intention to end his employment with the Company, effective June 4, 2010. On +June 4, 2010, Petrovich left HRBS. +20. On August 13, 2010, HRBS issued an amended Form 10-K/A for 2009 and an +amended 10-Q/A for the first quarter of 2010, restating the financial results for those periods to +reflect a valuation allowance against the entire DTA. +The Effects of HRBS’s DTA On Its Reported Capitalization Levels +21. The valuation allowance against HRBS’s DTA played a role in determining the +Company’s capitalization level, a measure that banks are required to report quarterly under bank +regulations. A portion of a bank’s DTA is included in its Tier 1 capital calculation. Prior to its +restatement, HRBS reported that it was “adequately capitalized” as of December 31, 2009, and +“undercapitalized” as of March 31, 2010. Following the restatement, HRBS changed this +statement to report that it was “undercapitalized” as of December 31, 2009, and “significantly +undercapitalized” as of March 31, 2010. +22. Changes in regulatory classification are material information to investors. A bank +that falls below certain regulatory capital classifications can be subject to adverse regulatory +actions by bank regulators that severely restrict its activities. Such activities can include the +requirement that a bank that becomes “undercapitalized” submit and obtain approval of a “capital +restoration plan,” and may also include requiring the institution to be recapitalized, prohibiting +asset growth, restricting interest rates paid, requiring prior approval of capital distributions by a +controlling bank holding company, requiring new election of directors or dismissal of directors and +officers, and requiring regulatory approval of proposed dividends or consent to consolidation or +divestiture of the institution or its affiliates. +Violations +23. As a result of the conduct described above, Petrovich was a cause of HRBS’s +violation of Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, +which require every issuer 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 and +quarterly reports on Form 10-Q, and mandate that the required reports must contain any further +material information necessary to make the required statements made in the reports not +misleading. + 8 +24. As a result of the conduct described above, Petrovich was a cause of HRBS’s +violation of Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to +make and keep books, records, and accounts which, in reasonable detail, accurately and fairly +reflect their transactions and dispositions of their assets. +25. As a result of the conduct described above, Petrovich was a cause of HRBS’s +violation of Section 13(b)(2)(B) of the Exchange Act, which requires issuers of securities +registered pursuant to Section 12 of the Exchange Act to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions are recorded as +necessary to permit preparation of financial statements in accordance with generally accepted +accounting principles. +Undertaking +Petrovich has agreed to the following undertaking: +Petrovich shall, within 10 days of the entry of an Order, make a payment in the nature of a +penalty in the amount of $25,000 to the Securities and Exchange Commission. If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Such payment shall be +made in one of the following ways: +(1) Petrovich may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Petrovich 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) Petrovich 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 shall be accompanied by a cover letter +identifying Neal A. Petrovich as a Respondent in these proceedings, and the +file number of these proceedings; a copy of the cover letter and check or +money order must be sent to Scott Friestad, Division of Enforcement, +Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549-5010. +In determining whether to accept Petrovich’s Offer, the Commission has considered this +undertaking. Petrovich agrees that if the Division of Enforcement believes that Petrovich has not + 9 +satisfied this undertaking, 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 the Offer. + +Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + +A. Petrovich cease and desist from committing or causing any violations and any future +violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, +13a-1 and 13a-13 thereunder. + + By the Commission. + + +Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3602.txt b/raw/aaer/2014/AAER-3602.txt new file mode 100644 index 0000000000000000000000000000000000000000..0a8e6ce2e4c62591e42489e0f7cb239558bccc4a --- /dev/null +++ b/raw/aaer/2014/AAER-3602.txt @@ -0,0 +1,1548 @@ +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + +SECURITIES AND EXCHANGE COMMISSION +Washington, D.C. + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73763 / December 5, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3602 / December 5, 2014 + +Admin. Proc. File No. 3-15012 + + +In the Matter of + +S.W. HATFIELD, CPA and +SCOTT W. HATFIELD, CPA + + + + + +OPINION OF THE COMMISSION + + RULE 102(e) PROCEEDING + + CEASE-AND-DESIST PROCEEDING + + Ground for Remedial Action + + Fraud + + Accounting firm and its sole proprietor willfully violated the antifraud provisions of the +federal securities laws by issuing false audit reports. Held, it is in the public interest to +permanently deny respondents the privilege of appearing or practicing before the Commission as +accountants, impose a cease-and-desist order, order disgorgement of $112,529, plus prejudgment +interest, and assess a $110,500 civil penalty. + +APPEARANCES: + + Scott W. Hatfield, CPA, pro se and for S.W. Hatfield, CPA. + + David B. Reece and Jessica B. Magee, for the Division of Enforcement. + +Appeal filed: October 1, 2013 +Last brief received: April 14, 2014 + +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 2 +The Division of Enforcement appeals from the decision of an administrative law judge +dismissing a proceeding brought pursuant to Sections 4C(a)(1) and (3), 21B, and 21C of the +Securities Exchange Act of 1934 and Rule 102(e)(1)(i) and (iii) of the Commission's Rules of +Practice and based on allegations that Respondents willfully violated the antifraud provisions of +the federal securities laws.1 The law judge found that the Division failed to allege that S.W. +Hatfield, CPA ("the Firm"), a Texas accounting firm, and Scott W. Hatfield, the Firm's sole +proprietor (together, "Respondents"), made misrepresentations with respect to certain audit +reports that Respondents issued while the Firm was not in possession of a state license to do so. +Accordingly, the law judge found that there was no basis for sanctioning Respondents. + +We base our findings on an independent review of the record, except with respect to +those findings not challenged on appeal. We find that the legal conclusions on which the law +judge based her dismissal were incorrect. We further find that the Division met its burden under +Rule of Practice 250 to show that "there is no genuine issue with regard to any material fact" and +that it "is entitled to a summary disposition as a matter of law."2 We find that Respondents +willfully violated the antifraud provisions and that certain sanctions are in the public interest. + +I. Background + +A. Respondents issued thirty-eight audit reports for twenty-one public company +issuers while the Firm was not licensed by the State of Texas. + + The underlying facts are largely undisputed. Hatfield has been licensed by the Texas +State Board of Public Accountancy ("TSBPA") as a certified public accountant ("CPA") since +1985. He is the Firm's sole officer, director, and accountant. The Firm has been licensed by the +TSBPA as a CPA firm since 1994, and Hatfield renewed the Firm's license annually through +January 2009. At the relevant times, the Firm also was registered with the Public Company +Accounting Oversight Board ("PCAOB"). + + In a letter dated October 9, 2009, the TSBPA notified Respondents that the Firm's license +for 2010 would not be issued because the Firm had failed to report peer review results as +required by the TSBPA's Peer Review Program.3 The letter instructed Hatfield to complete and +submit an "Affidavit for Exemption from Peer Review" if he believed that the Firm was exempt +from undergoing a peer review. If, for example, a CPA firm has issuer clients only, the firm can + +1 15 U.S.C. §§ 78d-3(a)(1) and (a)(3), 78u-2, 78u-3; 17 C.F.R. § 201.102(e)(1)(i) and (iii). +2 17 C.F.R. § 201.250. +3 See TEX. ADMIN. CODE § 515.3(b)(4) ("If a firm is subject to peer review, then a firm's +office license shall not be renewed unless the office has met the peer review requirements as +defined in Chapter 527 of this title" (relating to Peer Review)). The Peer Review Program +monitors firms' compliance with applicable accounting, auditing, and other attestation standards +adopted by generally recognized standard-setting bodies. The program includes education, +remediation, disciplinary sanctions, or other corrective action when a firm is not in compliance. +TEX. ADMIN. CODE § 527.1. +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 3 +claim an exemption and instead satisfy the peer review requirement by having the PCAOB +conduct an inspection and provide a report to the TSBPA stating that the peer review had been +completed. Although Respondents claim the Firm had only issuer clients, they did not submit +such an affidavit. In fact, the PCAOB had been investigating Respondents since 2008, and +Respondents could not provide the TSBPA with the requisite assurances that the PCAOB +inspection process had been completed. Hatfield did not claim any exemption. By the end of +2009, the TSBPA notified Respondents in writing that the Firm's license would expire on +January 31, 2010. + +On March 8, 2010, the TSBPA sent an e-mail to Ronald Johnson, a Firm affiliate, stating +that the Firm's license was delinquent and expired. On that same date, Johnson forwarded that e- +mail to Hatfield at his e-mail address on file with the TSBPA, asking "What is up with this?" At +about the same time, a TSBPA attorney informed Respondents' attorney by telephone that the +Firm's license was expired, the Firm was three years delinquent in satisfying peer review +requirements, and Respondents could be sanctioned for providing attest services without a valid +license.4 The TSBPA sent a letter to Respondents' attorney on March 15, 2010, stating that +because it had recently learned that the Firm had issuer clients only, the Firm could satisfy its +peer review by having the PCAOB inspect the Firm, and that the TSBPA would need to "receive +a letter from PCAOB stating that all issues have been 'Satisfactorily Addressed' by the firm." In +a letter dated July 8, 2010, the TSBPA again advised Respondents' counsel that the Firm could +not hold itself out as a CPA firm or perform audits or attestations because its license was +delinquent and expired. In May 2011, the TSBPA permitted the Firm to renew its license. + +From January 31, 2010 until May 19, 2011, the period during which the Firm's license +was expired ("the Relevant Period"), Respondents issued thirty-eight audit reports for twenty-one +public company issuers. Each audit report was issued on letterhead titled, "S.W. Hatfield, CPA," +and was signed by Hatfield on behalf of the Firm as "S.W. Hatfield, CPA." The audit reports +were included, with Respondents' authorization, in the issuers' periodic reports and registration +statements filed with the Commission.5 Respondents charged approximately $200,000 in fees +for audits conducted or completed while the Firm was not in possession of a valid license. + +B. The Commission instituted proceedings. + + On September 6, 2012, the Commission issued a Corrected Order Instituting Proceedings +("OIP") alleging that Respondents willfully violated Exchange Act Section 10(b) and Rule 10b-5 + + +4 Attest services include issuing audit reports. TEX. OCC. CODE § 901.002(a)(1). +5 We take official notice of the twenty-one issuers' thirty-eight periodic reports and +registration statements cited in this opinion pursuant to Rule 323. 17 C.F.R. § 201.323. +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 4 +thereunder6 and did not possess the requisite qualifications to represent others.7 The OIP +authorized, if appropriate, the imposition of sanctions under Exchange Act Section 4C(a)(1) and +(3) and Rule 102(e)(1)(i) and (iii); and Exchange Act Sections 21B and 21C. The Division +moved for summary disposition pursuant to Rule of Practice 250. + +In dismissing the proceeding, the law judge found that the Firm was not licensed during +the Relevant Period. The law judge determined that because the Firm was unlicensed when it +issued the thirty-eight audit reports, the reports were signed by a CPA that was "not state- +licensed and in good standing" contrary to the requirements of Regulation S-X. Accordingly, the +law judge concluded that "the issuers who included [the Firm]'s audit reports with their filings +violated the Exchange Act and Securities Act reporting provisions, and Hatfield and [the Firm] +were secondarily liable for [those] violations" (which were not charged in the OIP). But the law +judge also determined that "there is no allegation that the audit reports or the financial statements +that were the subject of the audit reports contained misrepresentations, much less that +Respondents were in any way liable for misrepresentations in the reports and financial +statements." The law judge concluded that the "the allegation that Respondents violated +Exchange Act Section 10(b) and Rule 10b-5 is unproven." + +The law judge found that there was "no basis for sanctioning Respondents pursuant to +Rule 102(e)(1)(iii)" in light of her determination that the Division failed to allege that +Respondents made misrepresentations.8 The law judge also found that there was no basis for +sanctioning Respondents under Rule 102(e)(1)(i) because, "[t]o the extent that Rule 102(e)(1)(i) +is referenced in any litigated case, it is associated with Rule 102(e)(1)(iii) and a respondent's +having willfully violated the federal securities laws. There is no litigated case in which a +respondent was sanctioned pursuant to Rule 102(e)(1)(i) alone." This appeal followed. + +II. The Law Judge's Dismissal Was Improper. + +Rule 250(a) permits a law judge to consider and rule on a motion for summary +disposition at any time after a respondent files an answer and the Division has made its +documents available to that respondent for inspection and copying.9 A law judge may grant a +motion for summary disposition if there is no genuine issue with regard to any material fact and +the party making the motion is entitled to a summary disposition as a matter of law.10 Where the +Division is the moving party and the law judge determines that the Division has not met the + +6 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5. +7 The OIP was reissued in November 2012 to correct a clerical error. +8 The law judge did not mention Exchange Act Section 21B or 21C in reaching her +disposition, but, without a finding that Respondents violated or were a cause of any securities +laws violations, there would be no basis for sanctions under those provisions either. +9 17 C.F.R. § 201.250(a); Gary M. Kornman, Exchange Act Release No. 59403, 2009 WL +367635, at *10 (Feb. 13, 2009). +10 17 C.F.R. § 201.250(b); Kornman, 2009 WL 367635, at *11. +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 5 +standard for summary disposition under Rule 250, and where a respondent has not filed its own +Rule 250 motion, our rules make no express provision for the law judge to sua sponte dismiss the +proceeding without a hearing, as the law judge did here. Rather, the language of Rule 250(b) +directing the law judge to either grant or deny the motion, together with language in the OIP +ordering "that a public hearing for the purpose of taking evidence on the questions set forth in +[the OIP] shall be convened" suggests that, in the circumstances here, a law judge's only +alternative to granting the motion is to deny it and proceed with a hearing. At the very least, if a +law judge concludes that it may be necessary to summarily dismiss a proceeding as a matter of +law, the parties should be provided notice and an opportunity to be heard as to the possible basis +for such a disposition.11 Here, the Division had no notice either from the law judge, or through +any arguments made by Respondents, that its case might be dismissed on the grounds that it +failed to allege that Respondents made a misrepresentation. + +On this record, we do not find it necessary to remand to the law judge for a hearing. The +record before us supports our conclusion that the law judge's dismissal was incorrect as a matter +of law and, further, that the Division has met its burden under Rule 250.12 Contrary to the + +11 Although we are not governed by the Federal Rules of Civil Procedure, those rules +sometimes provide helpful guidance. See Robert M. Ryerson, Exchange Act Release No. 57839, +2008 WL 2117161, at *5 (May 20, 2008) ("Under certain circumstances, the Federal Rules of +Civil Procedure provide helpful guidance, such as when issues are not directly addressed by our +Rules of Practice.") (citation omitted). We note that a federal district court may respond to a +motion for summary judgment by granting summary judgment sua sponte in a nonmoving party's +favor, but only if the court provides the losing party with adequate notice about the issue +ultimately decided against that party and an opportunity to address that issue. See Celotex Corp. +v. Catrett, 477 U.S. 317, 326 (1986) (stating that "district courts are widely acknowledged to +possess the power to enter summary judgments sua sponte, so long as the losing party was on +notice that she had to come forward with all of her evidence"); see also Advantage Consulting +Grp., Ltd. v. ADT Sec. Sys., Inc., 306 F.3d 582, 588 (8th Cir. 2002) (finding that the district court +did not err when it granted summary judgment sua sponte and stating that "[t]he court has +inherent power to grant dispositive motions sua sponte so long as the losing party was on notice +that she had to come forward with all of her evidence" (quoting McClure v. Am. Family Mut. Ins. +Co., 223 F.3d 845, 856 (8th Cir. 2000)); Gibson v. Mayor & City Council of Wilmington, 355 +F.3d 215, 222-23 (3d Cir. 2004) (finding that, although there is authority for a court to grant +summary judgment to the nonmoving party, a court should not do so without "first placing the +adversarial party on notice that the court is considering a sua sponte summary judgment motion" +and finding that notice means "that the targeted party had reason to believe the court might reach +the issue and received a fair opportunity to put its best foot forward" (internal quotation marks +omitted)); Kassbaum v. Steppenwolf Prods., Inc., 236 F.3d 487, 494 (9th Cir. 2000) ("[I]f a court +concludes that a non-moving party is entitled to judgment, great care must be exercised to assure +that the original movant has had an adequate opportunity to show that there is a genuine issue +and that his [or her] opponent is not entitled to judgment as a matter of law." (internal quotation +marks omitted)). +12 Where we have concluded that the record does not provide a basis for summary +disposition, we have remanded for a hearing. See Diane M. Keefe, Exchange Act Release No. +(continued…) +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 6 +conclusion in the Initial Decision, the Division did allege that the audit reports contained +misrepresentations. The OIP alleges that Respondents knew they were not permitted to act as +CPAs because the Firm's license had expired and that Hatfield nonetheless "knowingly signed +the firm's name [as CPAs] to each audit report [the Firm] issued during the period [the Firm's] +license was expired." In its brief in support of its motion for summary disposition, the Division +devoted two pages to a discussion of these misrepresentations, stating specifically that "inclusion +of an audit report issued by a person not recognized as an accountant is a material misstatement," +along with citation to authority, and that "[i]mplicit in each of SWH's audit reports issued +between January 31, 2010 and May 19, 2011 was the representation to each issuer that SWH was +recognized as a CPA under the federal securities laws and qualified and permitted to issue audit +reports on its clients' financial statements." Respondents' opposition to the Division's motion +argued that the issuers, not they, actually made the alleged misrepresentations; that Hatfield's +signature on the audit reports during the Relevant Period was not material due to the "technical +and administrative" reason for their license having lapsed; and that because they purportedly +made good-faith efforts to renew their license, they did not have the requisite scienter for fraud. +We address, and reject, these arguments below, but the fact that Respondents made them +demonstrates that they understood what misrepresentations they were alleged to have made. + +The law judge also incorrectly concluded that Rule 102(e)(1)(i) cannot stand alone as a +basis for sanctioning Respondents. The plain language separating the subparts of Rule 102(e)(1) +uses the disjunctive "or," meaning that any one basis in the rule is sufficient to establish the +Commission's authority to proceed. Such a reading is consistent with our previous determination +that "Rule 102(e)(1) provides that a person may be denied the privilege of appearing or +practicing before the Commission once the Commission makes one of three findings . . . ."13 +Whether all prior matters brought under Rule 102(e)(1)(i) also have been brought under Rule +102(e)(1)(iii) is not dispositive. + +III. Respondents Willfully Violated Exchange Act Section 10(b) and + Rule 10b-5(b) Thereunder. + + To establish liability under Exchange Act Section 10(b) and Rule 10b-5(b) thereunder, +the Division must show by a preponderance of the evidence that Respondents made a +misrepresentation or omission, that such misrepresentation or omission was material, that the +Respondents acted with scienter, and that the conduct was made in connection with the purchase + + +(…continued) +61928, 2010 WL 1514182, at *2 (Apr. 16, 2010) (remanding for amplification of the record +where the law judge decided the matter on summary disposition). +13 Steven Altman, Esq., Exchange Act Release No. 63306, 2010 WL 5092725, at *15 n.50 +(Nov. 10, 2010) (citing Robert W. Armstrong, III, Exchange Act Release No. 51920, 2005 WL +1498425, at *12 (June 24, 2005)) (emphasis added). +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 7 +or sale of securities.14 The Division also must show that Respondents' violations were willful to +obtain relief under Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii) and Exchange Act +Section 21B(a)(1)(A). Because the law judge found that the Division did not allege +misrepresentations, she did not address the parties' arguments regarding any of the other +elements necessary to impose sanctions. We address those elements here. + +A. Respondents made misrepresentations. + +Under Commission rules, a signature on an audit report is a representation that the signer +is a CPA. Exchange Act Section 13(a) requires that financial statements filed with the +Commission be certified by a public accountant.15 That certification occurs in the form of an +audit report in which the CPA expresses an opinion about whether an issuer's financial +statements fairly present the issuer's financial position in conformity with generally accepted +accounting principles.16 Under Rule 1-02(a) of Regulation S-X, an audit report must be prepared +by a CPA.17 Rule 2-01(a) of Regulation S-X provides that CPAs are only those accountants +"duly registered and in good standing" in the jurisdiction in which they reside.18 If a person +issues an audit report as to a public issuer's financial statements, that person impliedly is stating +that he is a CPA within the meaning of Regulation S-X. And if such person signs the audit +report using the title CPA, that person is expressly stating that he is a CPA within the meaning of +Regulation S-X. + +From January 2010 until May 2011, when Respondents were not duly registered and in +good standing in Texas, the jurisdiction in which they resided, they issued thirty-eight audit +reports that were included in documents filed with the Commission pursuant to Regulation S-X +by twenty-one issuers. As the Division argued, it was implicit in the filing of these audit reports +that they were signed by a CPA because they were issued with issuers' financial statements filed +pursuant to Regulation S-X. In fact, in the signature line and heading, Respondents explicitly +represented that they were CPAs. The representations in the thirty-eight audit reports that +Respondents were CPAs on the dates the reports were issued were false. + + +14 See 15 U.S.C. § 78j(b); 17 C.F.R. § 240.10b-5(b); Joseph John VanCook, Exchange Act +Release No. 61039, 2009 WL 4005083, at *8 (Nov. 20, 2009) (describing requirements for +liability under antifraud provisions); see also SEC v. Dain Rauscher, Inc., 254 F.3d 852, 855-56 +(9th Cir. 2001) (noting that the antifraud provisions "forbid making a material misstatement or +omission" in connection with the purchase or sale of securities); SEC v. Brooks, No. Civ. A. +3:99-CV-1326-D, 1999 WL 493052, at *2 (N.D. Tex. July 12, 1999). +15 15 U.S.C. § 78m. +16 17 C.F.R. § 210.2-02(c). +17 Id. at § 210.1-02(a)(1). +18 Id. at § 210.2-01(3)(a). +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 8 +Respondents argue they did not make the alleged misrepresentations.19 They argue that +"because they did not have 'ultimate authority' over the statements, the Respondents were not +makers of those statements for purposes of Section 10(b) and Rule 10b-5(b)," citing Janus +Capital Group, Inc. v. First Derivative Traders.20 Janus involved a private civil action alleging +claims under Exchange Act Rule 10b-5 based on misrepresentations made in prospectuses filed +with the Commission by Janus Investment Fund, a mutual fund company. The plaintiffs alleged +that Janus Capital Management ("JCM"), the fund's investment adviser and administrator, +committed fraud because it had been significantly involved in the creation of the +misrepresentations.21 The Court held that "the maker of a statement is the entity with authority +over the content of the statement and whether and how to communicate it."22 The Court found +that "attribution within a statement or implicit from surrounding circumstances is strong +evidence that a statement was made by—and only by—the party to whom it is attributed."23 The +Court found that JCM did not have ultimate control over the misrepresentations and therefore did +not make the misrepresentations for purposes of Rule 10b-5.24 + +In stark contrast to the Janus facts, Respondents drafted, dated, printed on Firm +letterhead, and signed thirty-eight audit reports that were included in documents filed with the +Commission by twenty-one issuers. Under Regulation S-X, it is the CPA—and only the CPA— +who has the authority over the content of the audit report and whether such audit report is issued + +19 Respondents have not filed any briefs or otherwise participated in the appeal before us. +The Office of the Secretary notified Respondents in a letter dated June 26, 2014 that +Respondents failed to file two briefs due in this appeal on December 23, 2013 and April 28, +2014, respectively. The letter noted that, on December 27, 2013, Respondents' counsel filed a +Notice of Withdrawal as counsel and, in that notice, stated that it had sent Respondents all the +pleadings in this matter, along with a copy of the notice. The letter explained that, pursuant to +Rule 180(c), 17 C.F.R. § 201.180(c), the Commission may "decide the particular matter at issue +against that person . . . if a person fails . . . to make a filing required under these Rules of +Practice." The letter further explained that the Commission was deliberating and "could affirm, +reverse and remand the proceeding to the law judge, or reverse and find against [Respondents] in +a final order." Respondents were instructed to contact the Office of the Secretary if they +intended to file any document in this matter, but they did not reply. Our discussion of +Respondents' arguments is based on pleadings in their opposition to the Division's motion for +summary disposition below. +20 131 S. Ct. 2296, 2302 (2011). +21 The plaintiffs also alleged that JCM had a close relationship with the fund, exercised +significant influence over the fund and its prospectus disclosures, and was understood by +investors to be the "maker" of disclosures issued by the fund. +22 131 S. Ct. at 2303. +23 Id. at 2302. +24 Id. at 2305. +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 9 +for purposes of being included in an issuer's filing with the Commission.25 Respondents were +the purported CPAs who opined about the twenty-one issuers' financial statements and permitted +those issuers to include the thirty-eight audit reports in their filings. Respondents thus were the +makers of the misstatements. + +B. Respondents' misrepresentations were material. + + A fact is material if there is a substantial likelihood that a reasonable investor would have +considered the misstated or omitted fact important in making an investment decision and if +disclosure of the misstated or omitted fact would have significantly altered the total mix of +information available to the investor.26 "'The question of materiality, it is universally agreed, is +an objective one, involving the significance of an omitted or misrepresented fact to a reasonable +investor.'"27 + +Under the circumstances described above, the misrepresentation that audit reports +appearing in registration statements and/or periodic reports filed with the Commission have been +signed by a CPA is material. Respondents' audit reports appeared in registration statements +and/or periodic reports filed with the Commission. Registration statements and periodic reports, +specifically Forms 10-K, are two of the most common types of investor resources. An audit +report signed by a CPA is important to investors because it provides an independent evaluation +of the issuer's financial position by a qualified professional on whose expertise investors can +rely. A reasonable investor would want to know that a purported CPA does not have a valid +license when rendering an opinion about financial statements, especially when the reason for the +license lapse calls into question whether the auditor currently complies with applicable +professional standards.28 + +25 Rule 1-02(a)(1) of Regulation S-X, 17 C.F.R. § 210.1-02(a)(1) (stating that "the term +accountant's report, when used in regard to financial statements, means a document in which an +independent public or certified public accountant indicates the scope of the audit (or +examination) which he has made and sets forth his opinion regarding the financial statements +taken as whole, or an assertion to the effect that an overall opinion cannot be expressed") +(emphasis in original). +26 Basic Inc. v. Levinson, 485 U.S. 224, 231-32 (1988); TSC Indus. Inc. v. Northway, Inc., +426 U.S. 438, 449 (1976). +27 David Henry Disraeli, Exchange Act Release No. 57027, 2007 WL 4481515, at *6 (Dec. +21, 2007) (quoting TSC Indus., 426 U.S. at 445), petition denied, 33 F. App'x 334 (D.C. Cir. +2008) (per curiam); see also Basic Inc., 485 U.S. at 232 ("We now expressly adopt the TSC +Industries standard of materiality for the § 10(b) and Rule 10b-5 context."); SEC v. Blatt, 583 +F.2d 1325, 1331 (5th Cir. 1978) ("We should emphasize, however, that the test for materiality is +objective.") (citing TSC Indus.). +28 Ronald Effren, Exchange Act Release No. 36713, 1996 WL 16981, at *3 (Jan. 16, 1996) +(settlement order finding that respondent violated antifraud provisions and Rule 102(e)(1)(i) and +(iii) by falsely holding himself out as a CPA and issuing an audit report that was included in an +issuer's registration statement). While settled cases are not precedent, Citizens Cap. Corp., +(continued…) +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 10 +Here, during the Relevant Period, Respondents could not render the requisite professional +opinion because the Firm's license had expired and the Firm was prohibited from providing attest +services or representing that it was an accounting firm or CPA firm.29 Significantly, the reason +Respondents were not able to renew their license was because they failed to comply with TSBPA +rules by reporting the results of a timely PCAOB inspection. The PCAOB's report was +important to show that investors could rely on Respondents' professional expertise by +demonstrating that they were in compliance with applicable accounting, auditing, and other +attestation standards. Moreover, a reasonable investor would want to know that an audit report +was signed by someone who had been expressly informed by the TSBPA, a state licensing +authority, that he was not legally authorized to issue such an audit report because he had not +satisfied the TSBPA's peer review requirements. + + Respondents argue that the misrepresentations are not material. They urge that the "best +and most probative evidence of materiality would be what an investor actually said regarding the +importance of the supposedly false or omitted information in question" and that the Division +failed to offer any evidence on this point. But "the reaction of individual investors is not +determinative of materiality, since the standard is objective, not subjective."30 "[M]ateriality +depends on the significance the reasonable investor would place on the withheld or +misrepresented information."31 We have stated that, although in general materiality is primarily +a factual inquiry, "the question of materiality is to be resolved as a matter of law when the +information is 'so obviously important [or unimportant] to an investor, that reasonable minds + +(…continued) +Exchange Act Release No. 67313, 2012 WL 2499350, at *5 n.27 (June 29, 2012) (citation +omitted), we "may use an opinion issued in connection with a settlement to state views on the +issues presented in that case that [the Commission] would apply in other contexts." George J. +Kolar, Exchange Act Release No. 46127, 2002 WL 1393652, at *4 (June 26, 2002) (finding that +manager of broker-dealer failed to exercise reasonable supervision over registered representative +who violated registration and antifraud provisions and that reference to a settled case with similar +factual and legal findings was appropriate) (citation omitted). +29 A firm is prohibited from providing attest services or holding itself out as an accounting +or CPA firm unless it holds a validly issued license. TEX. OCC. CODE §§ 901.003, 901.456, +901.460; TEX. ADMIN. CODE § 501.80, Rules of Professional Conduct. At the very least, +Respondents had a duty to know and observe the Rules of Professional Conduct. See TEX. +ADMIN. CODE § 501.53 (stating that "[a]ll of the rules of professional conduct shall apply to +and must be observed by" a CPA that practices in Texas). +30 Disraeli, 2007 WL 4481515, at *6 & n.30 (citing Richmark Capital Corp., Exchange Act +Release No. 48758, 2003 WL 22570712, at *5 (Nov. 7, 2003) (citing TSC Indus., 426 U.S. at +445)); see also SEC v. Nat'l Student Mktg. Corp., 457 F. Supp. 682, 708 (D.D.C. 1978) (stating +that the materiality analysis "is an [o]bjective one, involving the significance of an omitted or +misrepresented fact to a [r]easonable investor, not the significance of the information to various +individual investors") (citing TSC Indus.). +31 Disraeli, 2007 WL 4481515, at *6 & n.31 (citing Basic, Inc., 485 U.S. at 240). +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 11 +cannot differ on the question of materiality.'"32 We find that reasonable minds cannot differ here. +The qualification of a CPA to render an opinion about an issuer's financial statements is and has +been a fundamental aspect of an investor's decision about whether to invest in an issuer since the +adoption of the Exchange Act in 1934. + +Respondents state that, "due to the technical and administrative nature of the [Firm's] +temporary license revocation, it is unreasonable and factually unsupported to assume the +materiality of this revocation's non-disclosure to investors in the issuer companies." But the +expiration was neither technical nor administrative. As demonstrated above, it was based on +Respondents' failure to meet a requirement that goes to the heart of a CPA's competency and +highlighted the fact that the PCAOB, a regulatory body uniquely qualified to evaluate a CPA +firm's fitness to practice, had not yet resolved with the Respondents the significant audit +deficiencies identified in its most recent inspection report.33 + +C. Respondents acted with scienter. + +The Supreme Court has defined scienter as "a mental state embracing intent to deceive, +manipulate, or defraud."34 Scienter includes recklessness, defined as conduct that is "an extreme +departure from the standards of ordinary care, . . . which presents a danger of misleading buyers +or sellers that is either known to the [respondent] or is so obvious that the [respondent] must +have been aware of it."35 + +32 Id. at *6 & n.32 (quoting SEC v. Cochran, 214 F.3d 1261, 1267 (10th Cir. 2000)) +(alteration in original) (citations omitted); see also TSC Indus., 426 U.S. at 450 ("Only if the +established omissions are 'so obviously important to an investor, that reasonable minds cannot +differ on the question of materiality' is the ultimate issue of materiality appropriately resolved 'as +a matter of law' by summary judgment.") (citation omitted); accord SEC v. Phan, 500 F.3d 895, +908 (9th Cir. 2007) (same); SEC v. Research Automation Corp., 585 F.2d 31, 35 (2d Cir. 1978) +(same). +33 We take official notice pursuant to Rule 323 (permitting the Commission to take official +notice of, for example, "any material fact which might be judicially noticed by a district court of +the United States"), that, in fact, the PCAOB disciplined Respondents in a final order issued on +February 8, 2012. S.W. Hatfield, CPA and Scott W. Hatfield, CPA, PCAOB File No. 105-2009- +003 (Feb. 8, 2012). The record in that case indicates that the PCAOB's disciplinary action +against Respondents was instituted in 2009 and was pending throughout the Relevant Period. On +appeal, we sustained the PCAOB's findings of violation and determination to revoke the Firm's +PCAOB registration and permanently bar Hatfield from association with a registered public +accounting firm. S.W. Hatfield, CPA and Scott W. Hatfield, CPA, Exchange Act Release No. +69930, 2013 WL 3339647, at *26 (July 3, 2013). +34 Ernst & Ernst v. Hochfelder, 425 U.S. 185, 193 n.12 (1976). +35 Sundstrand Corp. v. Sun Chem. Corp., 553 F.2d 1033, 1045 (7th Cir. 1977); Hollinger v. +Titan Corp., 914 F.2d 1564, 1568-69 (9th Cir. 1990). The Division may demonstrate scienter by +circumstantial evidence. Herman & MacLean v. Huddleston, 459 U.S. 375, 390 n.30 (1983); +Valicenti Advisory Servs., Inc. v. SEC, 198 F.3d 62, 65 (2d Cir. 1999). +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 12 +Respondents knew by at least March 8, 2010 that the Firm's license had not been renewed +because that is when Hatfield received an email from the TSBPA expressly saying so.36 Also in +March, the TSBPA informed Respondents' counsel that, while Respondents' license was expired, +they were not permitted to hold themselves out as CPAs and issue audit reports. The TSBPA +reiterated this message to counsel in writing four months later. + +Even before March 8, 2010, Respondents were at least reckless in misrepresenting their +status. Respondents had been in the industry for over fifteen years and knew that the Firm had to +renew its license annually. It is implausible that Respondents did not know that having a valid +license was a prerequisite for holding themselves out as CPAs. Moreover, beginning in October +2009, well before the Firm's license expired, the TSBPA began to expressly notify Respondents +through letters, e-mails, and telephone calls about the Firm's impending license expiration, the +options Respondents had for renewing the Firm's license, and the consequences of not renewing +the license. Respondents acted with no care when they held themselves out as CPAs, and the +danger of deceiving investors about their qualifications could not have been more obvious. + +Respondents argue that they did not act with scienter because there is no evidence that +they acted with the specific, or even reckless, intent to deceive investors. Citing Sundstrand +Corp. v. Sun Chemical Corp. and Alvin W. Gebhart, Respondents assert that "recklessness +requires that the allegedly fraudulent material omission or misstatement 'derive from something +more egregious than even 'white heart/empty head' good faith,'"37 and that we must "'look at an +actor's actual state of mind at the time of the relevant conduct.'"38 Respondents assert that they +tried repeatedly in good faith to have the PCAOB complete its inspection and maintained +constant contact with the PCAOB and TSBPA regarding the status of the Firm's license. + +When the defendant is aware of the facts that made the statement misleading, "'he cannot +ignore the facts and plead ignorance of the risk.'"39 Notwithstanding any efforts Respondents + +36 Disraeli, 2007 WL 4481515, at *5 n.25 ("The scienter of a corporation's officers and +directors establishes the scienter of the corporation for purposes of the antifraud provisions." +(internal quotation marks and citation omitted)); see also A.J. White & Co. v. SEC, 556 F.2d 619, +624 (1st Cir. 1977) (holding that a firm "can act only through its agents, and is accountable for +the actions of its responsible officers"). +37 Sundstrand, 553 F.2d at 1045. The Sundstrand court explained that recklessness includes +subjective and objective components. The objective component is satisfied if the facts +demonstrate that the danger of deceiving investors was known or so obvious that it would be +known to any reasonable person. The subjective component is satisfied if the facts demonstrate +something more than "'white heart/empty head' good faith" or "inexcusable negligence." Id. +38 Gebhart, Exchange Act Release No. 58951, 2008 WL 4936788, at *7 (Nov. 14, 2008), +pet. for review denied, Gebhart v. SEC, 595 F.3d 1034 (9th Cir. 2010), cert. denied, 130 S. Ct. +3485 (June 21, 2010). +39 SEC v. Platforms Wireless Intern. Corp., 617 F.3d 1072, 1094 (9th Cir. 2010) (quoting +Makor Issues & Rights, Ltd. v. Tellabs Inc., 513 F.3d 702, 704 (7th Cir. 2008) and holding that, +in the context of a motion for summary judgment, "if no reasonable person could deny that the +(continued…) +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 13 +may have made to renew the Firm's license, Respondents knew that those efforts were not +successful during the Relevant Period. Thus, Respondents must have been cognizant of the +obvious risk of deceiving investors by falsely identifying themselves as CPAs. For the reasons +articulated above, we find that there is ample evidence to support our conclusion that +Respondents acted with scienter. We therefore reject Respondents' arguments. + +D. Misrepresentations were made "in connection with" the purchase or sale of +securities. + +The "in connection with" requirement is meant to be read broadly.40 The requirement can +be satisfied by statements made in public filings with the Commission, such as Forms 10-K and +registration statements.41 During the pendency of this appeal, we requested supplemental +briefing from the parties to address, among other things, in what way any of the thirty-eight audit +reports are "in connection with" the purchases or sales of securities of the twenty-one issuers.42 +In its response, the Division produced evidence that identifies certain audit reports along with +details of related trading in the relevant issuers' securities.43 The record establishes that + +(…continued) +statement was materially misleading, a defendant with knowledge of the relevant facts cannot +manufacture a genuine issue of material fact merely by denying (or intentionally disregarding) +what any reasonable person would have known"); see also Gebhart v. SEC, 255 F. App'x 254, +255 (9th Cir. 2007) (unpublished) ("When warranted, the SEC is entitled to infer from +circumstantial evidence that a defendant must have been cognizant of an extreme and obvious +risk and reject as implausible testimony [or other evidence] to the contrary."). +40 SEC v. Zandford, 535 U.S. 813, 819-20 (2002) (interpreting Exchange Act Section +10(b)'s "in connection with" requirement broadly; noting that "the statute should be construed not +technically and restrictively, but flexibly to effectuate its remedial purposes" (internal quotation +marks omitted) (citing SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 195 (1963))). +41 See SEC v. Wolfson, 539 F.3d 1249, 1262 (10th Cir. 2008) (finding that +misrepresentations in a small business issuer's Form 10-K and 10-Q satisfied the "in connection +with requirement"); McGann v. Ernst & Young, 102 F.3d 390, 397 (9th Cir. 1996) (finding that +fraudulent Forms 10-K fall within the ambit of Exchange Act Section 10(b)); Ames Dep't Stores, +Inc. Stock Litig., 991 F.2d 953, 965 (2d Cir. 1993) (finding that the "in connection with" +requirement is satisfied when misrepresentations are disseminated in public reports); see also +SEC v. Rana Research, Inc., 8 F.3d 1358, 1362 (9th Cir. 1993) ("Where the fraud alleged +involves public dissemination in a document such as a press release, annual report, investment +prospectus or other such document on which an investor would presumably rely, the 'in +connection with' requirement is generally met by proof of the means of dissemination and the +materiality of the misrepresentation or omission." (citing Ames Dep't Stores)). +42 Respondents did not reply. See supra note 19. +43 Attached to the Division's supplemental brief is a declaration of David R. King, a staff +accountant, identifying the sources of information for the chart, including the Commission's +public website, the OTCBB's public website, and a Bloomberg terminal located on Commission +premises. We take official notice of the information sources pursuant to Rule 323. +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 14 +purchases or sales occurred in the relevant issuers' securities after thirteen of the thirty-eight +audit reports appeared in Forms 10-K or registration statements and while those reports were the +most current on file (i.e., while investors would have been relying on them). Those audit reports +are as follows: + +No. Issuer Audit Report Issuer's Public Filing Date Range of +Purchase or Sale +1. 8888 Acquisition Corp. Fiscal Year End ("FYE") +8/31/10 audit report dated +10/7/10 +FYE 8/31/10 10-K filed +10/15/10 +10/19/10 to 6/21/11 +2. Eight Dragons Co. FYE 12/31/09 audit report +dated 2/23/10 +FYE 12/31/09 10-K filed +3/9/10 +4/6/10 to 11/16/11 +3. Eight Dragons Co. FYE 12/31/10 audit report +dated 1/26/11 +FYE 12/31/10 10-K filed +1/28/11 +4/6/10 to 11/16/11 +4. HPC Acquisitions, Inc. FYE 12/31/09 audit report +dated 2/11/10 +FYE 12/31/09 10-K filed +3/17/10 +5/11/10 to 1/25/12 +5. HPC Acquisitions, Inc. FYE 12/31/10 audit report +dated 1/6/11 +FYE 12/31/10 10-K filed +3/1/11 +5/11/10 to 1/25/12 +6. Truwest Corp. FYE 9/30/10 audit report +dated 11/9/10 +FYE 9/30/10 10-K filed +11/15/10 +12/14/10 to 9/9/11 +7. X-Change Corp. FYE 12/31/09 audit report +dated 3/31/10 +FYE 12/31/09 10-K filed +4/21/10 +4/22/10 to 5/7/12 +8. X-Change Corp. FYE 12/31/10 audit report +dated 1/14/11 +FYE 12/31/10 10-K filed +1/18/11 +4/22/10 to 5/7/12 +9. Asia Green Agriculture +Corp. f/k/a SMSA +Palestine Acquisition +Corp. +FYE 12/31/09 audit report +dated 3/15/10 +FYE 12/31/09 10-K filed +3/30/10 +4/21/10 to 7/23/10 +10. Marketing Acquisition +Corp. +FYE 12/31/09 audit report +dated 3/2/10 +FYE 12/31/09 10-K filed +3/5/10 +3/16/10 to 3/28/11 +11. Signet International +Holdings, Inc. +FYE 12/31/09 audit report +dated 4/7/10 +FYE 12/31/09 10-K filed +4/12/10 +4/13/10 to 3/29/11 +12. SMSA Gainesville +Acquisition Corp. +FYE 12/31/09 audit report +dated 3/11/10 +FYE 12/31/09 10-K filed +3/16/10 +10/15/10 to 10/28/10 +13. SMSA Crane Acquisition +Corp. +FYE 12/31/09 audit report +dated 2/17/10 +Form 10-12G/A filed +2/22/10 +11/5/10 + +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 15 +We find that the misstatements in the thirteen audit reports listed above are "in +connection with" the purchase or sale of securities and that, the other elements of the violation +having been met, Respondents violated Exchange Act Section 10(b) and Rule 10b-5 thereunder. + +E. Respondents' violations were willful. + + Under Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii), 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 by the Commission +after notice and opportunity for hearing in the matter . . . 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. + +We have found that Respondents violated the federal securities laws. The question here is +whether Respondents did so willfully. + +It is well established that a willful violation of the securities laws means "intentionally +committing the act which constitutes the violation" and does not require that the actor "also be +aware that he is violating one of the Rules or Acts."44 There is no dispute that Respondents +intentionally identified themselves as CPAs in audit reports that they issued for inclusion in +public filings. Respondents argue that their "mental state in permitting SWH's license to lapse +and in issuing any relevant audit reports during that time was far less than intentional or the +result of any willfulness on their part." But the record evidence contradicts their argument. +Respondents also argue that "there is no evidence that the Respondents acted willfully, that is, +with the specific intent to deceive investors or potential investors." The intent to deceive, i.e., +scienter, is different from the intent to the commit the act, i.e., willfulness, and we have +addressed Respondents' scienter above. We thus reject Respondents' arguments and find that +Respondents acted willfully. + +Accordingly, for all of the above reasons, we find that there is no genuine issue with +regard to any material fact and that the Division is entitled to a summary disposition as a matter +of law that Respondents willfully violated Exchange Act Section 10(b) and Rule 10b-5 +thereunder within the meaning of Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii). + +IV. Sanctions + +A. Respondents are denied the privilege of appearing or practicing before the +Commission under Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii). + +In assessing the need for sanctions in the public interest, we consider, among other +things: the egregiousness of the respondent's actions, the isolated or recurrent nature of the + +44 Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (internal quotation marks and +citation omitted). +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 16 +infraction, the degree of scienter involved, the sincerity of the respondent's assurances against +future violations, the respondent's recognition of the wrongful nature of his or her conduct, and +the likelihood that the respondent's occupation will present opportunities for future violations. +Our "inquiry into . . . the public interest is a flexible one, and no one factor is dispositive."45 We +also consider the extent to which the sanction will have a deterrent effect.46 + +Respondents' actions were egregious and recurrent. They repeatedly issued audit reports +for over one year while the Firm failed to possess a license despite knowing they were prohibited +from doing so. Respondents concealed the truth from the investing public by issuing such audit +reports despite knowing that they were prohibited from doing so, and thus acted with a high +degree of scienter. Respondents make no assurances against future violations and do not +recognize the wrongful nature of their conduct. In fact, Respondents continue to blame the +PCAOB for the license expiration, asserting that "it was in no way [their] fault or responsibility . +. . ." Respondents ignore that they are the only ones responsible for issuing audit reports despite +not holding a valid firm license. We find that Respondents' callous disregard for such a basic +regulatory requirement as the necessity of having a license to practice as a certified public +accountant demonstrates that there is a high likelihood that they will commit future violations. + +On July 3, 2013, following Respondents' appeal of a separate disciplinary proceeding by +the PCAOB regarding conduct unrelated to this proceeding, we sustained PCAOB's decision to +revoke the Firm's PCAOB registration and permanently bar Hatfield from association with a +registered public accounting firm.47 But those sanctions do not prohibit Respondents from +appearing and practicing before the Commission in other capacities, such as working in an +accounting capacity for Commission-registered investment advisers.48 As we have stated, "[t]he + +45 Michael C. Pattison, Exchange Act Release No. 67900, 2012 WL 4320146, at *8 (Sept. +20, 2012) (citing Disraeli, 2007 WL 4481515, at *15). +46 Id. (citing James E. Franklin, Exchange Act Release No. 56649, 2007 WL 2974200, at +*6 & n.28 (Oct. 12, 2007) (citing Ahmed Mohamed Soliman, Exchange Act Release No. 35609, +1995 WL 237220, at *3 n.12 (Apr. 17, 1995); Lester Kuznets, Exchange Act Release No. 23525, +1986 WL 625417, at *3 (Aug. 12, 1986); McCarthy v. SEC, 406 F.3d 179, 188, 190 (2d Cir. +2005))). +47 S.W. Hatfield, CPA, 2013 WL 3339647, at *26. Pursuant to Rule 323, we take official +notice that in March 2014, the TSBPA revoked Hatfield's and the Firm's licenses citing +violations regarding discreditable acts, violation of a rule of professional conduct adopted by the +Board, conduct indicating a lack of fitness to serve the public as a professional accountant, and +an "other rule or order violation." +48 See James M. Schneider, CPA, Exchange Act Release No. 69922, 2013 WL 3327751, at +*6 (July 2, 2013) (finding that a Rule 102(e) order protects against the "breadth of ways in which +accountants can threaten our processes" and denying respondent's motion for the Commission to +clarify that his Rule 102(e) suspension order did not preclude him from "serving on the audit +committee of a Commission registrant or as the CFO of a public company, so long as he does not +serve as the principal accounting officer" (citing SEC v. Brown, 878 F. Supp. 2d 109, 125 +(D.D.C. 2012) (quoting Armstrong, 2005 WL 1498425, at *11-12 (finding that the controller of a +(continued…) +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 17 +Commission disciplines professionals pursuant to Rule 102(e) in order to 'protect the integrity of +its processes.'"49 We find that permanently disqualifying Respondents from appearing or +practicing before the Commission is remedial because it will prevent Respondents and deter +others from disregarding their professional responsibilities and protect the investing public by +encouraging diligent compliance with regulatory requirements. Because we have found that a +bar under Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii) is in the public interest, we do +not reach the need for a sanction under Exchange Act Section 4C(a)(1) and Rule 102(e)(1)(i). + +B. A cease-and-desist order is warranted. + + Exchange Act Section 21C(a) authorizes us to impose a cease-and-desist order on any +person who is violating, has violated, or is about to violate that Act or any rule thereunder.50 In +determining whether a cease-and-desist order is appropriate, we consider, in addition to the +factors above, "whether the violation is recent, the degree of harm to investors or the marketplace +resulting from the violation, and the remedial function to be served by the cease-and-desist order +in the context of any other sanctions."51 + + We conclude that a cease-and-desist order is necessary. The violations are recent, having +occurred from 2010 to 2011. Although the record does not identify any pecuniary harm to +investors, our public interest analysis "focus[es] . . . on the welfare of investors generally."52 +Investors and the marketplace are harmed when a purported CPA misrepresents his qualification +to opine on an issuer's financial statements because such conduct undermines the reliability of +fundamental investment tools that help investors make informed decisions. We conclude that +Respondents pose a substantial, continuing risk of harm to investors and the marketplace. A +cease-and-desist order will serve the remedial purpose of encouraging Respondents to +understand and obey their obligations under the securities laws. + + +(…continued) +public company's subsidiary appeared and practiced before the Commission as an accountant)))); +accord SEC v. Prince, No. 09-1423, 942 F. Supp. 2d 108, 146 (D.D.C. May 2, 2013) (quoting +Armstrong and finding that a public company employee, serving as "Director of Mergers and +Acquisitions," violated a Rule 102(e) order by appearing and practicing before the Commission +as an accountant). +49 Pattison, 2012 WL 4320146, at *12 & n.70 (citing Armstrong, 2005 WL 1498425, at *11 +& n.62 (citing Touche Ross & Co. v. SEC, 609 F.2d 570, 582 (2d Cir. 1979) (stating that Rule of +Practice 2(e), the predecessor to Rule of Practice 102(e), "represents an attempt by the +Commission to protect the integrity of its own processes" and upholding the validity of Rule of +Practice 2(e) as "reasonably related" to the purposes of the federal securities laws))). +50 15 U.S.C. § 78u-3(a). +51 KPMG Peat Marwick LLP, Exchange Act Release No. 43862, 2001 WL 47245, at *26 +(Jan. 19, 2001), petition denied, 289 F.3d 109 (D.C. Cir. 2002). +52 Kornman, 2009 WL 367635, at *9. +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 18 +C. Disgorgement, plus prejudgment interest, is appropriate. + + Exchange Act Section 21C(e) authorizes disgorgement, including reasonable +prejudgment interest, in a cease-and-desist proceeding.53 Disgorgement is an equitable remedy +designed to deprive wrongdoers of their unjust enrichment and deter others from similar +misconduct.54 Accordingly, "[t]he amount of disgorgement should include all gains flowing +from the illegal activities," but calculating disgorgement "requires only a reasonable +approximation of profits causally connected to the violation."55 Once the Division shows that its +disgorgement figure is a reasonable approximation of the amount of unjust enrichment, the +burden shifts to the respondents to demonstrate that the Division's estimate is not a reasonable +approximation.56 Where disgorgement cannot be exact, the "well-established principle" is that +the burden of uncertainty in calculating ill-gotten gains falls on the wrongdoer whose illegal +conduct created that uncertainty.57 + + The record shows that total fees charged by Respondents for the thirteen reports issued in +violation of the antifraud provisions is $112,529. We conclude that this amount represents a +reasonable approximation of Respondents' ill-gotten gains.58 Respondents have submitted no +evidence to the contrary and therefore have not met their burden of showing that this estimate is +not a reasonable approximation. We order Respondents to disgorge $112,529 plus prejudgment +interest.59 Because the misconduct committed by Hatfield and the Firm was inextricably + +53 15 U.S.C. § 78u-3(e). +54 See, e.g., Platforms Wireless, 617 F.3d at 1096 (quoting SEC v. First Pacific Bancorp, +142 F.3d 1186, 1191 (9th Cir. 1998) ("Disgorgement is designed to deprive a wrongdoer of +unjust enrichment, and to deter others from violating securities laws by making violations +unprofitable.")). +55 Id. (quoting SEC v. JT Wallenbrock & Assocs., 440 F.3d 1109, 1114 (9th Cir. 2006) and +First Pacific Bancorp, 142 F.3d at 1192 n.6). +56 Id. (quoting SEC v. First City Fin. Corp., 890 F.2d 1215, 1232 (D.C. Cir. 1989)). +57 Id. (quoting First City Fin. Corp., 890 F.3d at 1232). +58 The Division urges us to impose disgorgement of fees paid to Respondents for all thirty- +eight audit reports at issue because such disgorgement "comports with prior Commission +decisions in which unregistered auditors were required to disgorge audit fees for work performed +in violation of Section 102(a) of the Sarbanes-Oxley Act of 2002 . . . ." But Respondents were +not charged with such a violation. We order disgorgement here for violations charged and +proven by the Division. +59 Terence Michael Coxon, Exchange Act Release No. 48385, 2003 WL 21991359, at *14 +(Aug. 21, 2003) ("[E]xcept in the most unique and compelling circumstances, prejudgment +interest should be awarded on disgorgement, among other things, in order to deny a wrongdoer +the equivalent of an interest free loan from the wrongdoer's victims."), aff'd, 137 F. App'x 975 +(9th Cir. 2005); 17 C.F.R. § 201.600(b) (stating that "[i]nterest on the sum to be disgorged shall +be computed at the underpayment rate of interest established under Section 6621(a)(2) of the +Internal Revenue Code, 26 U.S.C. § 6621(a)(2), and shall be compounded quarterly"). +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 19 +entwined, their liability for the disgorgement and prejudgment interest shall be joint-and- +several.60 + +D. A second-tier civil monetary penalty is in the public interest. + + Exchange Act Section 21B(a)(1)(A) authorizes us to impose a civil monetary penalty for +willful violations of the federal securities laws.61 In considering whether a civil penalty is in the +public interest, we consider: whether the conduct involved fraud or resulted in harm to others; +the extent to which any person was unjustly enriched; whether the individual has committed +prior violations; the need for deterrence; and such other matters as justice may require.62 +Second-tier penalties are appropriate if the violation "involved fraud, deceit, manipulation, or +deliberate or reckless disregard of a regulatory requirement," and third-tier penalties are +appropriate if, in addition, the violation "directly or indirectly resulted in substantial losses or +created a significant risk of substantial losses to other persons or resulted in substantial pecuniary +gain to the person who committed" the violation.63 + + The Division seeks a second-tier penalty, and we find this appropriate. As discussed +above, Respondents' conduct involved fraud and deceit under the securities laws and undermined +the reliability of disclosure resources used by investors to make investment decisions. The +record does not demonstrate any pecuniary loss to investors, and Respondents' pecuniary gain +(i.e., the audit report fees) is not substantial. Respondents' unjust enrichment also is not +substantial. Respondents have a disciplinary history and were sanctioned by the PCAOB for +having engaged in improper professional conduct in the audit of the financial statements of two +public companies.64 Respondents' misconduct addressed in the PCAOB proceeding, together +with the misconduct here, demonstrates that the need for deterrence is high. + + The statutory maximum amount that may be imposed as a second-tier penalty for each act +or omission occurring after March 3, 2009 but before March 5, 2013 is $75,000 against a natural + +60 Montford and Co., Inc., d/b/a Montford Assoc. and Ernest V. Montford, Sr., Investment +Advisers Act Release No. 3829, 2014 WL 1744130, at *23 & n.205 (May 2, 2014) ("Numerous +courts recognize that 'where two or more individuals or entities collaborate or have a close +relationship in engaging in the violations of securities laws, they have been held jointly and +severally liable for the disgorgement of illegally obtained proceeds.'") (quoting David R. Lehl, +Securities Act Release No. 8102, 2002 WL 1315552, at *14 (May 20, 2002) (citation omitted)); +see also SEC v. Hughes Capital Corp., 124 F.3d 449, 455 (3d Cir. 1997) ("When apportioning +[disgorgement] liability among multiple tortfeasors, it is appropriate to hold all tortfeasors jointly +and severally liable for the full amount of the damage unless the liability is reasonably +apportioned."). +61 15 U.S.C. § 78u-2(a)(1)(A). +62 Id. § 78u-2(c). +63 Id. § 78u-2(b). +64 S.W. Hatfield, CPA, 2013 WL 3339647, at *1, *24. +1 +2 +3 +4 +5 +6 +7 +8 +9 +10 +11 +12 +13 +14 +15 +16 +17 +18 +19 +20 +21 +22 +23 +24 +25 +26 +27 +28 + + 20 +person and $375,000 against any other person.65 Within this statutory framework, we have +discretion in setting the amount of penalty.66 We find that a civil penalty in the total amount of +$110,500, for which Respondents are jointly and severally liable, is appropriate. The figure +represents a second-tier penalty of $8,500 for each of the thirteen audit reports issued by +Respondents while the Firm's license was expired. + + An appropriate order will issue.67 + + By the Commission (Chair WHITE and Commissioners AGUILAR, GALLAGHER, +STEIN, and PIWOWAR). + + + + +Brent J. Fields +Secretary + +65 See Debt Collection Improvement Act of 1996, Pub. L. 104-134, title III, § 31001; 17 +C.F.R. § 201.1004. +66 Phlo Corp., Exchange Act Release No. 55562, 2007 WL 966943, at *14 (Mar. 30, 2007). +67 We have considered all of the parties' contentions. We have rejected or sustained them to +the extent that they are inconsistent or in accord with the views expressed in this opinion. + + +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73763 / December 5, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3602 / December 5, 2014 + +Admin. Proc. File No. 3-15012 + + +In the Matter of + +S.W. HATFIELD, CPA and +SCOTT W. HATFIELD, CPA + + +ORDER IMPOSING REMEDIAL SANCTIONS + + On the basis of the Commission's opinion issued this day, it is + + ORDERED that S.W. Hatfield, CPA and Scott W. Hatfield, CPA are permanently denied +the privilege of appearing or practicing before the Commission as accountants; and it is further + + ORDERED that S.W. Hatfield, CPA and Scott W. Hatfield, CPA cease and desist from +committing or causing any violations or future violations of Exchange Act Section 10(b) and +Rule 10b-5 thereunder; and it is further + + ORDERED that S.W. Hatfield, CPA and Scott W. Hatfield, CPA, jointly and severally, +disgorge $112,529, plus prejudgment interest of $18,469.78, such prejudgment interest +calculated beginning from March 1, 2010, in accordance with Commission Rule of Practice 600; +and it is further + + ORDERED that S.W. Hatfield, CPA and Scott W. Hatfield, CPA pay a civil monetary +penalty of $110,500, for which they are jointly and severally liable. + +2 + + Payment of the amounts to be disgorged and the civil money penalty shall be: (i) made by +United States postal money order, certified check, bank cashier's check, or bank money order; +(ii) made payable to the Securities and Exchange Commission; (iii) mailed to Enterprises +Services Center, Accounts Receivable Branch, HQ Bldg., Room 181, 6500 South MacArthur +Blvd., Oklahoma City, OK 73169; and (iv) submitted under cover letter that identifies the +respondent and the file number of this proceeding. + + By the Commission. + + + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3603.txt b/raw/aaer/2014/AAER-3603.txt new file mode 100644 index 0000000000000000000000000000000000000000..3ced4d71a7204e0e743bbbbb757c1da54db895e7 --- /dev/null +++ b/raw/aaer/2014/AAER-3603.txt @@ -0,0 +1,349 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73768 / December 8, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3603 / December 8, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16299 + + + + +In the Matter of + +BKD, LLP, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE ACT +OF 1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against BKD, LLP +(“Respondent” or “BKD”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of +1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + This matter concerns violations of the Commission’s auditor independence rules by BKD. +BKD audited the annual financial statements that were filed with the Commission for 21 broker- +dealer audit clients for the fiscal years 2010, 2011, and/or 2012. For at least one audit of nine of +these broker-dealer audit clients, BKD was not independent under auditor independence criteria +established by the Commission and made applicable by Exchange Act Rule 17a-5(f)(3) to audits +of brokers and dealers.4 As a result of this conduct, BKD engaged in improper professional +conduct, violated the auditor independence rules, and caused each of the broker-dealers’ failure to +file an annual report audited by an independent accountant. + B. RESPONDENT +Respondent BKD, a limited liability partnership, is an accounting and auditing firm +registered with the Public Company Accounting Oversight Board (“PCAOB”). BKD has 245 +partners and roughly 1,200 additional professional staff located in 34 offices in 15 states, with its +principal office in the state of Missouri. + +3 The findings 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 referred to herein are those in effect during, and applicable to, +the relevant conduct. On July 30, 2013, the Commission adopted certain amendments to Rule 17a -5. See Broker- +Dealer Reports, SEC Exchange Act Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, 2013). +Among other things, the amendments to Rule 17a-5 require that audits of brokers and dealers be performed in +accordance with Public Company Accounting Oversight Board standards, effective for audits of fiscal years ending +on or after June 1, 2014. 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 out in Rule 17a-5(f)(3). It is now set out in Rule 17a-5(f)(1). +3 + +C. FACTS + 1. Lack of Independence + a. During fiscal years 2010 through 2012 (the “Relevant Period”), BKD served as +the independent public accountant for 21 broker-dealer audit clients. In connection with at least +one audit performed for nine of its broker-dealer audit clients during the Relevant Period, BKD +prepared the financial statements and/or notes to the financial statements that were filed with the +Commission on Form X-17A-5. + b. For example, BKD audited the annual financial statements for one such broker- +dealer (“Broker-Dealer A”) for the fiscal year ending 2011. During the audit, BKD was +provided with financial documents generated by Broker-Dealer A, including a trial balance and +FOCUS reports. + c. BKD then utilized the information contained in these and other source documents +to create a set of financial statements to be filed with the Commission. In particular, using the +prior year’s financial statements as a template, BKD personnel working on BKD computers used +their engagement software to create the new set of financial statements, including the notes to the +financial statements. BKD then provided the set of financial statements it had prepared to +Broker-Dealer A’s management for approval. + d. In February 2012, Broker-Dealer A filed with the Commission a Form X-17A-5 +Part III for the fiscal year ended 2011. Included in that filing is an audit report signed by BKD +and stating, among other things, that BKD’s audit of Broker-Dealer A was conducted “in +accordance with auditing standards generally accepted in the United States of America.” + e. BKD engaged in substantially similar conduct in connection with at least one +audit for eight additional broker-dealer clients during the Relevant Period. + 2. Violations +a. Section 17(e)(1)(A) of the Exchange Act requires that every registered broker or +dealer “annually file with the Commission a balance sheet and income statement certified by an +independent public accounting firm, or by a registered public accounting firm if the firm is +required to be registered under the Sarbanes-Oxley Act of 2002, prepared on a calendar or fiscal +year basis, and such other financial statements (which shall, as the Commission specifies, be +certified) and information concerning its financial condition as the Commission, by rule may +prescribe as necessary or appropriate in the public interest or for the protection of investors.” +b. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a public +accountant who shall be in fact independent as defined in paragraph (f)(3) of this section herein, +and he shall give an opinion covering the statements filed pursuant to paragraph (d) . . . .” +Exchange Act Rule 17a-5(f)(3) further states that, for such audits, “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” +c. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in +accordance with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) requires +that “[t]he accountant’s report shall . . . [s]tate whether the audit was made in accordance with +4 + +generally accepted auditing standards.” Generally accepted auditing standards (“GAAS”) +require auditors to maintain strict independence from their audit clients. See Statement on +Auditing Standard No. 1, Section 220.03. 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 +violated Exchange Act Rule 17a-5(i). See In the Matter of Rosenberg Rich Baker Berman & +Company and Brian Zucker, CPA, Exchange Act Release No. 69765 at p. 5 (June 14, 2013). +d. Rule 2-01(c)(4) of Regulation S-X provides that accountants are not independent +if, at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of Regulation S-X provides +that prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: +Any service, unless it is reasonable to conclude that the results of these services +will not be subject to audit procedures during an audit of the audit client's +financial statements, including: +(A) Maintaining or preparing the audit client's accounting records; + +(B) Preparing the audit client's financial statements that are filed +with the Commission or that form the basis of financial +statements filed with the Commission; or + +(C) Preparing or originating source data underlying the audit +client's financial statements. + +e. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm from +preparing an audit client’s financial statements that are filed with the Commission. In this +context, preparing financial statements includes but is not limited to: aggregating line items +from internal books and records to the financial statements; changing line item descriptions; +drafting or editing notes to the financial statements; and converting FOCUS reports or +bookkeeping software program reports into financial statements. With respect to the audit of +Broker-Dealer A, and the additional audits in which BKD engaged in substantially similar +conduct, BKD engaged in one or more of the above prohibited actions. +f. As a result of BKD’s conduct described above, BKD was not independent of its +broker-dealer audit clients under the independence criteria established by Rule 2-01(c)(4) of +Regulation S-X, which Exchange Act Rule 17a-5 made applicable to the audits of broker-dealer +financial statements. As the Commission explained in adopting Rule 2-01(c)(4), providing such +services for an audit client “impairs the auditor’s independence because the auditor will be +placed in the position of auditing the firm’s work when auditing the client’s financial statements. +. . . In addition, keeping the books is a management function, the performance of which leads to +an inappropriate mutuality of interests between the auditor and the audit client.” Revision of the +Commission’s Auditor Independence Requirements, Exchange Act Release No. 43602, at +IV.D.4.b(i) (November 21, 2000). See also Strengthening the Commission’s Requirements +Regarding Auditor Independence, Exchange Act Release No. 47265 (“keeping the books is a +management function, which also is prohibited”)(January 28, 2003). +5 + + g. BKD violated Exchange Act Rule 17a-5(i) by representing in its audit reports that +it had performed the audits of the broker-dealers’ financial statements in accordance with GAAS +when in fact, because of the independence impairment described above, the audits had not been +performed in accordance with GAAS. +h. Exchange Act Section 17(a) and Rule 17a-5 require broker-dealers to file annual +reports containing financial statements audited by independent public accountants. No showing +of scienter is necessary to establish a violation of Exchange Act Section 17(a)(1). See In the +Matter of Orlando Joseph Jett, Exchange Act Release No. 49366 at n.45 (March 5, 2004) (citing +SEC v Drexel Burham Lambert Inc., 837 F. Supp. 587, 610 (S.D.N.Y. 1993); Stead v. SEC, 444 +F.2d 713, 716-17 (10th Cir. 1971), cert denied, 404 U.S. 1059 (1972)). +i. Under Section 21C of the Exchange Act, a person is a “cause” of another’s +primary violation if the person knew or should have known that his act or omission would +contribute to the primary violation. Negligence is sufficient to establish “causing” liability under +Section 21C when a person is alleged to have caused a primary violation that does not require +scienter. In re KPMG Peat Marwick, Exch. Act. Rel. No. 43862 (Jan. 19, 2001), aff’d, KPMG v. +SEC, 289 F.3d 109 (D.C. Cir. 2002). +j. BKD caused its broker-dealer audit clients to violate Exchange Act Section 17(a) +and Rule 17a-5. BKD, an audit firm registered with the PCAOB, knew or should have known +that its conduct, including incorrectly stating in audit reports that the audits were conducted in +accordance with GAAS, contributed to its audit clients’ violations of Exchange Act Section 17(a) +and Rule 17a-5. +k. Rule 102(e) of the Commission’s Rules of Practice allows the Commission to +censure a person if it finds that such person has engaged in “improper professional conduct.” +Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Rule 102(e) defines improper professional +conduct, in part, as: “[a] single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which the registered public +accounting firm or associated person knows, or should know, that heightened scrutiny is +warranted.” Exchange Act § 4C(b)(2); Rule 102(e)(1)(iv)(B). + l. 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. +57,164, 57,168 (Oct. 26, 1998) (codified at 17 C.F.R. Part 201). The Commission has defined +the “highly unreasonable” standard as: +an intermediate standard, higher than ordinary negligence but lower than the +traditional definition of recklessness used in cases brought under Section 10(b) of +the Exchange Act and Rule 10b-5 of the Exchange Act. The highly unreasonable +standard is an objective standard. The conduct at issue is measured by the degree +of the departure from professional standards and not the intent of the accountant. +Id. at 57,167; see also In the Matter of Ernst & Young LLP, Admin. Proc. File No. 3-10933, SEC +Initial Decision Release No. 249, at 60 (Apr. 16, 2004). +6 + + m. Based on the conduct set forth above, BKD engaged in highly unreasonable +conduct that resulted in violations of applicable professional standards when it knew or should +have known that heightened scrutiny was required. + 3. Findings + a. Based on the foregoing, the Commission finds that BKD engaged in improper +professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. +b. Based on the foregoing, the Commission finds that BKD committed violations of +Exchange Act Rule 17a-5(i) and caused nine broker-dealers’ violations of Section 17(a) and Rule +17a-5 promulgated thereunder. + 4. Respondent’s Remedial Efforts and Cooperation + + In determining to accept the Offer, the Commission considered the remedial acts +undertaken by Respondent and the cooperation afforded the Commission staff. As part of its +remediation, BKD has already implemented or begun to implement some of the Undertakings +listed below. + + 5. Undertakings + + BKD undertakes: + +a. within ninety (90) days from the date of the Order, to establish written policies +and procedures, or to revise and/or supplement existing written policies and procedures, for the +purpose of providing BKD with reasonable assurance of compliance with applicable +independence requirements, including those requirements of Rule 2-01 of Regulation S-X +applicable to an SEC Registered Broker-Dealer Engagement (defined to mean an engagement to +provide a report – whether an audit report, an examination report, or a review report – required +under Exchange Act Rule 17a-5(d)(1)(i)(C), as amended); +b. within ninety (90) days from the date of the Order, to establish a policy of +ensuring training, whether internal or external, on an annual or more frequent regular basis, +concerning applicable independence requirements, including those requirements of Rule 2-01 of +Regulation S-X applicable to an SEC Registered Broker-Dealer Engagement, of any Firm audit +personnel who participate in any way in the planning or performing of any SEC Registered +Broker-Dealer Engagement; +c. within ninety (90) days from the date of the Order and before BKD’s +commencement of any SEC Registered Broker-Dealer Engagement (or, where BKD by the date +of this Order has already commenced but not completed such an engagement, before BKD’s +release of its report), to ensure training pursuant to the policy described in paragraph (5)(b) +above has been provided on at least one occasion; +d. to provide a copy of the Order – +7 + + (i) within thirty (30) days from the date of the Order, to all audit personnel +who serve broker-dealer or SEC registrant clients and are employed by, or associated with (as +defined in PCAOB Rule 1001(p)(i)), BKD as of the date of the Order; and + (ii) within thirty (30) days from the date of the Order, to any client of BKD as +of the date of the Order for which BKD has performed or has been engaged to perform an SEC +Registered Broker-Dealer Engagement; +e. within ninety (90) days from the date of the Order, to designate and maintain at +least one partner (the “Independence Partner”) in its national office or headquarters with +responsibility for monitoring BKD’s compliance with the SEC’s auditor independence rules, +including without limitation, the adoption, implementation and oversight of policies and +procedures designed to provide BKD with reasonable assurance of such compliance; +f. within ninety (90) days from the date of the Order, to adopt and implement +written procedures to provide reasonable assurance that prohibited bookkeeping services will not +be provided in connection with any SEC Registered Broker-Dealer Engagement, including +procedures requiring BKD to complete, on an annual basis, a client continuance form for each +SEC Registered Broker-Dealer Engagement, which shall contain an assessment of risks and a +listing of non-audit services being provided, and procedures requiring BKD’s Independence +Partner to monitor the annual completion and review of client continuance forms for all SEC +Registered Broker-Dealer Engagements as well as the annual review of such other documents, +forms or other information sufficient to determine whether any prohibited bookkeeping services +are being provided in connection with any SEC Registered Broker-Dealer Engagements; and +g. to certify in writing to Stephen L. Cohen, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549- +5553, BKD’s compliance with paragraphs 5(a) through 5(f) above. The certification, which shall +be signed by the Independence Partner, shall identify the undertakings, provide written evidence +of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate +compliance. BKD shall submit such certification within one hundred twenty (120) days from the +date of the Order. BKD shall also submit such additional evidence of and information +concerning compliance as the staff of the Division of Enforcement may reasonably request. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent BKD’s Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: +A. BKD is hereby censured. +B. BKD shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Exchange Act and Rule 17a-5 promulgated thereunder. + C. BKD shall comply with the undertakings enumerated in Section (III)(C)(5) +above. +8 + + D. BKD shall, within seven days of the entry of this Order, pay a civil money penalty +in the amount of $15,000 to the Securities and Exchange Commission. If timely payment is not +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 +BKD 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 Stephen L. Cohen, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549- +5553. + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3604.txt b/raw/aaer/2014/AAER-3604.txt new file mode 100644 index 0000000000000000000000000000000000000000..7614a81fdbdf5c7e5cb6e4b5265b19e19303a817 --- /dev/null +++ b/raw/aaer/2014/AAER-3604.txt @@ -0,0 +1,342 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73769 / December 8, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3604 / December 8, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16300 + + + + +In the Matter of + +Robert Cooper and +Company, CPA PC, + + +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 Robert +Cooper and Company, CPA PC (“Respondent” or “Cooper”) pursuant to Sections 4C1 and 21C of +the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY +This matter concerns violations of the Commission’s auditor independence rules by Cooper. +Cooper audited the annual financial statements that were filed with the Commission for twelve +broker-dealer audit clients for the fiscal years 2010, 2011, and/or 2012. For the 2011 audit of one of +these broker-dealer audit clients, Cooper was not independent under auditor independence criteria +established by the Commission and made applicable by Exchange Act Rule 17a-5(f)(3) to audits +of brokers and dealers.4 As a result of this conduct, Cooper engaged in improper professional +conduct, violated the auditor independence rules, and caused the broker-dealer’s failure to file an +annual report audited by an independent accountant. + + +The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. + +3 The findings 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 referred to herein are those in effect during, and applicabl e to, +the relevant conduct. On July 30, 2013, the Commission adopted certain amendments to Rule 17a -5. See Broker- +Dealer Reports, SEC Exchange Act Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, 2013). +Among other things, the amendments to Rule 17a-5 require that audits of brokers and dealers be performed in +accordance with Public Company Accounting Oversight Board standards, effective for audits of fiscal years ending +on or after June 1, 2014. 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 out in Rule 17a-5(f)(3). It is now set out in Rule 17a-5(f)(1). + +3 + +B. RESPONDENT + Respondent Cooper, a professional corporation, is an accounting and auditing firm +registered with the Public Company Accounting Oversight Board (“PCAOB”). Cooper has one +partner, Robert Cooper, who is located in an office in Chicago, Illinois. +C. FACTS + 1. Lack of Independence + + a. During fiscal years 2010 through 2012 (the “Relevant Period”), Cooper served as +the independent public accountant for twelve broker-dealer audit clients. In connection with the +2011 audit performed for one of its broker-dealer audit clients (“Broker-Dealer A”) during the +Relevant Period, Cooper prepared the financial statements and/or notes to the financial +statements that were filed with the Commission on Form X-17A-5. + + b. During the audit for the fiscal year ended December 31, 2011, Cooper provided +Broker-Dealer A with financial statement footnotes from the prior year’s audit that Broker- +Dealer A updated and Cooper then reviewed. Cooper also made some suggestions for the +grouping of accounts to be incorporated into the financial statements. + +c. In February 2012, Broker-Dealer A filed with the Commission a Form X-17A-5 +Part III for the fiscal year ended December 31, 2011. Included in that filing is an audit report +signed by Cooper and stating, among other things, that Cooper’s audit of Broker-Dealer A was +conducted “in accordance with auditing standards generally accepted in the United States.” + + 2. Violations + +a. Section 17(e)(1)(A) of the Exchange Act requires that every registered broker or +dealer “annually file with the Commission a balance sheet and income statement certified by an +independent public accounting firm, or by a registered public accounting firm if the firm is +required to be registered under the Sarbanes-Oxley Act of 2002, prepared on a calendar or fiscal +year basis, and such other financial statements (which shall, as the Commission specifies, be +certified) and information concerning its financial condition as the Commission, by rule may +prescribe as necessary or appropriate in the public interest or for the protection of investors.” + +b. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a public +accountant who shall be in fact independent as defined in paragraph (f)(3) of this section herein, +and he shall give an opinion covering the statements filed pursuant to paragraph (d) . . . .” +Exchange Act Rule 17a-5(f)(3) further states that, for such audits, “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” + +c. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in +accordance with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) requires +that “[t]he accountant’s report shall . . . [s]tate whether the audit was made in accordance with +generally accepted auditing standards.” Generally accepted auditing standards (“GAAS”) +require auditors to maintain strict independence from their audit clients; an auditor “must be free + +4 + +from any obligation to or interest in the client, its management or its owners.” See Statement on +Auditing Standard No. 1, Section 220.03. 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 +violated Exchange Act Rule 17a-5(i). See In the Matter of Rosenberg Rich Baker Berman & +Company and Brian Zucker, CPA, Exchange Act Release No. 69765 at p. 5 (June 14, 2013). + +d. Rule 2-01(c)(4) of Regulation S-X provides that accountants are not independent +if, at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of Regulation S-X provides +that prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: + +Any service, unless it is reasonable to conclude that the results of these services +will not be subject to audit procedures during an audit of the audit client's +financial statements, including: + +(A) Maintaining or preparing the audit client's accounting records; + +(B) Preparing the audit client's financial statements that are filed +with the Commission or that form the basis of financial +statements filed with the Commission; or + +(C) Preparing or originating source data underlying the audit +client's financial statements. + +e. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm from +preparing an audit client’s financial statements that are filed with the Commission. In this +context, preparing financial statements includes but is not limited to: aggregating line items +from internal books and records to the financial statements; changing line item descriptions; +drafting or editing notes to the financial statements; and converting FOCUS reports or +bookkeeping software program reports into financial statements. With respect to the audit of +Broker-Dealer A, Cooper engaged in one or more of the above prohibited actions, by drafting or +editing the notes. + +f. As a result of Cooper’s conduct described above, Cooper was not independent of +Broker-Dealer A under the independence criteria established by Rule 2-01(c)(4) of Regulation S- +X, which Exchange Act Rule 17a-5 made applicable to the audits of broker-dealer financial +statements. As the Commission explained in adopting Rule 2-01(c)(4), providing such services +for an audit client “impairs the auditor’s independence because the auditor will be placed in the +position of auditing the firm’s work when auditing the client’s financial statements. . . . In +addition, keeping the books is a management function, the performance of which leads to an +inappropriate mutuality of interests between the auditor and the audit client.” Revision of the +Commission’s Auditor Independence Requirements, Exchange Act Release No. 43602, at +IV.D.4.b(i) (November 21, 2000). See also Strengthening the Commission’s Requirements +Regarding Auditor Independence, Exchange Act Release No. 47265 (“keeping the books is a +management function, which also is prohibited”)(January 28, 2003). + +5 + + + g. Cooper violated Exchange Act Rule 17a-5(i) by representing in its audit report +that it had performed the audit of Broker-Dealer A’s financial statements in accordance with +GAAS when in fact, because of the independence impairment described above, the audit had not +been performed in accordance with GAAS. + +h. Exchange Act Section 17(a) and Rule 17a-5 require broker-dealers to file annual +reports containing financial statements audited by independent public accountants. No showing +of scienter is necessary to establish a violation of Exchange Act Section 17(a)(1). See In the +Matter of Orlando Joseph Jett, Exchange Act Release No. 49366 at n.45 (March 5, 2004) (citing +SEC v Drexel Burham Lambert Inc., 837 F. Supp. 587, 610 (S.D.N.Y. 1993); Stead v. SEC, 444 +F.2d 713, 716-17 (10th Cir. 1971), cert denied, 404 U.S. 1059 (1972)). + +i. Under Section 21C of the Exchange Act, a person is a “cause” of another’s +primary violation if the person knew or should have known that his act or omission would +contribute to the primary violation. Negligence is sufficient to establish “causing” liability under +Section 21C when a person is alleged to have caused a primary violation that does not require +scienter. In re KPMG Peat Marwick, Exch. Act. Rel. No. 43862 (Jan. 19, 2001), aff’d, KPMG v. +SEC, 289 F.3d 109 (D.C. Cir. 2002). + +j. Cooper caused Broker-Dealer A to violate Exchange Act Section 17(a) and Rule +17a-5. Cooper, an audit firm registered with the PCAOB and operated by a Certified Public +Accountant, knew or should have known that its conduct, including incorrectly stating in an audit +report that the audit was conducted in accordance with GAAS, contributed to Broker-Dealer A’s +violations of Exchange Act Section 17(a) and Rule 17a-5. + +k. Rule 102(e) of the Commission’s Rules of Practice allows the Commission to +censure a person if it finds that such person has engaged in “improper professional conduct.” +Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Rule 102(e) defines improper professional +conduct, in part, as: “[a] single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which the registered public +accounting firm or associated person knows, or should know, that heightened scrutiny is +warranted.” Exchange Act § 4C(b)(2); Rule 102(e)(1)(iv)(B). + + l. 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. +57,164, 57,168 (Oct. 26, 1998) (codified at 17 C.F.R. Part 201). The Commission has defined +the “highly unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than the +traditional definition of recklessness used in cases brought under Section 10(b) of +the Exchange Act and Rule 10b-5 of the Exchange Act. The highly unreasonable +standard is an objective standard. The conduct at issue is measured by the degree +of the departure from professional standards and not the intent of the accountant. + + +6 + +Id. at 57,167; see also In the Matter of Ernst & Young LLP, Admin. Proc. File No. 3-10933, SEC +Initial Decision Release No. 249, at 60 (Apr. 16, 2004). + + m. Based on the conduct set forth above, Cooper engaged in highly unreasonable +conduct that resulted in a violation of applicable professional standards when it knew or should +have known that heightened scrutiny was required. + + 3. Findings + + a. Based on the foregoing, the Commission finds that Cooper engaged in improper +professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. + +b. Based on the foregoing, the Commission finds that Cooper committed a violation of +Exchange Act Rule 17a-5(i) and caused one broker-dealer’s violations of Section 17(a) and Rule +17a-5 promulgated thereunder. + + 4. Respondent’s Remedial Efforts and Cooperation + + In determining to accept the Offer, the Commission considered the remedial acts +undertaken by Respondent and the cooperation afforded the Commission staff. As part of its +remediation, Cooper has already implemented or begun to implement some of the Undertakings +listed below. + + 5. Undertakings + + Cooper undertakes: + +a. within ninety (90) days from the date of the Order, to establish written policies +and procedures, or to revise and/or supplement existing written policies and procedures, for the +purpose of providing Cooper with reasonable assurance of compliance with applicable +independence requirements, including those requirements of Rule 2-01 of Regulation S-X +applicable to an SEC Registered Broker-Dealer Engagement (defined to mean an engagement to +provide a report – whether an audit report, an examination report, or a review report – required +under Exchange Act Rule 17a-5(d)(1)(i)(C), as amended); + +b. within ninety (90) days from the date of the Order, to establish a policy of +ensuring training, whether internal or external, on an annual or more frequent regular basis, +concerning applicable independence requirements, including those requirements of Rule 2-01 of +Regulation S-X applicable to an SEC Registered Broker-Dealer Engagement, of any Firm audit +personnel who participate in any way in the planning or performing of any SEC Registered +Broker-Dealer Engagement; + +c. within ninety (90) days from the date of the Order and before Cooper’s +commencement of any SEC Registered Broker-Dealer Engagement (or, where Cooper by the +date of this Order has already commenced but not completed such an engagement, before + +7 + +Cooper’s release of its report), to ensure training pursuant to the policy described in paragraph +(5)(b) above has been provided on at least one occasion; + +d. to provide a copy of the Order – + + (i) within thirty (30) days from the date of the Order, to all audit personnel +employed by, or associated with (as defined in PCAOB Rule 1001(p)(i)), Cooper as of the date +of the Order; and + + (ii) within thirty (30) days from the date of the Order, to any client of Cooper +as of the date of the Order for which Cooper has performed or has been engaged to perform an +SEC Registered Broker-Dealer Engagement; and + + e. to certify in writing to Stephen L. Cohen, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549- +5553, Cooper’s compliance with paragraphs 5(a) through 5(d)(ii) 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. Cooper shall submit such +certification within one hundred twenty (120) days from the date of the Order. Cooper shall also +submit such additional evidence of and information concerning compliance as the staff of the +Division of Enforcement may reasonably request. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Cooper’s Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: +A. Cooper is hereby censured. + +B. Cooper shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Exchange Act and Rule 17a-5 promulgated thereunder. + + C. Cooper shall comply with the undertakings enumerated in Section (III)(C)(5) +above. + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3605.txt b/raw/aaer/2014/AAER-3605.txt new file mode 100644 index 0000000000000000000000000000000000000000..7b5673022ff5438664c36d6528f71aaf180b5710 --- /dev/null +++ b/raw/aaer/2014/AAER-3605.txt @@ -0,0 +1,382 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73770 / December 8, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3605 / December 8, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16301 + + + + +In the Matter of + +Joseph Yafeh CPA, 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 +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 +Yafeh CPA, Inc. (“Respondent” or “Yafeh”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2 ) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. +2 + + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + + This matter concerns violations of the Commission’s auditor independence rules by Yafeh. +Yafeh audited the annual financial statements that were filed with the Commission for +approximately 22 broker-dealer audit clients for the fiscal years 2010, 2011, and/or 2012. For at +least one of the audits of those clients during that time period, Yafeh was not independent under +auditor independence criteria established by the Commission and made applicable by Exchange +Act Rule 17a-5(f)(3) to audits of brokers and dealers.4 As a result of this conduct, Yafeh engaged +in improper professional conduct, violated the auditor independence rules, and caused each of the +broker-dealers’ failure to file an annual report audited by an independent accountant. + +B. RESPONDENT + Respondent Yafeh, a professional corporation, is an accounting and auditing firm +registered with the Public Company Accounting Oversight Board (“PCAOB”) with its office in +Los Angeles, California. Yafeh has one professional staff member, plus one administrative staff +member. + + +3 The findings 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 referred to herein are those in effect during, and applicable to, +the relevant conduct. On July 30, 2013, the Commission adopted certain amendments to Rule 17a -5. See Broker- +Dealer Reports, SEC Exchange Act Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, 2013). +Among other things, the amendments to Rule 17a-5 require that audits of brokers and dealers be performed in +accordance with Public Company Accounting Oversight Board standards, effective for audits of fiscal years ending +on or after June 1, 2014. 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 out in Rule 17a-5(f)(3). It is now set out in Rule 17a-5(f)(1). +3 + + +C. FACTS + + 1. Lack of Independence + + a. During fiscal years 2010 through 2012 (the “Relevant Period”), Yafeh +served as the independent public accountant for approximately 22 broker-dealer audit clients. In +connection with at least one audit performed for each of those broker-dealer audit clients during +the Relevant Period, Yafeh prepared the financial statements and/or notes to the financial +statements that were filed with the Commission on Form X-17A-5. + + b. For example, with respect to one of its broker-dealer clients (“Broker- +Dealer A”), Yafeh audited the annual financial statements for Broker-Dealer A for the fiscal year +ending 2011. During the audit, Broker-Dealer A provided Yafeh with financial statements +prepared from Quickbooks accounting software. Yafeh reviewed and tested these documents, +and the financial data contained therein, as part of the audit. Yafeh then utilized the information +contained in these documents to create and revise a set of financial statements to be filed with the +Commission. In particular, Yafeh personnel working on Yafeh computers typed and updated the +new set of financial statements, including the notes to the financial statements and the cash flow +statement. Yafeh then provided the set of financial statements it had prepared to Broker-Dealer +A’s management for approval. + + c. In February 2012, Broker-Dealer A filed with the Commission a Form X- +17A-5 Part III for the fiscal year ended December 31, 2011. Included in that filing is an audit +report signed by Yafeh and stating, among other things, that Yafeh’s audit of Broker-Dealer A +was conducted “in accordance with auditing standards generally accepted in the United States of +America.” + d. Yafeh engaged in substantially similar conduct in connection with at least +one audit for approximately 21 additional broker-dealer clients during the relevant period. + +2. Violations + + a. Section 17(e)(1)(A) of the Exchange Act requires that every registered broker or +dealer “annually file with the Commission a balance sheet and income statement certified by an +independent public accounting firm, or by a registered public accounting firm if the firm is +required to be registered under the Sarbanes-Oxley Act of 2002, prepared on a calendar or fiscal +year basis, and such other financial statements (which shall, as the Commission specifies, be +certified) and information concerning its financial condition as the Commission, by rule may +prescribe as necessary or appropriate in the public interest or for the protection of investors.” + + b. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a public +accountant who shall be in fact independent as defined in paragraph (f)(3) of this section herein, +and he shall give an opinion covering the statements filed pursuant to paragraph (d) . . . .” +Exchange Act Rule 17a-5(f)(3) further states that, for such audits, “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” + +4 + + c. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in accordance +with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) requires that “[t]he +accountant’s report shall . . . [s]tate whether the audit was made in accordance with generally +accepted auditing standards.” Generally accepted auditing standards (“GAAS”) require auditors to +maintain strict independence from their audit clients; an auditor “must be free from any obligation +to or interest in the client, its management or its owners.” See Statement on Auditing Standard No. +1, Section 220.03. 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 violated Exchange Act +Rule 17a-5(i). See In the Matter of Rosenberg Rich Baker Berman & Company and Brian Zucker, +CPA, Exchange Act Release No. 69765 at p. 5 (June 14, 2013). + + d. Rule 2-01(c)(4) of Regulation S-X provides that accountants are not independent if, +at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of Regulation S-X provides that +prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: + +Any service, unless it is reasonable to conclude that the results of these services will not be +subject to audit procedures during an audit of the audit client's financial statements, +including: + +(A) Maintaining or preparing the audit client's accounting records; + +(B) Preparing the audit client's financial statements that are filed with the Commission +or that form the basis of financial statements filed with the Commission; or + +(C) Preparing or originating source data underlying the audit client's financial +statements. + + e. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm from +preparing an audit client’s financial statements that are filed with the Commission. In this context, +preparing financial statements includes but is not limited to: aggregating line items from internal +books and records to the financial statements; changing line item descriptions; drafting or editing +notes to the financial statements; and converting FOCUS reports or bookkeeping software program +reports into financial statements. With respect to the audit of Broker-Dealer A and the additional +audits in which Yafeh engaged in substantially similar conduct, Yafeh engaged in one or more of +the above prohibited actions. + + f. As a result of Yafeh’s conduct in preparing the financial statements, including the +notes thereto, Yafeh was not independent of its broker-dealer audit clients under the independence +criteria established by Rule 2-01(c)(4) of Regulation S-X, which Exchange Act Rule 17a-5 made +applicable to the audits of broker-dealer financial statements. As the Commission explained in +adopting Rule 2-01(c)(4), providing such services for an audit client “impairs the auditor’s +independence because the auditor will be placed in the position of auditing the firm’s work when +auditing the client’s financial statements. . . . In addition, keeping the books is a management +function, the performance of which leads to an inappropriate mutuality of interests between the +5 + +auditor and the audit client.” Revision of the Commission’s Auditor Independence Requirements, +Exchange Act Release No. 43602, at IV.D.4.b(i) (November 21, 2000). See also Strengthening the +Commission’s Requirements Regarding Auditor Independence, Exchange Act Release No. 47265 +(“keeping the books is a management function, which also is prohibited”)(January 28, 2003). + + g. Yafeh violated Exchange Act Rule 17a-5(i) by representing in its audit report that it +had performed the audits of the broker-dealers’ financial statements in accordance with GAAS +when in fact, because of the independence impairment described above, the audit had not been +performed in accordance with GAAS. + + h. Exchange Act Section 17(a) and Rule 17a-5 require broker-dealers to file annual +reports containing financial statements audited by independent public accountants. No showing of +scienter is necessary to establish a violation of Exchange Act Section 17(a). See In the Matter of +Orlando Joseph Jett, Exchange Act Release No. 49366 at n.45 (March 5, 2004) (citing SEC v +Drexel Burham Lambert Inc., 837 F. Supp. 587, 610 (S.D.N.Y. 1993); Stead v. SEC, 444 F.2d 713, +716-17 (10th Cir. 1971), cert denied, 404 U.S. 1059 (1972)). + + i. Under Section 21C of the Exchange Act, a person is a “cause” of another’s primary +violation if the person knew or should have known that his act or omission would contribute to the +primary violation. Negligence is sufficient to establish “causing” liability under Section 21C when +a person is alleged to have caused a primary violation that does not require scienter. In re KPMG +Peat Marwick, Exch. Act. Rel. No. 43862 (Jan. 19, 2001), aff’d, KPMG v. SEC, 289 F.3d 109 +(D.C. Cir. 2002). + + j. Yafeh caused its broker-dealer audit clients to violate Exchange Act Section 17(a) +and Rule 17a-5. Respondent, an audit firm registered with the PCAOB and operated by a +Certified Public Accountant, knew or should have known that its conduct, including incorrectly +stating in audit reports that the audits were conducted in accordance with GAAS, contributed to its +audit clients’ violations of Exchange Act Section 17(a) and Rule 17a-5. + + k. Rule 102(e) of the Commission’s Rules of Practice allows the Commission to +censure a person if it finds that such person has engaged in “improper professional conduct.” +Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Rule 102(e) defines improper professional conduct, +in part, as: “[a] single instance of highly unreasonable conduct that results in a violation of +applicable professional standards in circumstances in which the registered public accounting firm +or associated person knows, or should know, that heightened scrutiny is warranted.” Exchange Act +§ 4C(b)(2); Rule 102(e)(1)(iv)(B). + + l. 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. 57,164, +57168 (Oct. 26, 1998) (codified at 17 C.F.R. Part 201). The Commission has defined the “highly +unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than the traditional +definition of recklessness used in cases brought under Section 10(b) of the Exchange Act +and Rule 10b-5 of the Exchange Act. The highly unreasonable standard is an objective +6 + +standard. The conduct at issue is measured by the degree of the departure from professional +standards and not the intent of the accountant. + +Id. at 57,167; see also In the Matter of Ernst & Young LLP, Admin. Proc. File No. 3-10933, SEC +Initial Decision Release No. 249, at 60 (Apr. 16, 2004). + + m. Based on the conduct set forth above, Yafeh engaged in highly unreasonable +conduct that resulted in violations of applicable professional standards when it knew or should +have known that heightened scrutiny was required. + +3. Findings + + a. Based on the foregoing, the Commission finds that Yafeh engaged in improper +professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. + + b. Based on the foregoing, the Commission finds that Yafeh committed violations of +Exchange Act Rule 17a-5(i) and caused approximately 22 broker-dealers’ violations of Section +17(a) and Rule 17a-5 promulgated thereunder. + + 4. Respondent’s Remedial Efforts and Cooperation + + In determining to accept the Offer, the Commission considered the remedial acts +undertaken by Respondent and the cooperation afforded the Commission staff. As part of its +remediation, Respondent has already implemented or begun to implement some of the +Undertakings listed below. + +5. Undertakings + + Yafeh undertakes: + +a. within ninety (90) days from the date of the Order, to establish written policies +and procedures, or to revise and/or supplement existing written policies and procedures, for the +purpose of providing Yafeh with reasonable assurance of compliance with applicable +independence requirements, including those requirements of Rule 2-01 of Regulation S-X +applicable to an SEC Registered Broker-Dealer Engagement (defined to mean an engagement to +provide a report – whether an audit report, an examination report, or a review report – required +under Exchange Act Rule 17a-5(d)(1)(i)(C), as amended); + +b. within ninety (90) days from the date of the Order, to establish a policy of +ensuring training, whether internal or external, on an annual or more frequent regular basis, +concerning applicable independence requirements, including those requirements of Rule 2-01 of +Regulation S-X applicable to an SEC Registered Broker-Dealer Engagement, of any Firm audit +personnel who participate in any way in the planning or performing of any SEC Registered +Broker-Dealer Engagement; + +7 + +c. within ninety (90) days from the date of the Order and before Yafeh’s +commencement of any SEC Registered Broker-Dealer Engagement (or, where Yafeh by the date +of this Order has already commenced but not completed such an engagement, before Yafeh’s +release of its report), to ensure training pursuant to the policy described in paragraph (5)(b) +above has been provided on at least one occasion; + +d. to provide a copy of the Order – + + (i) within thirty (30) days from the date of the Order, to all audit personnel +employed by, or associated with (as defined in PCAOB Rule 1001(p)(i)), Yafeh as of the date of +the Order; and + + (ii) within thirty (30) days from the date of the Order, to any client of Yafeh as +of the date of the Order for which Yafeh has performed or has been engaged to perform an SEC +Registered Broker-Dealer Engagement; and + +e. to certify in writing to Stephen L. Cohen, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549- +5553, Doe’s compliance with paragraphs 5(a) through 5(d)(ii). 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. Yafeh shall submit such +certification within one hundred twenty (120) days from the date of the Order. Yafeh shall also +submit such additional evidence of and information concerning compliance as the staff of the +Division of Enforcement may reasonably request. + +IV. + + On the basis of the foregoing, Respondent hereby consents to the entry of an Order by the +Commission that: + +A. Yafeh is hereby censured. + +B. Yafeh shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Exchange Act and Rule 17a-5 promulgated thereunder. + + C. Yafeh shall comply with the undertakings enumerated in Section (III)(C)(5) +above. + + D. Yafeh shall pay civil penalties of $20,000 to the Securities and Exchange +Commission. Payment shall be made in the following installments: $10,000 within ten days of +the entry of this Order and $10,000 in three quarterly installments of $3,333.33 beginning 120 +days after the entry of the Order and continuing thereafter at 120-day intervals until the three +quarterly payment schedule is complete. If any payment is not made by the date the payment is +required by this Order, the entire outstanding balance of civil penalties, plus any additional +interest 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: +8 + + + (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 +Yafeh 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 Stephen L. Cohen, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549- +5553. + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3606.txt b/raw/aaer/2014/AAER-3606.txt new file mode 100644 index 0000000000000000000000000000000000000000..2aca97ce8be7b928bfb40559e15452e328eed55c --- /dev/null +++ b/raw/aaer/2014/AAER-3606.txt @@ -0,0 +1,388 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73771 / December 8, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3606 / December 8, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16302 + + + + +In the Matter of + +Lally & Co., LLC, + + +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 Lally & Co., +LLC (“Respondent” or “Lally”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act +of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + This matter concerns violations of the Commission’s auditor independence rules by +Lally. Lally audited the annual financial statements that were filed with the Commission for ten +broker-dealer audit clients for the fiscal years 2010, 2011, and/or 2012. For at least one of the +audits of seven of those clients during that time period, Lally was not independent under auditor +independence criteria established by the Commission and made applicable by Exchange Act +Rule 17a-5(f)(3) to audits of brokers and dealers.4 As a result of this conduct, Lally engaged in +improper professional conduct, violated the auditor independence rules, and caused each of the +broker-dealers’ failure to file an annual report audited by an independent accountant. +B. RESPONDENT + Respondent Lally, a limited liability company, is an accounting and auditing firm +registered with the Public Company Accounting Oversight Board (“PCAOB”) with its office in +Pittsburgh, Pennsylvania. Lally has thirty professional staff plus six administrative staff. + + +3 The findings 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 referred to herein are those in effect during, and applicable to, +the relevant conduct. On July 30, 2013, the Commission adopted certain amendments to Rule 17a -5. See Broker- +Dealer Reports, SEC Exchange Act Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, 2013). +Among other things, the amendments to Rule 17a-5 require that audits of brokers and dealers be performed in +accordance with Public Company Accounting Oversight Board standards, effective for audits of fiscal years ending +on or after June 1, 2014. 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 out in Rule 17a-5(f)(3). It is now set out in Rule 17a-5(f)(1). +3 + +C. FACTS +1. Lack of Independence + + a. During fiscal years 2010 through 2012 (the “Relevant Period”), Lally +served as the independent public accountant for ten broker-dealer audit clients. In connection with +at least one audit performed for seven of its broker-dealer audit clients during the Relevant Period, +Lally prepared the financial statements and/or notes to the financial statements that were filed with +the Commission on Form X-17A-5. + + b. For example, with respect to one of its broker-dealer audit clients (“Broker- +Dealer A”), Lally’s staff entered the client’s trial balance using data derived from its client’s +Quickbook reports and uploaded the reports into Lally’s paperless engagement software in order to +produce the financial statements and notes to the financial statements that Broker-Dealer A filed +with the Commission on Form X-17A-5. Lally reviewed and tested these documents, and the +financial data contained therein, as part of the audit. Lally then utilized the information contained +in these documents to create and revise a set of financial statements to be filed with the +Commission. In particular, Lally personnel working on Lally engagement software updated the +new set of financial statements, including the notes to the financial statements and the cash flow +statement. Lally then provided the set of financial statements it had prepared to Broker-Dealer A’s +management for approval. + + c. In February 2012, Broker-Dealer A filed with the Commission a Form X- +17A-5 Part III for the fiscal year ended December 31, 2011. Included in that filing is an audit +report signed by Lally stating, among other things, that Lally’s audit of Broker-Dealer A was +conducted “in accordance with auditing standards generally accepted in the United States of +America.” + + d. Lally engaged in substantially similar conduct in connection with at least +one audit for six additional broker-dealer clients during the Relevant Period. + +2. Violations + +a. Section 17(e)(1)(A) of the Exchange Act requires that every registered broker or +dealer “annually file with the Commission a balance sheet and income statement certified by an +independent public accounting firm, or by a registered public accounting firm if the firm is +required to be registered under the Sarbanes-Oxley Act of 2002, prepared on a calendar or fiscal +year basis, and such other financial statements (which shall, as the Commission specifies, be +certified) and information concerning its financial condition as the Commission, by rule may +prescribe as necessary or appropriate in the public interest or for the protection of investors.” + +b. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a public +accountant who shall be in fact independent as defined in paragraph (f)(3) of this section herein, +and he shall give an opinion covering the statements filed pursuant to paragraph (d) . . . .” +Exchange Act Rule 17a-5(f)(3) further states that, for such audits, “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” + +4 + +c. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in accordance +with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) requires that “[t]he +accountant’s report shall . . . [s]tate whether the audit was made in accordance with generally +accepted auditing standards.” Generally accepted auditing standards (“GAAS”) require auditors to +maintain strict independence from their audit clients; an auditor “must be free from any obligation +to or interest in the client, its management or its owners.” See Statement on Auditing Standard No. +1, Section 220.03. 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 violated Exchange Act +Rule 17a-5(i). See In the Matter of Rosenberg Rich Baker Berman & Company and Brian Zucker, +CPA, Exchange Act Release No. 69765 at p. 5 (June 14, 2013). + +d. Rule 2-01(c)(4) of Regulation S-X provides that accountants are not independent if, +at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of Regulation S-X provides that +prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: + +Any service, unless it is reasonable to conclude that the results of these services will + not be subject to audit procedures during an audit of the audit client's financial statements, + including: + +(A) Maintaining or preparing the audit client's accounting records; + +(B) Preparing the audit client's financial statements that are filed with the +Commission or that form the basis of financial statements filed with the +Commission; or + +(C) Preparing or originating source data underlying the audit client's financial +statements. + +e. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm from +preparing an audit client’s financial statements that are filed with the Commission. In this context, +preparing financial statements includes but is not limited to: aggregating line items from internal +books and records to the financial statements; changing line item descriptions; drafting or editing +notes to the financial statements; and converting FOCUS reports or bookkeeping software program +reports into financial statements. With respect to the audit of Broker-Dealer A and the additional +audits in which Lally engaged in substantially similar conduct, Lally engaged in one or more of the +above prohibited actions. + +f. As a result of Lally’s conduct in preparing the financial statements, including the +notes thereto, Lally was not independent of its broker-dealer audit clients under the independence +criteria established by Rule 2-01(c)(4) of Regulation S-X, which Exchange Act Rule 17a-5 made +applicable to the audits of broker-dealer financial statements. As the Commission explained in +adopting Rule 2-01(c)(4), providing such services for an audit client “impairs the auditor’s +independence because the auditor will be placed in the position of auditing the firm’s work when +auditing the client’s financial statements. . . . In addition, keeping the books is a management +5 + +function, the performance of which leads to an inappropriate mutuality of interests between the +auditor and the audit client.” Revision of the Commission’s Auditor Independence Requirements, +Exchange Act Release No. 43602, at IV.D.4.b(i) (November 21, 2000). See also Strengthening the +Commission’s Requirements Regarding Auditor Independence, Exchange Act Release No. 47265 +(“keeping the books is a management function, which also is prohibited”)(January 28, 2003). + + g. Lally violated Exchange Act Rule 17a-5(i) by representing in its audit report +that it had performed the audits of the broker-dealers’ financial statements in accordance with +GAAS when in fact, because of the independence impairment described above, the audit had not +been performed in accordance with GAAS. + + h. Exchange Act Section 17(a) and Rule 17a-5 require broker-dealers to file +annual reports containing financial statements audited by independent public accountants. No +showing of scienter is necessary to establish a violation of Exchange Act Section 17(a). See In the +Matter of Orlando Joseph Jett, Exchange Act Release No. 49366 at n.45 (March 5, 2004) (citing +SEC v Drexel Burham Lambert Inc., 837 F. Supp. 587, 610 (S.D.N.Y. 1993); Stead v. SEC, 444 +F.2d 713, 716-17 (10th Cir. 1971), cert denied, 404 U.S. 1059 (1972)). + + i. Under Section 21C of the Exchange Act, a person is a “cause” of another’s +primary violation if the person knew or should have known that his act or omission would +contribute to the primary violation. Negligence is sufficient to establish “causing” liability under +Section 21C when a person is alleged to have caused a primary violation that does not require +scienter. In re KPMG Peat Marwick, Exch. Act. Rel. No. 43862 (Jan. 19, 2001), aff’d, KPMG v. +SEC, 289 F.3d 109 (D.C. Cir. 2002). + + j. Lally caused its broker-dealer audit clients to violate Exchange Act Section +17(a) and Rule 17a-5. Respondent, an audit firm registered with the PCAOB and operated by a +Certified Public Accountant, knew or should have known that its conduct, including incorrectly +stating in audit reports that the audits were conducted in accordance with GAAS, contributed to its +audit clients’ violations of Exchange Act Section 17(a) and Rule 17a-5. + + k. Rule 102(e) of the Commission’s Rules of Practice allows the Commission +to censure a person if it finds that such person has engaged in “improper professional conduct.” +Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Rule 102(e) defines improper professional conduct, +in part, as: “[a] single instance of highly unreasonable conduct that results in a violation of +applicable professional standards in circumstances in which the registered public accounting firm +or associated person knows, or should know, that heightened scrutiny is warranted.” Exchange Act +§ 4C(b)(2); Rule 102(e)(1)(iv)(B). + + l. 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. +57,164, 57,168 (Oct. 26, 1998) (codified at 17 C.F.R. Part 201). The Commission has defined the +“highly unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than the traditional + definition of recklessness used in cases brought under Section 10(b) of the Exchange Act +6 + + and Rule 10b-5 of the Exchange Act. The highly unreasonable standard is an objective + standard. The conduct at issue is measured by the degree of the departure from professional + standards and not the intent of the accountant. + +Id. at 57,167; see also In the Matter of Ernst & Young LLP, Admin. Proc. File No. 3-10933, +SEC Initial Decision Release No. 249, at 60 (Apr. 16, 2004) + + m. Based on the conduct set forth above, Lally engaged in highly unreasonable +conduct that resulted in violations of applicable professional standards when it knew or should +have known that heightened scrutiny was required. + +3. Findings + +a. Based on the foregoing, the Commission finds that Lally engaged in improper professional +conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice. + +b. Based on the foregoing, the Commission finds that Lally committed violations of Exchange +Act Rule 17a-5(i) and caused seven broker-dealers’ violations of Section 17(a) and Rule 17a-5 +promulgated thereunder. + + 4. Respondent’s Remedial Efforts and Cooperation + + In determining to accept the Offer, the Commission considered the remedial acts +undertaken by Respondent and the cooperation afforded the Commission staff. As part of its +remediation, Respondent has already implemented or begun to implement some of the +Undertakings listed below. + + + 5. Undertakings + +Lally undertakes: + + a. within ninety (90) days from the date of the Order, to establish written policies +and procedures, or to revise and/or supplement existing written policies and procedures, for the +purpose of providing Lally with reasonable assurance of compliance with applicable +independence requirements, including those requirements of Rule 2-01 of Regulation S-X +applicable to an SEC Registered Broker-Dealer Engagement (defined to mean an engagement to +provide a report – whether an audit report, an examination report, or a review report – required +under Exchange Act Rule 17a-5(d)(1)(i)(C), as amended); + + b. within ninety (90) days from the date of the Order, to establish a policy of +ensuring training, whether internal or external, on an annual or more frequent regular basis, +concerning applicable independence requirements, including those requirements of Rule 2-01 of +Regulation S-X applicable to an SEC Registered Broker-Dealer Engagement, of any Firm audit +7 + +personnel who participate in any way in the planning or performing of any SEC Registered +Broker-Dealer Engagement; + + c. within ninety (90) days from the date of the Order and before Lally’s +commencement of any SEC Registered Broker-Dealer Engagement (or, where Lally by the date +of this Order has already commenced but not completed such an engagement, before Lally’s +release of its report), to ensure training pursuant to the policy described in paragraph (5)(b) +above has been provided on at least one occasion; + + d. to provide a copy of the Order – + + (i) within thirty (30) days from the date of the Order, to all audit personnel +employed by, or associated with (as defined in PCAOB Rule 1001(p)(i)), Lally as of the date of +the Order; and + + (ii) within thirty (30) days from the date of the Order, to any client of Lally as +of the date of the Order for which Lally has performed or has been engaged to perform an SEC +Registered Broker-Dealer Engagement; + + e. within ninety (90) days from the date of the Order, to designate and maintain at +least one partner (the “Independence Partner”) in its national office or headquarters with +responsibility for monitoring Lally’s compliance with the SEC’s auditor independence rules, +including without limitation, the adoption, implementation and oversight of policies and +procedures designed to provide Lally with reasonable assurance of such compliance; + + f. within ninety (90) days from the date of the Order, to adopt and implement +written procedures to provide reasonable assurance that prohibited bookkeeping services will not +be provided in connection with any SEC Registered Broker-Dealer Engagement, including +procedures requiring Lally to complete, on an annual basis, a client continuance form for each +SEC Registered Broker-Dealer Engagement, which shall contain an assessment of risks and a +listing of non-audit services being provided, and procedures requiring Lally’s Independence +Partner to monitor the annual completion and review of client continuance forms for all SEC +Registered Broker-Dealer Engagements as well as the annual review of such other documents, +forms or other information sufficient to determine whether any prohibited bookkeeping services +are being provided in connection with any SEC Registered Broker-Dealer Engagements; and + + g. to certify in writing to Stephen L. Cohen, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549- +5553, Lally’s compliance with paragraphs 5(a) through 5(f) above. The certification, which shall +be signed by the Independence Partner, shall identify the undertakings, provide written evidence +of compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate +compliance. Lally shall submit such certification within one hundred twenty (120) days from the +date of the Order. Lally shall also submit such additional evidence of and information +concerning compliance as the staff of the Division of Enforcement may reasonably request. +8 + + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Lally’s Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Lally is hereby censured. + B. Lally shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Exchange Act and Rule 17a-5 promulgated thereunder. + C. Lally shall comply with the undertakings enumerated in Section (III)(C)(5) above. + D. Lally shall within ten days of the entry of this Order pay a civil penalty of $10,000 to +the Securities and Exchange Commission. If any payment is not made by the date the payment is +required by this Order, the entire outstanding balance of civil penalties, plus any additional interest +pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without further application. +Payment must be made in one of the following ways: + (1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + (2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + (3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and hand-delivered +or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + +9 + + Payments by check or money order must be accompanied by a cover letter identifying Lally +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 Stephen L. Cohen, Division of Enforcement, +Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5553. + + By the Commission. + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3607.txt b/raw/aaer/2014/AAER-3607.txt new file mode 100644 index 0000000000000000000000000000000000000000..290e565504068eac2f3d21b0e29027607534d3c4 --- /dev/null +++ b/raw/aaer/2014/AAER-3607.txt @@ -0,0 +1,344 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73772 / December 8, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3607 / December 8, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16303 + + + + +In the Matter of + +Brace & Associates, PLLC, + +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 Brace & +Associates, PLLC (“Respondent” or “Brace”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in charact er +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + This matter concerns violations of the Commission’s auditor independence rules by +Brace. Brace audited the annual financial statements that were filed with the Commission for 20 +broker-dealer audit clients for the fiscal years 2010 through 2012. For at least one audit for two +of these broker-dealer audit clients during that time period, Brace was not independent under +auditor independence criteria established by the Commission and made applicable by Exchange +Act Rule 17a-5(f)(3) to audits of brokers and dealers.4 As a result of this conduct, Brace +engaged in improper professional conduct, violated the auditor independence rules, and caused +each of the broker-dealers’ failure to file an annual report audited by an independent accountant. + +B. RESPONDENT + Respondent Brace, a professional company, is an accounting and auditing firm registered +with the Public Company Accounting Oversight Board (“PCAOB”) with its office in +Londonderry, New Hampshire. Brace is a solo practitioner with no administrative staff. + + + +3 The findings 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 referred to herein are those in effect during, and applicable to, +the relevant conduct. On July 30, 2013, the Commission adopted certain amendments to Rule 17a -5. See Broker- +Dealer Reports, SEC Exchange Act Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, 2013). +Among other things, the amendments to Rule 17a-5 require that audits of brokers and dealers be performed in +accordance with Public Company Accounting Oversight Board standards, effective for audits of fiscal years ending +on or after June 1, 2014. 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, pri or to the +amendments, that requirement was set out in Rule 17a-5(f)(3). It is now set out in Rule 17a-5(f)(1). +3 + +C. FACTS +1. Lack of Independence + + a. During fiscal years 2010 through 2012 (the “Relevant Period”), Brace +served as the independent public accountant for twenty broker-dealer audit clients. In connection +with at least one audit performed for two of those broker-dealer audit clients during the Relevant +Period, Brace prepared the financial statements and/or notes to the financial statements that were +filed with the Commission on Form X-17A-5. + + b. For example, with respect to one of its broker-dealer clients (“Broker- +Dealer A”), Brace audited the annual financial statements for Broker-Dealer A for the fiscal year +ending 2012. During the audit, Broker-Dealer A provided Brace with accounting records and +source data. Brace reviewed and tested these ledgers and accounts contained therein, as part of the +audit. Brace then utilized the information contained in these documents to create and revise a set +of financial statements to be filed with the Commission. In particular, Brace typed and updated the +new set of financial statements, including the notes to the financial statements and the cash flow +statement. Brace then provided the financial statements it had prepared to Broker-Dealer A’s +management for approval. + + c. In June 2012, Broker-Dealer A filed with the Commission a Form X-17A-5 +Part III for the fiscal year ended March 31, 2012. Included in that filing is an audit report signed +by Brace and stating, among other things, that Brace’s audit of Broker-Dealer A was conducted “in +accordance with auditing standards generally accepted in the United States of America.” + + d. Brace engaged in substantially similar conduct in connection with at least +one audit for one additional broker-dealer client during the Relevant Period. + +2. Violations + +a. Section 17(e)(1)(A) of the Exchange Act requires that every registered broker or +dealer “annually file with the Commission a balance sheet and income statement certified by an +independent public accounting firm, or by a registered public accounting firm if the firm is +required to be registered under the Sarbanes-Oxley Act of 2002, prepared on a calendar or fiscal +year basis, and such other financial statements (which shall, as the Commission specifies, be +certified) and information concerning its financial condition as the Commission, by rule may +prescribe as necessary or appropriate in the public interest or for the protection of investors.” + +b. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a public +accountant who shall be in fact independent as defined in paragraph (f)(3) of this section herein, +and he shall give an opinion covering the statements filed pursuant to paragraph (d) . . . .” +Exchange Act Rule 17a-5(f)(3) further states that, for such audits, “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” + +c. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in accordance +with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) requires that “[t]he +4 + +accountant’s report shall . . . [s]tate whether the audit was made in accordance with generally +accepted auditing standards.” Generally accepted auditing standards (“GAAS”) require auditors to +maintain strict independence from their audit clients; an auditor “must be free from any obligation +to or interest in the client, its management or its owners.” See Statement on Auditing Standard No. +1, Section 220.03. 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 violated Exchange Act +Rule 17a-5(i). See In the Matter of Rosenberg Rich Baker Berman & Company and Brian Zucker, +CPA, Exchange Act Release No. 69765 at p. 5 (June 14, 2013). + +d. Rule 2-01(c)(4) of Regulation S-X provides that accountants are not independent if, +at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of Regulation S-X provides that +prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: + +Any service, unless it is reasonable to conclude that the results of these services will not be + subject to audit procedures during an audit of the audit client's financial statements, + including: + +(A) Maintaining or preparing the audit client's accounting records; + +(B) Preparing the audit client's financial statements that are filed with the Commission +or that form the basis of financial statements filed with the Commission; or + +(C) Preparing or originating source data underlying the audit client's financial +statements. + +e. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm from +preparing an audit client’s financial statements that are filed with the Commission. In this context, +preparing financial statements includes but is not limited to: aggregating line items from internal +books and records to the financial statements; changing line item descriptions; drafting or editing +notes to the financial statements; and converting FOCUS reports or bookkeeping software program +reports into financial statements. With respect to the audit of Broker-Dealer A and one other +broker-dealer client, Brace engaged in one or more of the above prohibited actions. + +f. As a result of Brace’s conduct in preparing the financial statements, including the +notes thereto, Brace was not independent of its broker-dealer audit clients under the independence +criteria established by Rule 2-01(c)(4) of Regulation S-X, which Exchange Act Rule 17a-5 made +applicable to the audits of broker-dealer financial statements. As the Commission explained in +adopting Rule 2-01(c)(4), providing such services for an audit client “impairs the auditor’s +independence because the auditor will be placed in the position of auditing the firm’s work when +auditing the client’s financial statements. . . . In addition, keeping the books is a management +function, the performance of which leads to an inappropriate mutuality of interests between the +auditor and the audit client.” Revision of the Commission’s Auditor Independence Requirements, +Exchange Act Release No. 43602, at IV.D.4.b(i) (November 21, 2000). See also Strengthening the +5 + +Commission’s Requirements Regarding Auditor Independence, Exchange Act Release No. 47265 +(“keeping the books is a management function, which also is prohibited”)(January 28, 2003). + + g. Brace violated Exchange Act Rule 17a-5(i) by representing in its audit +report that it had performed the audits of the broker-dealers’ financial statements in accordance +with GAAS when in fact, because of the independence impairment described above, the audit had +not been performed in accordance with GAAS. + + h. Exchange Act Section 17(a) and Rule 17a-5 require broker-dealers to file +annual reports containing financial statements audited by independent public accountants. No +showing of scienter is necessary to establish a violation of Exchange Act Section 17(a). See In the +Matter of Orlando Joseph Jett, Exchange Act Release No. 49366 at n.45 (March 5, 2004) (citing +SEC v Drexel Burham Lambert Inc., 837 F. Supp. 587, 610 (S.D.N.Y. 1993); Stead v. SEC, 444 +F.2d 713, 716-17 (10th Cir. 1971), cert denied, 404 U.S. 1059 (1972)). + + i. Under Section 21C of the Exchange Act, a person is a “cause” of another’s +primary violation if the person knew or should have known that his act or omission would +contribute to the primary violation. Negligence is sufficient to establish “causing” liability under +Section 21C when a person is alleged to have caused a primary violation that does not require +scienter. In re KPMG Peat Marwick, Exch. Act. Rel. No. 43862 (Jan. 19, 2001), aff’d, KPMG v. +SEC, 289 F.3d 109 (D.C. Cir. 2002). + + j. Brace caused its broker-dealer audit clients to violate Exchange Act Section +17(a) and Rule 17a-5. Respondent, an audit firm registered with the PCAOB and operated by a +Certified Public Accountant, knew or should have known that its conduct, including incorrectly +stating in audit reports that the audits were conducted in accordance with GAAS, contributed to its +audit clients’ violations of Exchange Act Section 17(a) and Rule 17a-5. + + k. Rule 102(e) of the Commission’s Rules of Practice allows the Commission +to censure a person if it finds that such person has engaged in “improper professional conduct.” +Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Rule 102(e) defines improper professional conduct, +in part, as: “[a] single instance of highly unreasonable conduct that results in a violation of +applicable professional standards in circumstances in which the registered public accounting firm +or associated person knows, or should know, that heightened scrutiny is warranted.” Exchange Act +§ 4C(b)(2); Rule 102(e)(1)(iv)(B). + + l. 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. +57,164, 57,168 (Oct. 26, 1998) (codified at 17 C.F.R. Part 201). The Commission has defined the +“highly unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than the traditional + definition of recklessness used in cases brought under Section 10(b) of the Exchange Act + and Rule 10b-5 of the Exchange Act. The highly unreasonable standard is an objective + standard. The conduct at issue is measured by the degree of the departure from professional + standards and not the intent of the accountant. +6 + + +Id. at 57,167; see also In the Matter of Ernst & Young LLP, Admin. Proc. File No. 3- +10933, SEC Initial Decision Release No. 249, at 60 (Apr. 16, 2004). + + m. Based on the conduct set forth above, Brace engaged in highly unreasonable +conduct that resulted in violations of applicable professional standards when it knew or should +have known that heightened scrutiny was required. + +3. Findings + + a. Based on the foregoing, the Commission finds that Brace engaged in improper +professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. + + b. Based on the foregoing, the Commission finds that Brace committed violations of +Exchange Act Rule 17a-5(i) and caused two broker-dealers’ violations of Section 17(a) and Rule +17a-5 promulgated thereunder. + + 4. Respondent’s Remedial Efforts and Cooperation + + In determining to accept the Offer, the Commission considered the remedial acts +undertaken by Respondent and the cooperation afforded the Commission staff. As part of its +remediation, Respondent has already implemented or begun to implement some of the +Undertakings listed below. + + 5. Undertakings + + Brace undertakes: + a. within ninety (90) days from the date of the Order, to establish written policies +and procedures, or to revise and/or supplement existing written policies and procedures, for the +purpose of providing Brace with reasonable assurance of compliance with applicable +independence requirements, including those requirements of Rule 2-01 of Regulation S-X +applicable to an SEC Registered Broker-Dealer Engagement (defined to mean an engagement to +provide a report – whether an audit report, an examination report, or a review report – required +under Exchange Act Rule 17a-5(d)(1)(i)(C), as amended); + + b. within ninety (90) days from the date of the Order, to establish a policy of +ensuring training, whether internal or external, on an annual or more frequent regular basis, +concerning applicable independence requirements, including those requirements of Rule 2-01 of +Regulation S-X applicable to an SEC Registered Broker-Dealer Engagement, of any Firm audit +personnel who participate in any way in the planning or performing of any SEC Registered +Broker-Dealer Engagement; + + c. within ninety (90) days from the date of the Order and before Brace’s +commencement of any SEC Registered Broker-Dealer Engagement (or, where Brace by the date +7 + +of this Order has already commenced but not completed such an engagement, before Brace’s +release of its report), to ensure training pursuant to the policy described in paragraph (5)(b) +above has been provided on at least one occasion; + + d. to provide a copy of the Order – + + (i) within thirty (30) days from the date of the Order, to all audit personnel +employed by, or associated with (as defined in PCAOB Rule 1001(p)(i)), Brace as of the date of +the Order; + + (ii) within thirty (30) days from the date of the Order, to any client of Brace as +of the date of the Order for which Brace has performed or has been engaged to perform an SEC +Registered Broker-Dealer Engagement; and + + e. to certify in writing to Stephen L. Cohen, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549- +5553, Brace’s compliance with paragraphs 5(a) through 5(d)(ii) 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. Brace shall submit such +certification within one hundred twenty (120) days from the date of the Order. Brace shall also +submit such additional evidence of and information concerning compliance as the staff of the +Division of Enforcement may reasonably request. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Brace’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + A. Brace is hereby censured. + +8 + + B. Brace shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Exchange Act and Rule 17a-5 promulgated thereunder. + + C. Brace shall comply with the undertakings enumerated in Section (III)(C)(5) +above. + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3608.txt b/raw/aaer/2014/AAER-3608.txt new file mode 100644 index 0000000000000000000000000000000000000000..cb60d3dfe16fa55247d11334aed21060b3db9e11 --- /dev/null +++ b/raw/aaer/2014/AAER-3608.txt @@ -0,0 +1,397 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73773 / December 8, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3608 / December 8, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16304 + + + +In the Matter of + +Boros & Farrington + Accountancy Corporation, + +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 Boros & +Farrington Accountancy Corporation (“Boros & Farrington” or “Respondent”) pursuant to Sections +4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to 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 + + +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 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, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + + This matter concerns violations of the Commission’s auditor independence rules by Boros & +Farrington. Boros & Farrington audited the annual financial statements that were filed with the +Commission for 26 broker-dealer audit clients for the fiscal years 2010, 2011, and/or 2012. For at +least one audit of each of these broker-dealer audit clients, Boros & Farrington was not independent +under auditor independence criteria established by the Commission and made applicable by +Exchange Act Rule 17a-5(f)(3) to audits of brokers and dealers.4 As a result of this conduct, Boros +& Farrington engaged in improper professional conduct, violated the auditor independence rules, + + +2 Rule 102(e)(1)(ii) provides, in relevant part, that: + + The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +4 The provisions of Exchange Act Rule 17a-5 referred to herein are those in effect during, and applicable to, the +relevant conduct. On July 30, 2013, the Commission adopted certain amendments to Rule 17a-5. See Broker- +Dealer Reports, SEC Exchange Act Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, +2013). Among other things, the amendments to Rule 17a-5 require that audits of brokers and dealers be +performed in accordance with Public Company Accounting Oversight Board standards, effective for audits of +fiscal years ending on or after June 1, 2014. 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 out in Rule 17a-5(f)(3). It is +now set out in Rule 17a-5(f)(1). +3 + +and caused each of the broker-dealers’ failure to file an annual report audited by an independent +accountant. + +B. RESPONDENT + + Respondent Boros & Farrington, a professional corporation, is an accounting and auditing +firm registered with the Public Company Accounting Oversight Board (“PCAOB”). Boros & +Farrington has two partners and two professional staff located in San Diego, California. + +C. FACTS + + 1. Lack of Independence + + a. During fiscal years 2010 through 2012 (the “Relevant Period”), Boros & Farrington +served as the independent public accountant for 26 broker-dealer audit clients. In connection with +at least one audit performed for each of these broker-dealer audit clients during the Relevant +Period, Boros & Farrington prepared the financial statements and/or notes to the financial +statements that were filed with the Commission on Form X-17A-5. + +b. For example, Boros & Farrington audited the annual financial statements for +Broker-Dealer A for the fiscal year ending March 31, 2012. During the audit, Boros & +Farrington was provided with financial documents generated by Broker-Dealer A, including a +trial balance, balance sheet, incomes statement, and FOCUS report. Boros & Farrington +reviewed and tested these documents, and the financial data contained therein, as part of the +audit. + +c. Boros & Farrington then utilized the information contained in these documents to +create and revise a set of financial statements to be filed with the Commission. In particular, +using the prior year’s financial statements as a template, Boros & Farrington personnel working +on Boros & Farrington computers typed and updated the new set of financial statements, +including the notes to the financial statements. Boros & Farrington then provided the set of +financial statements it had prepared to Broker-Dealer A’s management for approval. + +d. In May 2012, Broker-Dealer A filed with the Commission a Form X-17A-5 Part +III for the fiscal year ended March 31, 2012. Included in that filing is an audit report signed by +Boros & Farrington and stating, among other things, that Boros & Farrington’s audit of Broker- +Dealer A was conducted “in accordance with the Public Company Accounting Oversight Board +(United States).” Boros & Farrington has acknowledged that this statement was made in error. +Despite this statement, Boros & Farrington applied generally accepted auditing standards as +established by the American Institute of Certified Public Accountants to the audit of Broker- +Dealer A. + +e. Boros & Farrington engaged in substantially similar conduct in connection with at +least one audit for 25 additional broker-dealer clients during the Relevant Period. +4 + + + 2. Violations + +a. Section 17(e)(1)(A) of the Exchange Act requires that every registered broker or +dealer “annually file with the Commission a balance sheet and income statement certified by an +independent public accounting firm, or by a registered public accounting firm if the firm is +required to be registered under the Sarbanes-Oxley Act of 2002, prepared on a calendar or fiscal +year basis, and such other financial statements (which shall, as the Commission specifies, be +certified) and information concerning its financial condition as the Commission, by rule may +prescribe as necessary or appropriate in the public interest or for the protection of investors.” +b. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a public +accountant who shall be in fact independent as defined in paragraph (f)(3) of this section herein, +and he shall give an opinion covering the statements filed pursuant to paragraph (d) . . . .” +Exchange Act Rule 17a-5(f)(3) further states that, for such audits, “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” + +c. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in accordance +with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) requires that “[t]he +accountant’s report shall . . . [s]tate whether the audit was made in accordance with generally +accepted auditing standards.” Generally accepted auditing standards (“GAAS”) require auditors to +maintain strict independence from their audit clients; an auditor “must be free from any obligation +to or interest in the client, its management or its owners.” See Statement on Auditing Standard No. +1, Section 220.03. 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 violated Exchange Act +Rule 17a-5(i). See In the Matter of Rosenberg Rich Baker Berman & Company and Brian Zucker, +CPA, Exchange Act Release No. 69765 at p. 5 (June 14, 2013). +d. Rule 2-01(c)(4) of Regulation S-X provides that accountants are not independent if, +at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of Regulation S-X provides that +prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: + +Any service, unless it is reasonable to conclude that the results of these services will +not be subject to audit procedures during an audit of the audit client's financial +statements, including: +(A) Maintaining or preparing the audit client's accounting records; + +(B) Preparing the audit client's financial statements that are filed +with the Commission or that form the basis of financial +statements filed with the Commission; or + +5 + +(C) Preparing or originating source data underlying the audit client's +financial statements. + +e. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm from +preparing an audit client’s financial statements that are filed with the Commission. In this context, +preparing financial statements includes but is not limited to: aggregating line items from internal +books and records to the financial statements; changing line item descriptions; drafting or editing +notes to the financial statements; and converting FOCUS reports or bookkeeping software program +reports into financial statements. With respect to the audit of Broker-Dealer A, and the additional +audits in which Boros & Farrington engaged in substantially similar conduct, Boros & Farrington +engaged in one or more of the above prohibited actions. + +f. As a result of Boros & Farrington’s conduct in preparing the financial statements, +including the notes thereto, Boros & Farrington was not independent of its broker-dealer audit +clients under the independence criteria established by Rule 2-01(c)(4) of Regulation S-X, which +Exchange Act Rule 17a-5 made applicable to the audits of broker-dealer financial statements. As +the Commission explained in adopting Rule 2-01(c)(4), providing such services for an audit client +“impairs the auditor’s independence because the auditor will be placed in the position of auditing +the firm’s work when auditing the client’s financial statements. . . . In addition, keeping the books +is a management function, the performance of which leads to an inappropriate mutuality of +interests between the auditor and the audit client.” Revision of the Commission’s Auditor +Independence Requirements, Exchange Act Release No. 43602, at IV.D.4.b(i) (November 21, +2000). See also Strengthening the Commission’s Requirements Regarding Auditor Independence, +Exchange Act Release No. 47265 (“keeping the books is a management function, which also is +prohibited”)(January 28, 2003). + + g. Boros & Farrington failed to identify in its audit reports whether its audits were +conducted in accordance with GAAS. Even if Boros & Farrington’s audit reports had stated that it +performed the audits in accordance with GAAS, which was Boros & Farrington’s intent, such a +representation would have been false because of the independence impairments described +above. Accordingly, Boros & Farrington violated Exchange Act Rule 17a-5(i). + +h. Exchange Act Section 17(a) and Rule 17a-5 require broker-dealers to file annual +reports containing financial statements audited by independent public accountants. No showing of +scienter is necessary to establish a violation of Exchange Act Section 17(a)(1). See In the Matter +of Orlando Joseph Jett, Exchange Act Release No. 49366 at n.45 (March 5, 2004) (citing SEC v +Drexel Burham Lambert Inc., 837 F. Supp. 587, 610 (S.D.N.Y. 1993); Stead v. SEC, 444 F.2d 713, +716-17 (10th Cir. 1971), cert denied, 404 U.S. 1059 (1972)). +i. Under Section 21C of the Exchange Act, a person is a “cause” of another’s primary +violation if the person knew or should have known that his act or omission would contribute to the +primary violation. Negligence is sufficient to establish “causing” liability under Section 21C when +a person is alleged to have caused a primary violation that does not require scienter. In re KPMG +6 + +Peat Marwick, Exch. Act. Rel. No. 43862 (Jan. 19, 2001), aff’d, KPMG v. SEC, 289 F.3d 109 +(D.C. Cir. 2002). +j. Boros & Farrington caused its broker-dealer audit clients to violate Exchange Act +Section 17(a) and Rule 17a-5. Boros & Farrington, an audit firm registered with the PCAOB and +operated by Certified Public Accountants, knew or should have known that its conduct contributed +to its audit clients’ violations of Exchange Act Section 17(a) and Rule 17a-5. +k. Rule 102(e) of the Commission’s Rules of Practice allows the Commission to +censure a person if it finds that such person has engaged in “improper professional conduct.” +Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Rule 102(e) defines improper professional conduct, +in part, as: “[a] single instance of highly unreasonable conduct that results in a violation of +applicable professional standards in circumstances in which the registered public accounting firm +or associated person knows, or should know, that heightened scrutiny is warranted.” Exchange Act +§ 4C(b)(2); Rule 102(e)(1)(iv)(B). + l. 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) (codified at 17 C.F.R. Part 201). The Commission has defined the “highly +unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than the +traditional definition of recklessness used in cases brought under Section 10(b) of +the Exchange Act and Rule 10b-5 of the Exchange Act. The highly unreasonable +standard is an objective standard. The conduct at issue is measured by the degree of +the departure from professional standards and not the intent of the accountant. + +Id. at 57,167; see also In the Matter of Ernst & Young LLP, Admin. Proc. File No. 3-10933, SEC +Initial Decision Release No. 249, at 60 (Apr. 16, 2004). + + m. Based on the conduct set forth above, Boros & Farrington engaged in highly +unreasonable conduct that resulted in violations of applicable professional standards when it knew +or should have known that heightened scrutiny was required. + + 3. Findings + + a. Based on the foregoing, the Commission finds that Boros & Farrington engaged in +improper professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice. + +b. Based on the foregoing, the Commission finds that Boros & Farrington committed +violations of Exchange Act Rule 17a-5(i) and caused 26 broker-dealers’ violations of Section 17(a) +and Rule 17a-5 promulgated thereunder. + + +7 + + 4. Respondent’s Remedial Efforts and Cooperation + + In determining to accept the Offer, the Commission considered the remedial acts +undertaken by Respondent and the cooperation afforded the Commission staff. + + 5. Undertakings + + Boros & Farrington undertakes: + +a. within ninety (90) days from the date of the Order, to establish written policies and +procedures, or to revise and/or supplement existing written policies and procedures, for the purpose +of providing Boros & Farrington with reasonable assurance of compliance with applicable +independence requirements, including those requirements of Rule 2-01 of Regulation S-X +applicable to an SEC Registered Broker-Dealer Engagement (defined to mean an engagement to +provide a report – whether an audit report, an examination report, or a review report – required +under Exchange Act Rule 17a-5(d)(1)(i)(C), as amended); + +b. within ninety (90) days from the date of the Order, to establish a policy of ensuring +training, whether internal or external, on an annual or more frequent regular basis, concerning +applicable independence requirements, including those requirements of Rule 2-01 of Regulation S- +X applicable to an SEC Registered Broker-Dealer Engagement, of any Firm audit personnel who +participate in any way in the planning or performing of any SEC Registered Broker-Dealer +Engagement; + +c. within ninety (90) days from the date of the Order and before Boros & Farrington’s +commencement of any SEC Registered Broker-Dealer Engagement (or, where Boros & Farrington +by the date of this Order has already commenced but not completed such an engagement, before +Boros & Farrington’s release of its report), to ensure training pursuant to the policy described in +paragraph (5)(b) above has been provided on at least one occasion; + +d. to provide a copy of the Order – + + (i) within thirty (30) days from the date of the Order, to all audit personnel +employed by, or associated with (as defined in PCAOB Rule 1001(p)(i)), Boros & Farrington as of +the date of the Order; and + + (ii) within thirty (30) days from the date of the Order, to any client of Boros & +Farrington as of the date of the Order for which Boros & Farrington has performed or has been +engaged to perform an SEC Registered Broker-Dealer Engagement; + +e. to certify in writing to Stephen L. Cohen, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549- +5553, Boros & Farrington’s compliance with paragraphs 5(a) through 5(d)(ii) above. The +certification shall identify the undertakings, provide written evidence of compliance in the form of +8 + +a narrative, and be supported by exhibits sufficient to demonstrate compliance. Boros & +Farrington shall submit such certification within one hundred twenty (120) days from the date of +the Order. Boros & Farrington shall also submit such additional evidence of and information +concerning compliance as the staff of the Division of Enforcement may reasonably request. + + +IV. + + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Boros & Farrington’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Boros & Farrington is hereby censured. + +B. Boros & Farrington shall cease and desist from committing or causing any +violations and any future violations of Section 17(a) of the Exchange Act and Rule 17a-5 +promulgated thereunder. + + C. Boros & Farrington shall comply with the undertakings enumerated in Section +(III)(C)(5) above. + + D. Boros & Farrington shall, within seven days of the entry of this Order, pay a civil +money penalty in the amount of $30,000 to the Securities and Exchange Commission. If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must +be made in one of the following ways: + + (1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + + (2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + (3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +9 + + +Payments by check or money order must be accompanied by a cover letter identifying +Boros & Farrington 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 Stephen L. +Cohen, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5553. + + + + + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3609.txt b/raw/aaer/2014/AAER-3609.txt new file mode 100644 index 0000000000000000000000000000000000000000..2297baae38a857ca3775de1d6e9d2816eb82fa7d --- /dev/null +++ b/raw/aaer/2014/AAER-3609.txt @@ -0,0 +1,401 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73774 / December 8, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3609 / December 8, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16305 + + + +In the Matter of + +OUM & Co. LLP, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE ACT +OF 1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against OUM & Co. +LLP (“OUM” or “Respondent”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act +of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in charact er +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 relevant part, that: + + +2 + + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this 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, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + + This matter concerns violations of the Commission’s auditor independence rules by OUM. +OUM audited the annual financial statements that were filed with the Commission for six broker- +dealer audit clients for the fiscal years 2010, 2011, and/or 2012. For at least one audit of four of +these broker-dealer audit clients, OUM was not independent under auditor independence criteria +established by the Commission and made applicable by Exchange Act Rule 17a-5(f)(3) to audits of +brokers and dealers.4 As a result of this conduct, OUM engaged in improper professional conduct, +violated the auditor independence rules, and caused each of the four broker-dealers’ failure to file an +annual report audited by an independent accountant. + + + The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +4 The provisions of Exchange Act Rule 17a-5 referred to herein are those in effect during, and applicable to, the +relevant conduct. On July 30, 2013, the Commission adopted certain amendments to Rule 17a-5. See Broker- +Dealer Reports, SEC Exchange Act Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, +2013). Among other things, the amendments to Rule 17a-5 require that audits of brokers and dealers be +performed in accordance with Public Company Accounting Oversight Board standards, effective for audits of +fiscal years ending on or after June 1, 2014. 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 out in Rule 17a-5(f)(3). It is +now set out in Rule 17a-5(f)(1). +3 + +B. RESPONDENT + + Respondent OUM, a limited liability partnership, is an accounting and auditing firm +registered with the Public Company Accounting Oversight Board (“PCAOB”). OUM has 11 +partners and 54 professional staff located in three offices located in California. + +C. FACTS + + 1. Lack of Independence + + a. During fiscal years 2010 through 2012 (the “Relevant Period”), OUM served as the +independent public accountant for six broker-dealer audit clients. In connection with at least one +audit performed for four of its broker-dealer audit clients during the Relevant Period, OUM +prepared the financial statements and/or notes to the financial statements that were filed with the +Commission on Form X-17A-5. + + b. For example, OUM audited the annual financial statements for Broker-Dealer A for +the fiscal year ending December 31, 2011. During the audit, OUM was provided with financial +documents generated by Broker-Dealer A, including a trial balance and other financial data. OUM +reviewed and tested these documents, and the financial data contained therein, as part of the audit. + +c. OUM then utilized the information contained in these documents to create and +revise a set of financial statements to be filed with the Commission. In particular, using the prior +year’s financial statements as a template, OUM personnel working on OUM computers typed and +updated the new set of financial statements, including the notes to the financial statements. OUM +then provided the set of financial statements it had prepared to Broker-Dealer A’s management for +approval. + +d. In February 2012, Broker-Dealer A filed with the Commission a Form X-17A-5 +Part III for the fiscal year ended December 31, 2011. Included in that filing is an audit report +signed by OUM and stating, among other things, that OUM’s audit of Broker-Dealer A was +conducted “in accordance with auditing standards generally accepted in the United States of +America.” + +e. OUM engaged in substantially similar conduct in connection with at least one audit +for three additional broker-dealer clients during the Relevant Period. + + 2. Violations + +a. Section 17(e)(1)(A) of the Exchange Act requires that every registered broker or +dealer “annually file with the Commission a balance sheet and income statement certified by an +independent public accounting firm, or by a registered public accounting firm if the firm is +required to be registered under the Sarbanes-Oxley Act of 2002, prepared on a calendar or fiscal +year basis, and such other financial statements (which shall, as the Commission specifies, be +4 + +certified) and information concerning its financial condition as the Commission, by rule may +prescribe as necessary or appropriate in the public interest or for the protection of investors.” +b. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a public +accountant who shall be in fact independent as defined in paragraph (f)(3) of this section herein, +and he shall give an opinion covering the statements filed pursuant to paragraph (d) . . . .” +Exchange Act Rule 17a-5(f)(3) further states that, for such audits, “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” + +c. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in accordance +with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) requires that “[t]he +accountant’s report shall . . . [s]tate whether the audit was made in accordance with generally +accepted auditing standards.” Generally accepted auditing standards (“GAAS”) require auditors to +maintain strict independence from their audit clients; an auditor “must be free from any obligation +to or interest in the client, its management or its owners.” See Statement on Auditing Standard No. +1, Section 220.03. 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 violated Exchange Act +Rule 17a-5(i). See In the Matter of Rosenberg Rich Baker Berman & Company and Brian Zucker, +CPA, Exchange Act Release No. 69765 at p. 5 (June 14, 2013). +d. Rule 2-01(c)(4) of Regulation S-X provides that accountants are not independent if, +at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of Regulation S-X provides that +prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: + +Any service, unless it is reasonable to conclude that the results of these services will +not be subject to audit procedures during an audit of the audit client's financial +statements, including: +(A) Maintaining or preparing the audit client's accounting records; + +(B) Preparing the audit client's financial statements that are filed +with the Commission or that form the basis of financial +statements filed with the Commission; or + +(C) Preparing or originating source data underlying the audit client's +financial statements. + +e. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm from +preparing an audit client’s financial statements that are filed with the Commission. In this context, +preparing financial statements includes but is not limited to: aggregating line items from internal +books and records to the financial statements; changing line item descriptions; drafting or editing +notes to the financial statements; and converting FOCUS reports or bookkeeping software program +5 + +reports into financial statements. With respect to the audit of Broker-Dealer A, and the additional +audits in which OUM engaged in substantially similar conduct, OUM engaged in one or more of +the above prohibited actions. + +f. As a result of OUM’s conduct in preparing the financial statements, including the +notes thereto, OUM was not independent of its broker-dealer audit clients under the independence +criteria established by Rule 2-01(c)(4) of Regulation S-X, which Exchange Act Rule 17a-5 made +applicable to the audits of broker-dealer financial statements. As the Commission explained in +adopting Rule 2-01(c)(4), providing such services for an audit client “impairs the auditor’s +independence because the auditor will be placed in the position of auditing the firm’s work when +auditing the client’s financial statements. . . . In addition, keeping the books is a management +function, the performance of which leads to an inappropriate mutuality of interests between the +auditor and the audit client.” Revision of the Commission’s Auditor Independence Requirements, +Exchange Act Release No. 43602, at IV.D.4.b(i) (November 21, 2000). See also Strengthening the +Commission’s Requirements Regarding Auditor Independence, Exchange Act Release No. 47265 +(“keeping the books is a management function, which also is prohibited”)(January 28, 2003). + + g. OUM violated Exchange Act Rule 17a-5(i) by representing in its audit reports that +it had performed the audits of the broker-dealers’ financial statements in accordance with GAAS +when in fact, because of the independence impairment described above, the audits had not been +performed in accordance with GAAS. + +h. Exchange Act Section 17(a) and Rule 17a-5 require broker-dealers to file annual +reports containing financial statements audited by independent public accountants. No showing of +scienter is necessary to establish a violation of Exchange Act Section 17(a)(1). See In the Matter +of Orlando Joseph Jett, Exchange Act Release No. 49366 at n.45 (March 5, 2004) (citing SEC v +Drexel Burham Lambert Inc., 837 F. Supp. 587, 610 (S.D.N.Y. 1993); Stead v. SEC, 444 F.2d 713, +716-17 (10th Cir. 1971), cert denied, 404 U.S. 1059 (1972)). +i. Under Section 21C of the Exchange Act, a person is a “cause” of another’s primary +violation if the person knew or should have known that his act or omission would contribute to the +primary violation. Negligence is sufficient to establish “causing” liability under Section 21C when +a person is alleged to have caused a primary violation that does not require scienter. In re KPMG +Peat Marwick, Exch. Act. Rel. No. 43862 (Jan. 19, 2001), aff’d, KPMG v. SEC, 289 F.3d 109 +(D.C. Cir. 2002). +j. OUM caused its broker-dealer audit clients to violate Exchange Act Section 17(a) +and Rule 17a-5. OUM, an audit firm registered with the PCAOB and operated by Certified Public +Accountants, knew or should have known that its conduct, including incorrectly stating in audit +reports that the audits were conducted in accordance with GAAS, contributed to its audit clients’ +violations of Exchange Act Section 17(a) and Rule 17a-5. +k. Rule 102(e) of the Commission’s Rules of Practice allows the Commission to +censure a person if it finds that such person has engaged in “improper professional conduct.” +Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Rule 102(e) defines improper professional conduct, +6 + +in part, as: “[a] single instance of highly unreasonable conduct that results in a violation of +applicable professional standards in circumstances in which the registered public accounting firm +or associated person knows, or should know, that heightened scrutiny is warranted.” Exchange Act +§ 4C(b)(2); Rule 102(e)(1)(iv)(B). + l. 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. 57,164, +57,168 (Oct. 26, 1998) (codified at 17 C.F.R. Part 201). The Commission has defined the “highly +unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than the +traditional definition of recklessness used in cases brought under Section 10(b) of +the Exchange Act and Rule 10b-5 of the Exchange Act. The highly unreasonable +standard is an objective standard. The conduct at issue is measured by the degree of +the departure from professional standards and not the intent of the accountant. + +Id. at 57,167; see also In the Matter of Ernst & Young LLP, Admin. Proc. File No. 3-10933, SEC +Initial Decision Release No. 249, at 60 (Apr. 16, 2004). + + m. Based on the conduct set forth above, OUM engaged in highly unreasonable +conduct that resulted in violations of applicable professional standards when it knew or should +have known that heightened scrutiny was required. + + 3. Findings + + a. Based on the foregoing, the Commission finds that OUM engaged in improper +professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. + +b. Based on the foregoing, the Commission finds that OUM committed violations of +Exchange Act Rule 17a-5(i) and caused four broker-dealers’ violations of Section 17(a) and Rule +17a-5 promulgated thereunder. + + 4. Respondent’s Remedial Efforts and Cooperation + + In determining to accept the Offer, the Commission considered the remedial acts +undertaken by Respondent and the cooperation afforded the Commission staff. + + 5. Undertakings + + OUM undertakes: + +a. within ninety (90) days from the date of the Order, to establish written policies and +procedures, or to revise and/or supplement existing written policies and procedures, for the purpose +of providing OUM with reasonable assurance of compliance with applicable independence +7 + +requirements, including those requirements of Rule 2-01 of Regulation S-X applicable to an SEC +Registered Broker-Dealer Engagement (defined to mean an engagement to provide a report – +whether an audit report, an examination report, or a review report – required under Exchange Act +Rule 17a-5(d)(1)(i)(C), as amended); + +b. within ninety (90) days from the date of the Order, to establish a policy of ensuring +training, whether internal or external, on an annual or more frequent regular basis, concerning +applicable independence requirements, including those requirements of Rule 2-01 of Regulation S- +X applicable to an SEC Registered Broker-Dealer Engagement, of any Firm audit personnel who +participate in any way in the planning or performing of any SEC Registered Broker-Dealer +Engagement; + +c. within ninety (90) days from the date of the Order and before OUM’s +commencement of any SEC Registered Broker-Dealer Engagement (or, where OUM by the date of +this Order has already commenced but not completed such an engagement, before OUM’s release +of its report), to ensure training pursuant to the policy described in paragraph (5)(b) above has been +provided on at least one occasion; + +d. to provide a copy of the Order – + + (i) within thirty (30) days from the date of the Order, to all audit personnel +employed by, or associated with (as defined in PCAOB Rule 1001(p)(i)), OUM as of the date of +the Order; and + + (ii) within thirty (30) days from the date of the Order, to any client of OUM as +of the date of the Order for which OUM has performed or has been engaged to perform an SEC +Registered Broker-Dealer Engagement; + +e. within ninety (90) days from the date of the Order, to designate and maintain at +least one partner (the “Independence Partner”) in its national office or headquarters with +responsibility for monitoring OUM’s compliance with the SEC’s auditor independence rules, +including without limitation, the adoption, implementation and oversight of policies and +procedures designed to provide OUM with reasonable assurance of such compliance; + +f. within ninety (90) days from the date of the Order, to adopt and implement written +procedures to provide reasonable assurance that prohibited bookkeeping services will not be +provided in connection with any SEC Registered Broker-Dealer Engagement, including procedures +requiring OUM to complete, on an annual basis, a client continuance form for each SEC +Registered Broker-Dealer Engagement, which shall contain an assessment of risks and a listing of +non-audit services being provided, and procedures requiring OUM’s Independence Partner to +monitor the annual completion and review of client continuance forms for all SEC Registered +Broker-Dealer Engagements as well as the annual review of such other documents, forms or other +information sufficient to determine whether any prohibited bookkeeping services are being +provided in connection with any SEC Registered Broker-Dealer Engagements; and +8 + + +g. to certify in writing to Stephen L. Cohen, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549- +5553, OUM’s compliance with paragraphs 5(a) through 5(f) above. The certification, which shall +be signed by the Independence Partner, shall identify the undertakings, provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate +compliance. OUM shall submit such certification within one hundred twenty (120) days from the +date of the Order. OUM shall also submit such additional evidence of and information concerning +compliance as the staff of the Division of Enforcement may reasonably request. + + + +IV. + + + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent OUM’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. OUM is hereby censured. + +B. OUM shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Exchange Act and Rule 17a-5 promulgated thereunder. + + C. OUM shall comply with the undertakings enumerated in Section (III)(C)(5) +above. + + D. OUM shall, within seven days of the entry of this Order, pay a civil money penalty +in the amount of $10,000 to the Securities and Exchange Commission. If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. Payment must be made in one +of the following ways: + + (1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + + (2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + (3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +9 + +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 +OUM 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 Stephen L. Cohen, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5553. + + + + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3610.txt b/raw/aaer/2014/AAER-3610.txt new file mode 100644 index 0000000000000000000000000000000000000000..532c52decd6baf991c69b4cc6e271cc682a89416 --- /dev/null +++ b/raw/aaer/2014/AAER-3610.txt @@ -0,0 +1,359 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73775 / December 8, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3610 / December 8, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16306 + + + + +In the Matter of + +Lerner & Sipkin CPAs +LLP, + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE ACT +OF 1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Lerner & +Sipkin CPAs LLP (“Respondent” or “Lerner”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + This matter concerns violations of the Commission’s auditor independence rules by Lerner. +Lerner audited the annual financial statements that were filed with the Commission for 74 broker- +dealer audit clients for the fiscal years 2010, 2011, and/or 2012. For at least one audit of +approximately 70 of these broker-dealer audit clients, Lerner was not independent under auditor +independence criteria established by the Commission and made applicable by Exchange Act +Rule 17a-5(f)(3) to audits of brokers and dealers.4 As a result of this conduct, Lerner engaged in +improper professional conduct, violated the auditor independence rules, and caused each of the +approximately 70 broker-dealers’ failure to file an annual report audited by an independent +accountant. +B. RESPONDENT + Respondent Lerner, a limited liability partnership, is an accounting and auditing firm +registered with the Public Company Accounting Oversight Board (“PCAOB”). Lerner has two +partners and three additional professional staff located in one office in the state of New York. + + +3 The findings 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 referred to herein are those in effect during, and applicable to, +the relevant conduct. On July 30, 2013, the Commission adopted certain amendments to Rule 17a -5. See Broker- +Dealer Reports, SEC Exchange Act Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, 2013). +Among other things, the amendments to Rule 17a-5 require that audits of brokers and dealers be performed in +accordance with Public Company Accounting Oversight Board standards, effective for audits of fiscal years ending +on or after June 1, 2014. 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 out in Rule 17a-5(f)(3). It is now set out in Rule 17a-5(f)(1). + +3 + +C. FACTS + 1. Lack of Independence + a. During fiscal years 2010 through 2012 (the “Relevant Period”), Lerner served as +the independent public accountant for 74 broker-dealer audit clients. In connection with at least +one audit performed for approximately 70 of its broker-dealer audit clients during the Relevant +Period, Lerner prepared the financial statements and/or notes to the financial statements that +were filed with the Commission on Form X-17A-5. + b. For example, Lerner audited the annual financial statements for one of its broker- +dealer clients (“Broker-Dealer A”) for the fiscal year ending 2011. During the audit, Lerner was +provided with financial documents generated by Broker-Dealer A, including its financial +statements for the prior year and its most recent four FOCUS reports. + c. Lerner then utilized the information contained in these documents to create a set +of financial statements to be filed with the Commission. In particular, using the prior year’s +financial statements as a template and filling in this year’s information from Broker-Dealer A’s +four most recent FOCUS reports and other information gathered from Broker-Dealer A, Lerner +personnel working on Lerner computers typed and updated the new set of financial statements, +including the notes to the financial statements and the cash flow statement. Lerner then provided +the set of financial statements it had prepared to Broker-Dealer A’s management for approval. + d. In February 2012, Broker-Dealer A filed with the Commission a Form X-17A-5 +Part III for the fiscal year ended December 31, 2011. Included in that filing is an audit report +signed by Lerner and stating, among other things, that Lerner’s audit of Broker-Dealer A was +conducted “in accordance with auditing standards generally accepted in the United States of +America.” + e. Lerner engaged in substantially similar conduct in connection with at least one +audit for approximately 69 additional broker-dealer clients during the Relevant Period. + 2. Violations +a. Section 17(e)(1)(A) of the Exchange Act requires that every registered broker or +dealer “annually file with the Commission a balance sheet and income statement certified by an +independent public accounting firm, or by a registered public accounting firm if the firm is +required to be registered under the Sarbanes-Oxley Act of 2002, prepared on a calendar or fiscal +year basis, and such other financial statements (which shall, as the Commission specifies, be +certified) and information concerning its financial condition as the Commission, by rule may +prescribe as necessary or appropriate in the public interest or for the protection of investors.” +b. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a public +accountant who shall be in fact independent as defined in paragraph (f)(3) of this section herein, +and he shall give an opinion covering the statements filed pursuant to paragraph (d) . . . .” +Exchange Act Rule 17a-5(f)(3) further states that, for such audits, “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” + +4 + +c. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in +accordance with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) requires +that “[t]he accountant’s report shall . . . [s]tate whether the audit was made in accordance with +generally accepted auditing standards.” Generally accepted auditing standards (“GAAS”) +require auditors to maintain strict independence from their audit clients; an auditor “must be free +from any obligation to or interest in the client, its management or its owners.” See Statement on +Auditing Standard No. 1, Section 220.03. 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 +violated Exchange Act Rule 17a-5(i). See In the Matter of Rosenberg Rich Baker Berman & +Company and Brian Zucker, CPA, Exchange Act Release No. 69765 at p. 5 (June 14, 2013). +d. Rule 2-01(c)(4) of Regulation S-X provides that accountants are not independent +if, at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of Regulation S-X provides +that prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: +Any service, unless it is reasonable to conclude that the results of these services +will not be subject to audit procedures during an audit of the audit client's +financial statements, including: +(A) Maintaining or preparing the audit client's accounting records; + +(B) Preparing the audit client's financial statements that are filed +with the Commission or that form the basis of financial +statements filed with the Commission; or + +(C) Preparing or originating source data underlying the audit +client's financial statements. + +e. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm from +preparing an audit client’s financial statements that are filed with the Commission. In this +context, preparing financial statements includes but is not limited to: aggregating line items +from internal books and records to the financial statements; changing line item descriptions; +drafting or editing notes to the financial statements; and converting FOCUS reports or +bookkeeping software program reports into financial statements. With respect to the audit of +Broker-Dealer A, and the additional audits in which Lerner engaged in substantially similar +conduct, Lerner engaged in one or more of the above prohibited actions. +f. As a result of Lerner’s conduct in preparing the financial statements, including the +notes thereto, Lerner was not independent of its broker-dealer audit clients under the +independence criteria established by Rule 2-01(c)(4) of Regulation S-X, which Exchange Act +Rule 17a-5 made applicable to the audits of broker-dealer financial statements. As the +Commission explained in adopting Rule 2-01(c)(4), providing such services for an audit client +“impairs the auditor’s independence because the auditor will be placed in the position of auditing +the firm’s work when auditing the client’s financial statements. . . . In addition, keeping the +books is a management function, the performance of which leads to an inappropriate mutuality + +5 + +of interests between the auditor and the audit client.” Revision of the Commission’s Auditor +Independence Requirements, Exchange Act Release No. 43602, at IV.D.4.b(i) (November 21, +2000). See also Strengthening the Commission’s Requirements Regarding Auditor +Independence, Exchange Act Release No. 47265 (“keeping the books is a management function, +which also is prohibited”)(January 28, 2003). + g. Lerner violated Exchange Act Rule 17a-5(i) by representing in its audit reports +that it had performed the audits of the broker-dealers’ financial statements in accordance with +GAAS when in fact, because of the independence impairment described above, the audits had +not been performed in accordance with GAAS. +h. Exchange Act Section 17(a) and Rule 17a-5 require broker-dealers to file annual +reports containing financial statements audited by independent public accountants. No showing +of scienter is necessary to establish a violation of Exchange Act Section 17(a)(1). See In the +Matter of Orlando Joseph Jett, Exchange Act Release No. 49366 at n.45 (March 5, 2004) (citing +SEC v Drexel Burham Lambert Inc., 837 F. Supp. 587, 610 (S.D.N.Y. 1993); Stead v. SEC, 444 +F.2d 713, 716-17 (10th Cir. 1971), cert denied, 404 U.S. 1059 (1972)). +i. Under Section 21C of the Exchange Act, a person is a “cause” of another’s +primary violation if the person knew or should have known that his act or omission would +contribute to the primary violation. Negligence is sufficient to establish “causing” liability under +Section 21C when a person is alleged to have caused a primary violation that does not require +scienter. In re KPMG Peat Marwick, Exch. Act. Rel. No. 43862 (Jan. 19, 2001), aff’d, KPMG v. +SEC, 289 F.3d 109 (D.C. Cir. 2002). +j. Lerner caused its broker-dealer audit clients to violate Exchange Act Section +17(a) and Rule 17a-5. Lerner, an audit firm registered with the PCAOB and operated by a +Certified Public Accountant, knew or should have known that its conduct, including incorrectly +stating in audit reports that the audits were conducted in accordance with GAAS, contributed to +its audit clients’ violations of Exchange Act Section 17(a) and Rule 17a-5. +k. Rule 102(e) of the Commission’s Rules of Practice allows the Commission to +censure a person if it finds that such person has engaged in “improper professional conduct.” +Exchange Act § 4C(a)(2); Rule 102(e)(1)(ii). Rule 102(e) defines improper professional +conduct, in part, as: “[a] single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which the registered public +accounting firm or associated person knows, or should know, that heightened scrutiny is +warranted.” Exchange Act § 4C(b)(2); Rule 102(e)(1)(iv)(B). + l. 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. +57,164, 57,168 (Oct. 26, 1998) (codified at 17 C.F.R. Part 201). The Commission has defined +the “highly unreasonable” standard as: +an intermediate standard, higher than ordinary negligence but lower than the +traditional definition of recklessness used in cases brought under Section 10(b) of +the Exchange Act and Rule 10b-5 of the Exchange Act. The highly unreasonable + +6 + +standard is an objective standard. The conduct at issue is measured by the degree +of the departure from professional standards and not the intent of the accountant. +Id. at 57,167; see also In the Matter of Ernst & Young LLP, Admin. Proc. File No. 3-10933, SEC +Initial Decision Release No. 249, at 60 (Apr. 16, 2004). + m. Based on the conduct set forth above, Lerner engaged in highly unreasonable +conduct that resulted in violations of applicable professional standards when it knew or should +have known that heightened scrutiny was required. + 3. Findings + a. Based on the foregoing, the Commission finds that Lerner engaged in improper +professional conduct pursuant to Exchange Act Section 4C(a)(2) and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. +b. Based on the foregoing, the Commission finds that Lerner committed violations of +Exchange Act Rule 17a-5(i) and caused approximately 70 broker-dealers’ violations of Section +17(a) and Rule 17a-5 promulgated thereunder. + 4. Respondent’s Remedial Efforts and Cooperation + + In determining to accept the Offer, the Commission considered the remedial acts +undertaken by Respondent and the cooperation afforded the Commission staff in its investigation. +As part of its remediation, Lerner has already implemented or begun to implement some of the +Undertakings listed below. + + 5. Undertakings + + Lerner undertakes: + +a. within ninety (90) days from the date of the Order, to establish written policies +and procedures, or to revise and/or supplement existing written policies and procedures, for the +purpose of providing Lerner with reasonable assurance of compliance with applicable +independence requirements, including those requirements of Rule 2-01 of Regulation S-X +applicable to an SEC Registered Broker-Dealer Engagement (defined to mean an engagement to +provide a report – whether an audit report, an examination report, or a review report – required +under Exchange Act Rule 17a-5(d)(1)(i)(C), as amended); +b. within ninety (90) days from the date of the Order, to establish a policy of +ensuring training, whether internal or external, on an annual or more frequent regular basis, +concerning applicable independence requirements, including those requirements of Rule 2-01 of +Regulation S-X applicable to an SEC Registered Broker-Dealer Engagement, of any Firm audit +personnel who participate in any way in the planning or performing of any SEC Registered +Broker-Dealer Engagement; +c. within ninety (90) days from the date of the Order and before Lerner’s +commencement of any SEC Registered Broker-Dealer Engagement (or, where Lerner by the date + +7 + +of this Order has already commenced but not completed such an engagement, before Lerner’s +release of its report), to ensure training pursuant to the policy described in paragraph (5)(b) +above has been provided on at least one occasion; +d. to provide a copy of the Order – + (i) within thirty (30) days from the date of the Order, to all audit personnel +employed by, or associated with (as defined in PCAOB Rule 1001(p)(i)), Lerner as of the date of +the Order; and + (ii) within thirty (30) days from the date of the Order, to any client of Lerner +as of the date of the Order for which Lerner has performed or has been engaged to perform an +SEC Registered Broker-Dealer Engagement; and +e. to certify in writing to Stephen L. Cohen, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street, N.E., Washington, DC 20549- +5553, Lerner’s compliance with paragraphs 5(a) through 5(d)(ii) 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. Lerner shall submit such +certification within one hundred twenty (120) days from the date of the Order. Lerner shall also +submit such additional evidence of and information concerning compliance as the staff of the +Division of Enforcement may reasonably request. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Lerner’s Offer. + Accordingly, it is hereby ORDERED, effective immediately, that: +A. Lerner is hereby censured. + +B. Lerner shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Exchange Act and Rule 17a-5 promulgated thereunder. + + C. Lerner shall comply with the undertakings enumerated in Section (III)(C)(5) +above. + + D. Respondent shall pay civil penalties of $55,000 to the Securities and Exchange +Commission. Payment shall be made in the following installments: $25,000 to be paid within +seven days of entry of the Order; $10,000 to be paid within 120 days of entry of the Order; +$10,000 to be paid within 240 days of entry of the Order; and $10,000 to be paid within 360 days +of 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 civil penalties, plus any additional interest 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: + + +8 + + (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 +Lerner 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 Stephen L. Cohen, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549- +5553. + + By the Commission. + + + + Brent J. Fields + Secretary + + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3611.pdf b/raw/aaer/2014/AAER-3611.pdf new file mode 100644 index 0000000000000000000000000000000000000000..e68c7593c3424a91ec5c94db56f8aee97a9ed626 --- /dev/null +++ b/raw/aaer/2014/AAER-3611.pdf @@ -0,0 +1,3 @@ +version https://git-lfs.github.com/spec/v1 +oid sha256:8b2ca5a1fb58b6ecfe32018676c7cb62c828a45ef37c53adae212c29536f7c8a +size 247791 diff --git a/raw/aaer/2014/AAER-3611.txt b/raw/aaer/2014/AAER-3611.txt new file mode 100644 index 0000000000000000000000000000000000000000..46fbbedf04612351b0a157bbdf5d6f80edb72339 --- /dev/null +++ b/raw/aaer/2014/AAER-3611.txt @@ -0,0 +1,315 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73835 / December 15, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3611 / December 15, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16314 + + +In the Matter of + +BRUKER 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 Bruker Corporation (“Bruker” 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 controls +provisions of the Foreign Corrupt Practices Act (“FCPA”) by Bruker. The violations took place +from at least 2005 through 2011 and occurred throughout Bruker’s China operations. Employees +of the China offices of four Bruker subsidiaries (collectively, the “Bruker China Offices”) made +unlawful payments of approximately $230,938 to government officials (“Chinese government +officials”) who were employed by state owned entities (“SOEs”) in China that were Bruker +customers. These payments were made to obtain or retain business from the SOEs for the Bruker +China Offices. Specifically, all of the Bruker China Offices provided non-business related travel to +Chinese government officials, and one Bruker China Office also paid Chinese government officials +under “research cooperation” ventures and “collaboration” agreements (collectively, the +“Collaboration Agreements”) for which there was no legitimate business purpose. Bruker realized +approximately $1.7 million in profits from sales contracts with SOEs whose officials received the +improper payments. + +2. The payments to the Chinese government officials were recorded as legitimate +business and marketing expenses in the Bruker China Offices’ books and records, when in fact +they were improper payments designed to personally benefit the officials. The Bruker China +Offices’ books and records were consolidated into Bruker’s books and records, thereby causing +Bruker’s books and records to be inaccurate. Bruker failed to devise and maintain an adequate +system of internal accounting controls sufficient to prevent and detect the improper payments that +occurred over several years. + +Respondent + +3. Bruker Corporation is a Delaware corporation with its headquarters in Billerica, +Massachusetts. Bruker designs, manufactures, and markets analytical tools and life science and +materials research systems (e.g., infrared spectrometers and microscopes) and maintains operations +in North America, Europe, and China. Bruker manages its China operations through the Shanghai +and Beijing representative offices of the Asia-based subsidiaries of four Bruker divisions: Bruker +Optics, Bruker BioSpin, Bruker Daltonics, and Bruker Materials (formerly Bruker AXS). Bruker’s +common stock is registered with the Commission pursuant to Section 12(g) of the Exchange Act +and is listed on the NASDAQ Global Select Market (ticker: BRKR). + +Facts + +A. The Bruker China Offices Improperly Funded +Leisure Travel for Chinese Government Officials + +4. The Bruker China Offices funded leisure travel for Chinese government officials to +visit the United States, the Czech Republic, Norway, Sweden, France, Germany, Switzerland and +Italy. These leisure trips typically followed business-related travel funded by the Bruker China +Offices. The Chinese government officials who went on the trips often authorized the purchase of + + 3 +products from the Bruker China Offices. For example, during 2006, as part of a sales contract with +an SOE, a Bruker China Office paid for purported training expenses for a Chinese government +official (who signed the sales contract on behalf of the SOE). In fact, the payment included +reimbursement for sightseeing, tour tickets, shopping and other leisure activities in Frankfurt and +Paris. Also, in 2007, a Bruker China Office paid for three Chinese government officials to visit +Sweden for a conference, but included as part of the travel, several days of sightseeing in Sweden, +Finland, and Norway. + +5. The Bruker China Offices also funded certain trips for Chinese government +officials that had no legitimate business component. For example, during 2009, a Bruker China +Office paid for two Chinese government officials to travel to New York, despite the lack of any +Bruker facilities there, and to Los Angeles, where they engaged in sightseeing activities. Also +during 2009, a Bruker China Office paid for three Chinese government officials to visit +destinations in Europe for sightseeing. In another instance, during 2010, a Bruker China Office +paid for three Chinese government officials to visit Frankfurt, Heidelberg, Stuttgart, and Munich, +in Germany, as well as Salzburg, Liz, Innsbruck, Graz, and Vienna, in Austria. And in 2011, a +Bruker China Office paid for Chinese government officials from seven SOEs to go on sightseeing +visits to Europe, including Austria, France, Switzerland, Italy, and the Czech Republic. In certain +cases, the Chinese government officials who went on these trips were involved in purchasing +products from the Bruker China Offices. + +6. Overall, from 2005 through 2011, the Bruker China Offices paid approximately +$119,710 to fund 17 trips for Chinese government officials that were for the most part not related +to any legitimate business purpose. These trips were recorded in Bruker’s books and records as +business expenses, without any indication that they were primarily for sightseeing and other non- +business related activities. Bruker improperly profited by $1,131,740 from contracts obtained from +the SOEs whose officials participated on these trips. + +B. A Bruker China Office Improperly Funneled Payments to Officials of +SOEs Under the Guise of Collaboration and Research Agreements + +7. From 2008 through 2011, a Bruker China Office paid $111,228 to Chinese +government officials pursuant to 12 suspect Collaboration Agreements. Generally, under these +Collaboration Agreements, the SOEs had to provide research on Bruker products, or had to use +Bruker products in demonstration laboratories. However, the Collaboration Agreements did not +specify the work product that the SOEs had to provide to be paid, and no work product was in fact +provided to the Bruker China Office by the SOEs. Also, certain Collaboration Agreements were +executed directly with a Chinese government official, rather than the SOE itself; in some cases, the +Bruker China Office paid the Chinese government official directly. And at times, the Chinese +government officials who signed the Collaboration Agreements or obtained payments under the +Agreements were involved in purchasing products from the Bruker China Office. Bruker profited +by approximately $583,112 from contracts improperly obtained from the SOEs whose officials +received payments under the Collaboration Agreements. + + + 4 +C. Bruker Failed to Implement an Adequate Internal Controls System + +8. From at least 2005 through 2011, Bruker failed to implement an adequate internal +controls system to address the potential FCPA problems posed by its ownership of the Bruker +China Offices, which sold their products primarily to SOEs. For example, Bruker did not translate +its training presentations on FCPA, ethics, or compliance issues into local languages, including +Mandarin. And although Bruker implemented an FCPA policy in 2006, it failed to translate that +policy into Mandarin and relied mainly on its China-based managers to ensure that employees +understood the potential FCPA implications of doing business with SOEs. Also, while Bruker +periodically distributed its Code of Conduct (containing its gifts and entertainment policies) and +employee handbook to employees worldwide, it again failed to translate these documents into local +languages, including Chinese. Likewise, Bruker’s toll free employee hotline, which employees +were to use to report complaints anonymously, was not provided in Mandarin, limiting its efficacy. + +9. Bruker also failed to adequately monitor and supervise the senior executives at the +Bruker China Offices to ensure that they enforced anti-corruption policies or kept accurate records +concerning payments to Chinese government officials. The Bruker China Offices had no +independent compliance staff or an internal audit function that had authority to intervene into +management decisions and, if appropriate, take remedial actions. Bruker also failed to tailor its +preapproval processes for conditions in China, instead allowing the Bruker China Offices approval +over items such as nonemployee travel and changes to contracts. As a result, senior employees of +the Bruker China Offices had unsupervised control over the compliance process; these employees +in turn abused their privileges, approving suspect payments to Chinese government officials for +non-business related travel and for purported Collaboration Agreements. + +D. Discovery, Internal Investigation, and Self-Reporting + +10. Bruker discovered the improper payments to Chinese government officials during +2011 while investigating the misappropriation of company funds by certain employees of a Bruker +China Office. Upon learning about these payments, Bruker’s board of directors promptly initiated +an investigation, with the assistance of independent outside counsel and an independent forensic +consulting firm. Bruker self-reported the preliminary results of its internal investigation to both the +staff of the Commission and to the Department of Justice. Thereafter, Bruker, on its own initiative, +undertook a broad review of the China operations of its other divisions. To the extent this internal +review identified additional issues of concern, Bruker fully shared its findings with the staff. + +11. As part of its internal review and investigation, Bruker promptly undertook +significant remedial measures including terminating the senior staff at each of the Bruker China +Offices. Bruker also revised its pre-existing compliance program, updated and enhanced its +financial accounting controls and its compliance protocols and policies, and implemented those +enhancements in China, and thereafter around the world. These steps included: (1) instituting pre- +approval processes for nonemployee travel and significant changes to contracts; (2) establishing a +new internal audit function and hiring a new director of internal audit who is charged with +oversight over Bruker’s global compliance program, including FCPA compliance; (3) adopting an + + 5 +amended FCPA policy translated into local languages; (4) implementing an enhanced FCPA +training program, which includes training programs in local languages as well as mandatory online +employee training programs regarding ethics and FCPA compliance; (5) enhancing due diligence +procedures for third-parties; and (6) implementing a new global whistleblower hotline. + +12. Throughout the process, Bruker provided extensive, thorough, and real-time +cooperation with the Commission. In addition to self-reporting to the Commission shortly after +discovering the FCPA violations, Bruker voluntarily provided the Commission with real-time +reports of its investigative findings; shared its analysis of important documents and summaries of +witness interviews; expanded the scope of the investigation at the Commission’s request; and +responded to the Commission’s requests for documents and information in a timely manner. These +actions assisted the Commission in efficiently collecting valuable evidence, including information +that may not have been otherwise available to the staff. + +Legal Standards and Violations + +A. Legal Standards + +13. 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. + +14. The FCPA, enacted in 1977, added Section 13(b)(2)(A) to the Exchange Act to +require reporting companies 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). + +15. The FCPA also added Section 13(b)(2)(B) to the Exchange Act to require reporting +companies to, among other things, devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurances that the transactions: (i) are executed in accordance +with management’s general or specific authorization; and (ii) are recorded as necessary to permit +preparation of financial statements in conformity with generally accepted accounting principles +(“GAAP”) or any other criteria applicable to such statements, and to maintain accountability for +assets. 15 U.S.C. § 78m(b)(2)(B). + +B. Bruker Violated Section 13(b)(2) of the Exchange Act + +16. The Bruker China Offices made payments to Chinese government officials that +they improperly recorded on their books and records as legitimate business and marketing +expenses. The books and records of the Bruker China Offices were consolidated into Bruker’s +books and records. As a result of the misconduct of its subsidiaries, Bruker failed to make and +keep books, records, and accounts which, in reasonable detail, accurately and fairly reflected its + + 6 +transactions and the disposition of its assets as required by Section 13(b)(2)(A) of the Exchange +Act. + +17. The improper payments described above took place over several years and +throughout Bruker’s China operations. Bruker failed to implement an adequate system of internal +controls, including an appropriate FCPA compliance and training program at its Bruker China +Offices, which was commensurate with the risks of doing business in China, and particularly the +risks of businesses that sold products primarily to SOEs. Accordingly, in violation of Section +13(b)(2)(B) of the Exchange Act, Bruker failed to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that it maintained accountability +for its assets, and that its transactions were executed in accordance with management’s +authorization and recorded as necessary to permit the preparation of financial statements in +conformity with GAAP. + +Commission Consideration of Bruker’s Cooperation and Remedial Efforts + +18. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Bruker and the significant cooperation it afforded to the Commission staff. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Bruker’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent Bruker 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 ten (10) days of the entry of this Order, pay $2,399,969 to +the United States Treasury, including $1,714,852 in disgorgement, $310,117 in prejudgment +interest, and a civil monetary penalty of $375,000. If timely payment is not made, additional +interest shall accrue pursuant to SEC Rule of Practice 600 and 31 U.S.C. § 3717. Payment must be +made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + + 7 +(3) Respondent may pay by certified check, bank cashier’s check, or United States postal +money order, made payable to the Securities and Exchange Commission and hand- +delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Bruker as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Paul G. Block, Assistant Director, +Foreign Corrupt Practices Act Unit, Boston Regional Office, Securities and Exchange +Commission, 33 Arch Street, Suite 2300, Boston, Massachusetts 02110. + +C. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $375,000 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/2014/AAER-3612.pdf b/raw/aaer/2014/AAER-3612.pdf new file mode 100644 index 0000000000000000000000000000000000000000..8b8e3bd3d5be960429a8aa90ee504f496b4a7d98 Binary files /dev/null and b/raw/aaer/2014/AAER-3612.pdf differ diff --git a/raw/aaer/2014/AAER-3612.txt b/raw/aaer/2014/AAER-3612.txt new file mode 100644 index 0000000000000000000000000000000000000000..9a2f279353f33d51d19a4fb2c729610303d21514 --- /dev/null +++ b/raw/aaer/2014/AAER-3612.txt @@ -0,0 +1,75 @@ + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73838 / December 15, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3612 / December 15, 2014 + +ADMINISTRATIVE PROCEEDING +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 : EXTENSION ORDER + PARTNERSHIP), : +DELOITTE TOUCHE TOHMATSU CERTIFIED : + PUBLIC ACCOUNTANTS LTD., and : +PRICEWATERHOUSECOOPERS ZHONG : + TIAN CPAs LIMITED : + : + : + + + On December 12, 2014, Respondents Ernst & Young Hua Ming LLP, KPMG +Huazhen (Special General Partnership), Deloitte Touche Tohmatsu Certified Public +Accountants, Ltd., Pricewaterhousecoopers Zhong Tian CPAs Limited (collectively the +“Big Four Respondents”), and the Division of Enforcement (“Division”), jointly +requested an approximately 70-day extension to the briefing schedule set by the +Commission by order dated October 22, 2014.1 The Division represents that Respondent +BDO China Dahua CPA Co., Ltd. agrees with the proposed extension. + + In support of their motion, the Division and the Big Four Respondents state that, +the substantial progress already made towards settlement has increased significantly; +however, the multi-party nature of the negotiations, the importance, complexity and +sensitivity of the matters under discussion, and the legal and cross-border regulatory +issues presented have continued to require significant time and care to discuss. The +Division and Big Four Respondents now anticipate that this will be the final extension + +1` Extension Order, Exchange Act Release No. 73408 (October 22, 2014). +2 + +request. The parties jointly seek an additional extension of all briefing schedules of +approximately 70-days. + +Extensions of time are disfavored. It appears appropriate, however, to grant the +requested extension. Therefore, + + It is ORDERED that the briefing schedule is extended as follows: + +February 26, 2015: Big Four Respondents’ consolidated opening brief; the +Division’s opening brief (as to remedies imposed on Dahua). + +April 21, 2015: Division’s principal brief and response to Big Four Respondents’ +opening brief; Dahua’s response brief to the Division’s opening brief (as to +remedies imposed by Dahua). + +May 12, 2015: Big Four Respondents’ single consolidated response and reply +brief. + +May 29, 2015: Division’s reply brief (as to the Division’s Petition for review). + + For the Commission, by its Secretary, pursuant to delegated authority. + + + + + Lynn M. Powalski +Deputy Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3613.txt b/raw/aaer/2014/AAER-3613.txt new file mode 100644 index 0000000000000000000000000000000000000000..d8f34eb2ae382b3877fc9cf435882301e93bae40 --- /dev/null +++ b/raw/aaer/2014/AAER-3613.txt @@ -0,0 +1,402 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73839 / December 15, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3613 / December 15, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16315 + +In the Matter of + +CANADIAN SOLAR, INC. +and YAN ZHUANG, + +Respondents. + +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS PURSUANT TO SECTION +21C OF THE SECURITIES EXCHANGE ACT +OF 1934, MAKING FINDINGS, AND +IMPOSING A CEASE-AND-DESIST ORDER +AND CIVIL PENALTIES + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) against Canadian Solar, Inc. (“CSI” or “Canadian Solar”) +and Yan Zhuang (“Zhuang”) (collectively, “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order and Civil Penalties (“Order”), as set forth below. + + + + 2 +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds that: + +A. SUMMARY + +This matter arises from Canadian Solar’s violations of the reporting, books and records, and +internal controls provisions of the Exchange Act resulting from CSI’s recognition of revenue for +certain transactions with United States (“U.S.”) customers during the second, third, and fourth +quarters of 2009 even though certain criteria for revenue recognition had not been met . Yan +Zhuang, CSI’s Vice President of Global Sales and Marketing during the relevant period , was a +cause of CSI’s violations. In addition, by directing a customer to make certain revisions to purchase +orders, Zhuang also violated Section 13(b)(5) of the Exchange Act. + +B. RESPONDENTS + +Canadian Solar, Inc. is a Canadian corporation headquartered in Ontario that designs, +develops, manufactures and markets solar power products. Canadian Solar has its principal place +of business in Suzhou, People’s Republic of China (“PRC”), and has a U.S. head office and +customer center in San Ramon, California. Canadian Solar is a foreign private issuer of securities +registered with the Commission pursuant to Section 12(b) of the Exchange Act and quoted on +NASDAQ under the ticker symbol CSIQ. +Yan Zhuang, age 49, is a resident of the PRC. Zhuang has been Senior Vice President and +Chief Commercial Officer of Canadian Solar since May 2012. From July 2011 until May 2012, +Zhuang was Senior Vice President of Global Sales and Marketing. From June 2009 until July +2011, and during the relevant period, Zhuang was Vice President of Global Sales and Marketing. +From September 2007 until June 2009, Zhuang was an independent director of CSI. +C. FACTS + +Beginning in 2006 with its initial public offering in the United States, CSI—which, since +starting operations in 2001, had focused primarily on the European market— publicly stated its +intentions “to expand into the U.S. market” as a result of new government incentives in select +states. +To facilitate its U.S. expansion, in 2007, by which time at least six states were offering +incentives to developers of solar projects, CSI set up an office in Phoenix, Arizona and + + + 3 +incorporated a U.S. subsidiary. In 2007, however, CSI’s revenue from the U.S. was still only $2.6 +million or less than 1% of CSI’s reported annual revenue.1 +In 2008 and 2009, CSI continued its U.S. expansion efforts. During 2008, CSI entered into +a distributorship with a California company and by early 2009 opened a sales office in San Ramon, +California. At the time, CSI announced in a press release that it was “increasing its footprint in +anticipation of the U.S. becoming a significant market” and that it “expect[ed] to see substantial +growth in the U.S. in 2009.” + By the end of 2008, CSI’s publicly reported U.S. revenue increased to $32.3 million and +accounted for approximately 4.6% of CSI’s revenue. CSI continued to demonstrate growth in the +U.S. in 2009: For the second quarter of 2009, CSI reported “strong sales growth in Asia and +America, with sequential gains of 188% and 500%, respectively, over Q109, resulting in a +diversified and balanced global market distribution.” For the third quarter of 2009, CSI reported +U.S. revenue of $12.9 million or 6% of CSI’s revenues and for the fourth quarter of 2009, U.S. +revenue of $24.8 million, or 8.6% of revenues. For the full year 2009, approximately 8.5% of +CSI’s revenue was generated from the U.S. +However, CSI’s depiction of steady growth in the U.S. market in 2009 was inaccurate +because CSI recognized revenue from certain transactions during the second, third, and fourth +quarters of 2009 which failed to meet all of the criteria for revenue recognition. + Relevant Accounting Standards + In determining whether to recognize revenue during an accounting period, U.S. Generally +Accepted Accounting Principles (“GAAP”) require an entity to consider whether (1) the revenue +is realized or realizable and (2) the revenue is earned. + Revenue is realizable when related assets received or held are readily convertible to +known amounts of cash or claims to cash. Revenues are considered to have been earned when +the entity has substantially accomplished what it must do to be entitled to the benefits +represented by the revenues. Revenue is realized and earned when all of the following criteria +are met: +(i) Persuasive evidence of an arrangement exists; +(ii) Delivery has occurred or services have been rendered; +(iii) The seller’s price to the buyer is fixed and determinable; and +(iv) Collectability is reasonably assured. + + Each of the four conditions must be met by the end of an accounting period in order to +recognize revenue from a particular transaction. If any condition fails to be satisfied, revenue + +1 During the relevant period, CSI’s U.S. revenue was reported within the “America” geographic region. +While the “America” region included some revenue from Canadian customers, most of it was derived from U.S. +customers. + + + 4 +recognition must be deferred until the period in which the condition is met. See, e.g., +Accounting Standards Codification (“ASC”) 605-10-25-1. See also ASC 605-10-S99-1. + + Customer A +In April 2009, CSI began discussions to supply a California-based solar power contractor +(“Customer A”) with solar modules for two large-scale municipal projects in California and +Florida, transactions that CSI anticipated would yield over $7.7 million in revenue. +Upon completion of the two projects, Customer A expected large U.S. government +subsidies and significant income, but Customer A required financing to cover the initial costs +associated with purchasing the solar modules. CSI had access to financing from Chinese banks, in +addition to the ability to obtain credit insurance from a Chinese government-funded entity +established to promote foreign trade.2 CSI concluded that by utilizing these resources it could +provide or arrange for the financing Customer A required. +While negotiations over the terms of the transaction were ongoing, CSI began to +manufacture and ship solar modules to Customer A. On June 23, 2009, CSI shipped its first batch +of solar modules to Customer A’s Florida project, whereupon it recorded $1.2 million in revenue.3 +On June 30, 2009, CSI shipped a second batch of modules to Customer A’s Florida project, +recognizing an additional $1.2 million in revenue. +Evidence of an arrangement +It was improper for CSI to recognize this $2.4 million in revenue in the second quarter of +2009. First, negotiations between Customer A and CSI regarding the final financing for the +transaction remained ongoing into the third quarter of 2009. By the third quarter, the parties had +still not determined how Customer A would pay for the entirety of the panels required for the +large-scale projects. + +2 This entity (the “Insurer”) provided insurance against losses from a particular customer for a defined +payment term and up to a specific amount. For example, in a typical arrangement, the Insurer might agree to +provide credit insurance up to $3 million for a customer with a 90-day payment term. If the customer defaulted, CSI +could file a claim with the Insurer seeking reimbursement of between 70% - 90% of its resulting loss. Any amount +of credit CSI extended to a particular customer above the agreed credit limit would not be covered by the Insurer. +Accordingly, in the above example, if CSI allowed the customer to purchase $5 million worth of product, only $3 +million would be covered by the Insurer. In addition, allowing payment terms beyond those dictated by the Insurer +nullified the insurance. Therefore, if CSI allowed the customer more than 90 days to pay for product, the Insurer +would not protect against losses upon the customer’s default. + +3 Pursuant to its revenue recognition policy at the time, CSI recorded revenue for the sale of solar panels +when title had passed to the customer. Under CSI’s customary shipping terms, this usually occurred when a product +shipped from its place of origin in China. + + + + 5 +Collectability +CSI recognized the revenue from sales to Customer A, even though CSI questioned +whether it would be able to collect payment for these sales. In particular, at the time that CSI +shipped the first two batches of solar modules to Customer A and recognized the corresponding +revenue, CSI expressed reservations about Customer A’s ability to pay. For example, shortly +before shipment, Zhuang noted Customer A’s poor Dun & Bradstreet credit report and “I am +raising several yellow flags about [Customer A] here – I have been watching them closely! . . . +They are very short money. They are not confident they can pay us on November 1st and not +confident enough to find money to finish the project.” Nevertheless, CSI shipped the modules and +recognized revenue. +Despite shipping modules to Customer A in June 2009 and recognizing $2.4 million in +revenue, and shipping additional modules in July and August 2009, negotiations between the +parties fell apart in mid-September 2009. As a result, CSI repossessed all of the modules it had +already shipped. + Customer B +a. Second Quarter +CSI also recognized $3.4 million of revenue in the second quarter of 2009 from +transactions with Customer B, a preferred distributor of CSI, when not all the criteria for revenue +recognition had been met. +Fixed and determinable price +Commencing in the second quarter of 2009, in its transactions with Customer B, CSI at +times reduced the price of solar modules already shipped, even though revenue had already been +recognized. This practice was a way for CSI to effectively guarantee Customer B against losses by +adjusting Customer B’s price below that which Customer B could expect on resale. For example, +in June 2009, Zhuang directed sales personnel to “drop the price of [Customer B’s] inventory . . . +Need them to move the goods to pay us.” Zhuang also indicated that CSI might further reduce +Customer B’s price in the future, directing sales personnel to “be prepared to further lower the +price if their inventory still does not move soon. We need them to sell out to pay us back.” Absent +a fixed or determinable price, it was improper for Canadian Solar to recognize revenue of $3.4 +million on sales to Customer B in the second quarter of 2009. +Collectability +Collectability was also questionable for CSI’s sales to Customer B in the second quarter of +2009. In particular, after initial shipments to Customer B in the second quarter, CSI’s outstanding +accounts receivable balance for Customer B exceeded the limit of the Insurer’s credit insurance + + + 6 +coverage.4 Customer B submitted additional purchase orders, one of which sought an additional +$2.3 million in solar modules to be shipped within the second quarter of 2009. Although Customer +B committed to a payment plan, CSI personnel expressed concern about further increasing CSI’s +credit risk by shipping additional product before Customer B paid down its account balance. + +Ultimately, CSI developed a plan to expand its warehouse capacity in Northern +California and, beginning in June 2009, ship product to this warehouse instead of shipping +directly to Customer B. Pursuant to the plan, CSI would release solar modules to Customer B in +installments as Customer B paid down its outstanding balance pursuant to an agreed-upon +schedule. At the time this plan was developed, Zhuang and others understood that CSI could not +recognize revenue associated with shipments to its own warehouse until Customer B made +payment and picked up the solar modules from CSI’s warehouse. + +After this plan was developed, the Insurer’s limit for Customer B was raised from $1 +million to $3 million. When CSI’s sales team learned this, they sought permission to ship +additional containers directly to Customer B rather than shipping to CSI’s warehouse. By doing +so, CSI would avoid extra handling and storage fees. Zhuang was firm, however, that CSI +should stick with the original storage and payment plan: “We had a good plan! [Customer B] +still owe [sic] $1M and most of the panels are still sitting in their inventory. We lowered our +price to help them to sell out. I do not want to ship more to their warehouse without their +promised payment monthly before they clear their inventory significantly. . . I already gave the +final decision in my previous mail. This is final!” + +Despite this decision, CSI discovered that its Northern California warehouse could not +store as many containers as planned. Therefore, rather than following the original storage and +payment plan, CSI released containers directly to Customer B and booked revenue for those +panels. Although Zhuang earlier had insisted that the existing payment plan be followed, instead +he directed CSI personnel to “ask for a payment plan and try to ship more to [Customer B]. +Revenue not recognized by shipping to our warehouse.” + +In addition, the decision to abandon the original storage and payment plan and to ship the +containers directly to Customer B was not made until after the close of the second quarter of 2009. +However, revenue from solar modules shipped to Customer B in the third quarter of 2009 was +booked in the second quarter. +The recognition of this revenue relating to Customers A and B was publicly reported in a +press release and filed with the Commission on Form 6-K. This revenue accounted for 36% of +CSI’s second-quarter 2009 U.S. revenue and 5% of CSI’s second-quarter 2009 global revenue. + +4 The Insurer subsequently raised the limit, although Customer B’s outstanding balance ultimately exceeded +the higher limit as well. + + + 7 +b. Third Quarter +Collectability +In the third quarter of 2009, CSI recognized revenue of $3.7 million from sales to Customer +B even though collectability was doubtful. This transaction, which was booked at the very end of +the third quarter, resulted from CSI’s failure to finalize the deal with Customer A, described above. +Faced with the anticipated return of a large quantity of modules previously shipped to Customer A +during a period of falling prices and having to reverse revenue already recognized in the second +and third quarters of 2009, CSI sought to resell the solar modules repossessed from Customer A. +At Zhuang’s direction, all modules repossessed from Customer A that could not be resold to other +customers were resold to Customer B. +Collectability, however, was questionable because Customer B already had a large +outstanding balance at the time of the transaction, as well as substantial unsold inventory from +prior purchases. CSI committed its own sales force to help Customer B in reselling the +repossessed modules to end users, and CSI did not require Customer B to pay for the modules until +reselling them. +Zhuang and others understood that Customer B owed substantial sums for prior purchases, +and questioned whether Customer B would be able to pay for additional shipments. In fact, +immediately prior to redirecting the return from Customer A to Customer B, CSI personnel were +instructed, “If you can divert to other credible customers then it should be done first – let all sales +managers know and push them!!!! The rest goes to [Customer B] – as their [Accounts Receivable] +will be 5 month [sic] old soon (2 months overdue).” +Further, CSI agreed as part of the transaction to reimburse Customer B for costs it incurred +in storing the inventory CSI shipped. This agreement was reflected in a purchase order Customer +B sent to CSI, which indicated that CSI was to pay Customer B’s storage fees. However, Zhuang +directed Customer B to “delete the storage fee from the PO. We can not realize sales for Q3 with +this line. We can have a separate contract on the storage fee and I will approve it.” In addition, the +actual purchase orders for this transaction were not completed until October 2009. At Zhuang’s +direction, Customer B dated the purchase orders for September 29, the date when some of the +panels were shipped to Customer B. + The recognition of this revenue relating to Customer B was publicly reported in a press +release and filed with the Commission on Form 6-K. This revenue accounted for 29% of CSI’s +third-quarter U.S. revenue and 1.7% of CSI’s third-quarter global revenue. +Revision of Fourth Quarter + On March 3, 2010, CSI publicly announced its financial results for the fourth quarter of +2009 in a press release filed with the Commission on Form 6-K. CSI reported U.S. revenue of +$24.8 million and identified U.S. revenue as 8.6% of CSI’s total revenues. + + + + 8 + In August 2010, CSI revised its previously reported earnings for the fourth quarter of 2009. +One portion of the revision related to revenue recognition, resulting in a $19.5 million reduction in +CSI’s fourth-quarter 2009 U.S. revenue from $24.8 million to $5.3 million to account for (1) +products shipped in the fourth quarter of 2009 for which collection was not reasonably assured, and +(2) a sales return reserve that CSI began to accrue for the fourth quarter 2009 forward. CSI did not +revise its previously reported earnings for the second and third quarters of 2009. +Internal Controls + CSI was able to recognize revenue from the above-described transactions, due to CSI’s +deficient internal control over financial reporting. Both CSI’s management and its independent +auditor concluded that as of December 31, 2009, there were material weaknesses in the +effectiveness of CSI’s internal control over its financial reporting. These deficiencies included, +among others, the failure to establish effective controls to ensure that all revenue recognition +criteria were met prior to recognizing revenue and a control to monitor sales returns and record a +reserve related to estimated sales returns. + +D. VIOLATIONS +Section 13(a) of the Exchange Act and Rule 13a-16 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, and, +pursuant to Rule 12b-20 of the Exchange Act, mandate that such reports contain such further +material information as may be necessary to make the required statements not misleading. +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 reflect their transactions and +dispositions of their assets, and prohibit any person from, directly or indirectly, falsifying or +causing to be falsified, any book, record or account subject to Section 13(b)(2)(A). +Section 13(b)(2)(B) of the Exchange Act 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. +Section 13(b)(5) of the Exchange Act prohibits any person from knowingly circumventing +a system of accounting controls or knowingly falsifying any book, record, or account subject to +Section 13(b)(2)(A). +Canadian Solar + As a result of the conduct described above, CSI violated Section 13(a) of the Exchange Act +and Rules 12b-20 and 13a-16 thereunder by reporting inaccurate U.S. revenue in its quarterly +earnings reports for the second, third, and fourth quarters of 2009 by including revenue for certain +transactions when the criteria for revenue recognition had not been met. + + + 9 + As a result of the conduct described above, CSI violated Section 13(b)(2)(A) of the +Exchange Act because it did not keep books, records, or accounts that accurately reflected the +amount of U.S. revenue it had earned. + As a result of the conduct described above, CSI violated Section 13(b)(2)(B) of the +Exchange Act because it failed to maintain a system of internal accounting controls sufficient to +provide reasonable assurances that it was recognizing revenue in accordance with GAAP. +Yan Zhuang + +As a result of the conduct described above, Zhuang knew or should have known that CSI +was improperly recognizing revenue with respect to certain transactions with U.S. customers. As a +result of the conduct described above, Zhuang caused or was a cause of CSI’s violations of Section +13(a) and 13(b)(2)(A) of the Exchange Act and Rules 12b-20 and 13a-16 thereunder. In addition, +by directing Customer B to make certain revisions to purchase orders, Zhuang violated Section +13(b)(5) of the Exchange Act. + +E. CSI’S REMEDIAL MEASURES + +In determining to accept the Offers of Settlement, the Commission considered remedial +acts undertaken by CSI. + +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, pursuant to Sections 21C and 21B of the Exchange Act, it is hereby +ORDERED that: + +A. Respondent Canadian Solar cease and desist from committing or causing any +violations and any future violations of Section 13(a) and Sections 13(b)(2)(A) and (B) of the +Exchange Act and Rules 12b-20 and 13a-16 thereunder. +B. Respondent Yan Zhuang cease and desist from committing or causing any violations +and any future violations of Sections 13(a), 13(b)(2)(A) and 13(b)(5) of the Exchange Act and +Rules 12b-20 and 13a-16 thereunder. +C. Within 30 days of the entry of this Order: +a. Respondent Canadian Solar shall pay to the United States Treasury a civil +money penalty in the amount of $500,000; + + + 10 +b. Respondent Yan Zhuang shall pay to the United States Treasury a civil money +penalty of $50,000. + If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. 3717. +Payment must be made in one of the following ways: (1) Respondents may transmit payment +electronically to the Commission, which will provide detailed ACH transfer/Fedwire instructions +upon request; (2) Respondents may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; or (3) Respondents may pay by +certified check, bank cashier’s check, or United States postal money order, made payable to the +Securities and Exchange Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + Payments by check or money order must be accompanied by a cover letter identifying the +payer 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, Assistant Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549-5010A. + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3614.txt b/raw/aaer/2014/AAER-3614.txt new file mode 100644 index 0000000000000000000000000000000000000000..db185993fdc36746b476806b09ce95ef0cda9d4d --- /dev/null +++ b/raw/aaer/2014/AAER-3614.txt @@ -0,0 +1,413 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 9691 / December 16, 2014 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 73852 / December 16, 2014 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3614 / December 16, 2014 + +ADMINISTRATIVE PROCEEDING +File No. 3-16319 + + + +In the Matter of + +ANGEL E. LANA, 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 Angel E. +Lana, CPA (“Respondent” or “Lana”) pursuant to Section 8A of the Securities Act of 1933 +(“Securities Act”), Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +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 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, which are +admitted, 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. RESPONDENT + +1. Lana, age 56, is a resident of Boca Raton, Florida. He is a certified public +accountant (“CPA”) licensed to practice in the State of Florida since 1981. Lana has worked as a +sole practitioner since 1986, and has performed accounting work for several public companies. +Lana also has an affiliation with an accounting firm that represents public companies. From May +2011 to 2014, Lana served as Chief Financial Officer (“CFO”) of Aurum Mining, LLC (“Aurum”). +Lana was also one of three managers of Aurum and was to receive an aggregate compensation of +$288,000 for his services to Aurum during the relevant period, which remains unpaid. + + + +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 + + + + +B. RELEVANT PERSONS + +2. Alexandre S. Clug (“Clug”), age 46, was a resident of Miami, Florida and Lima, +Peru during the relevant period. Clug is a principal and manager of Aurum. Clug did not hold any +securities industry licenses during the relevant period. + +3. Michael W. Crow (“Crow”), age 55, was a resident of Miami, Florida and Lima, +Peru during the relevant period. Crow was a principal and manager of Aurum until early 2014. +Crow also owns and controls three Peruvian entities, named Alta Mining, S.A.C., AlterTerra, +S.A.C. and Grupo Alta, S.A.C. Since 1998, Crow has been barred from serving or acting as an +officer or director of a public company and from appearing or practicing before the Commission as +an accountant. SEC v. Crow, 96-cv-1661 (S.D. Cal.); In re Michael W. Crow, Exchange Act Rel. +No. 39902 (Apr. 22, 1998). In 2008, Crow was also barred from associating with any broker, +dealer or investment adviser. SEC v. Crow, 07-cv-3814 (S.D.N.Y.); In re Michael W. Crow, +Initial Dec. Rel. No. 376 (Apr. 22, 2009). In 2010, Crow filed for personal bankruptcy. + +4. Aurum is a Nevada limited liability company established in April 2011, with its +principal place of business in Miami, Florida. Aurum established several subsidiaries in Peru +during the relevant period, including Aurum Mining Peru, S.A., Admiral Cove Partners, S.A, Alta +Gold, S.A., Carolina Gold, S.A., and Oceano Pacifico Minerales, S.A. Crow and Clug each owned +50% of Aurum’s voting shares and controlled Aurum’s finances and operations during the relevant +period. Crow, Clug and Lana served as the managers of Aurum. Aurum was not registered with +the Commission in any capacity during the relevant period. + +C. FACTS + +5. Lana became involved with Aurum through Clug. In April 2011, Lana accepted +Clug’s invitation to be the CFO of Aurum. Lana knew that Clug and Crow were the principals of +Aurum. Since early 2011, Lana knew that Crow had been barred from serving or acting as an +officer or director of a public company and from associating with any broker, dealer or investment +adviser. Sometime in 2012, Lana also knew that Crow was in bankruptcy. + +6. In April 2011, Clug told Lana that he had identified a gold mining opportunity in +Brazil for Aurum. At the time, Lana, Clug and Crow had no experience in mining or geology. +Clug also told Lana that Aurum required capital to fund the Brazil venture and asked Lana to help +raise funds for Aurum. + +7. Lana used a term sheet dated May 10, 2011 to solicit investors, including his tax +clients, to invest in Aurum. Between May and June 2011, Aurum raised $250,000 from nine +investors in exchange for convertible notes issued by Aurum and secured by Aurum’s minimal +assets. The notes offered investors 8% return with a nine month maturity date. The notes also +4 + +offered investors an option to convert their notes into equity at a 50% discount or $2.50 per share at +the earlier of the “Close” or maturity. The notes defined the “Close” as “the financing and closing +of the acquisition on the land rights and mining rights for the [Brazilian] Gold project.” + +8. In August 2011, Lana, Crow and Clug started soliciting investors to invest in non- +voting equity membership units in Aurum. They provided investors, including some of the +convertible noteholders, with a Private Placement Memorandum dated August 1, 2011 (the +“August 2011 PPM”). The August 2011 PPM provided a detailed description of Crow’s +professional background, including his designation as a CPA and his work experience prior to +becoming president and chairman of a public company that led to his officer and director bar. +However, the PPM omitted Crow’s role and activities at that public company, his history of +securities law violations, his pending bankruptcy, and the fact that his CPA license had expired. +The August 2011 PPM identified Lana as one of the managers of Aurum, along with Crow and +Clug. + +9. The August 2011 PPM stated that closing would not occur and investor funds +would be escrowed until at least $1 million had been raised in the equity offering and “certain +closing conditions” relating to the Brazilian gold project had been satisfied. + +10. The “closing conditions” in the August 2011 PPM required that Aurum: (1) enter +into a joint venture with its Brazilian partners; (2) receive a geological report from a qualified and +licensed geologist stating the gold content in the Brazilian property; and (3) obtain from Brazilian +legal counsel an opinion stating that, among other things, the joint venture owned or had +irrevocable rights to the land and mining rights, and had received the required licenses from the +Brazilian government. + +11. Between mid-January and February 2012, Aurum sent another PPM dated +December 31, 2011 (the “December 2011 PPM”) and a PPM “update” letter (“PPM Update +Letter”) to investors, mostly convertible noteholders. The PPM Update Letter recommended that +the convertible noteholders convert their notes into equity and they all did. + +12. However, the December 2011 PPM and the PPM Update Letter misled investors +about Aurum’s ownership interest in the Brazilian property and the amount of gold contained in +the property. The December 2011 PPM and PPM Update Letter also contained material +misrepresentations and omissions concerning, among other things: (a) the use of investor proceeds; +(b) test results and financial projections relating to the Brazilian property; (c) the acquisition of +other gold properties in Peru; and (d) Crow’s bankruptcy and securities litigation background. +Furthermore, the PPM Update Letter falsely stated that Aurum had “satisfied the conditions of +closing on the Aurum original PPM,” referring to the closing conditions of the August 2011 PPM. +This representation was false because Aurum never acquired an interest in the Brazilian property, +nor did it obtain the required licenses from the Brazilian government or the geological report from +a qualified and licensed geologist stating the total gold content in the Brazilian property. + +5 + +13. As CFO and manager of Aurum, Lana failed to take any steps to ascertain whether +the closing conditions in the August 2011 PPM were met. For instance, Lana did not seek any +evidence or written confirmation of Brazilian counsel’s opinion, the required licenses and the +geological report specified in the August 2011 PPM. + +14. As CFO, Lana also failed to safeguard investor proceeds against misuse and +allowed Clug and Crow unfettered access to investor funds. For instance, Lana knew or should +have known that Crow and Clug used a majority of the funds raised from the convertible +noteholders to personally benefit themselves instead of using the funds for due diligence activities +on the Brazilian property, as promised to investors. Lana also knew or should have known that +Crow and Clug used a substantial amount of the investor proceeds from the equity offering to +personally benefit themselves while Aurum had failed to fulfill the closing conditions. + +15. The Aurum operating agreement annexed to the PPMs required the managers to +send to investors annual audited and unaudited balance sheets and income statements. Lana, as +Aurum’s CFO, had access to these financial statements but failed to provide them to investors. + +16. From August 2011 to September 2012, Aurum raised approximately $2.2 million +from at least 20 investors in Florida, Connecticut and California. + +17. By September 2012, Aurum had substantially depleted the proceeds from +investors. Aurum then prepared a new PPM dated September 15, 2012 (“September 2012 PPM”) +to raise $1 million purportedly to build a mineral processing plant and launch mining operations in +Peru. Subsequently, Aurum prepared another PPM dated January 1, 2013 (“January 2013 PPM”), +a Confidential Information Memorandum (“CIM”), and an Aurum Business Plan dated January 30, +2013 (“Aurum Business Plan”), to raise an additional $1 million, also purportedly to build a +mineral processing plant and launch mining operations in Peru. + +18. The September 2012 PPM, January 2013 PPM, CIM, and Aurum Business Plan +contained material misrepresentations and omissions about Aurum’s ownership interest, test +results, financial projections, the timing of production, and cash flow on the Peruvian mineral +concessions acquired by Aurum. + +19. From September 2012 to November 2013, Aurum raised approximately $1.5 +million from at least 10 investors in Florida, Connecticut, California, New Jersey, and the United +Kingdom. + +20. Furthermore, from May 2012 to July 2013, Aurum prepared and disseminated +quarterly reports to “update” existing and prospective Aurum investors. Through these quarterly +reports, Aurum misled investors about its ownership interests in various mineral properties in +Brazil and Peru, the test results obtained from those properties, and the timing of production and +cash flow associated with those properties. + +6 + +21. Lana was negligent in soliciting investors for Aurum using materially false and +misleading documents. Lana was the CFO and a manager of Aurum, and he participated in the +review and approval of Aurum’s offering documents. As a result, Lana knew or should have +known about Crow’s bankruptcy and previous securities laws violations, Aurum’s failures in +Brazil, and Crow and Clug’s use of the offering proceeds to benefit themselves in spite of Aurum’s +failures in Brazil. Due to these red flags, Lana should have investigated whether the offering +documents he used to solicit investors for Aurum contained inaccurate or misleading +representations. Lana failed to do so. + +22. To date, the Aurum investors have not received any return on their investments. + +D. VIOLATIONS + + Sections 17(a) (2) and 17(a) (3) of the Securities Act prohibit a person, in the offer or sale +of any securities, 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 make, 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. By his conduct described above, Lana willfully violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act. + +E. FINDINGS + +Based on the foregoing, the Commission finds that Lana willfully violated Sections +17(a)(2) and 17(a)(3) of the Securities Act. + +Undertakings + +Lana has undertaken to: + +Forego any compensation due to him from Aurum and any entity owned or controlled, +directly or indirectly, by either Crow or Clug or both, during the relevant period; and + +Cease raising any funds for Aurum and any entity owned or controlled, directly or +indirectly, by either Crow or Clug or both. + +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 Lana’s Offer. + +7 + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Lana shall cease and desist from committing or causing any violations and any +future violations of Section 17(a) of the Securities Act. + + B. Lana is denied the privilege of appearing or practicing before the Commission as an +accountant. + + C. After five 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: + + (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 +Respondent’s or the firm’s quality control system that would +indicate that 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. +8 + + +D. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. + + E. Respondent shall pay a civil penalty of $50,000. Payment shall be made in the +following installments: $15,000 within ten (10) calendar days of the date of this Order, and +$35,000 within one (1) year of the date of this Order. If any payment is not made by the date the +payment is required by this Order, the entire outstanding balance, plus any additional interest +accrued pursuant to 31 U.S.C. 3717, shall be due and payable immediately, without further +application. Payment must be made in one of the following ways: + + (1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + + (2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + (3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying Angel E. Lana 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 Amelia Cottrell, Associate Regional Director, Division of +Enforcement, Securities and Exchange Commission, 200 Vesey Street, Suite 400, +Brookfield Place, New York, NY 10281. + + F. Such civil money penalty may be distributed pursuant to Section 308(a) of the +Sarbanes-Oxley Act of 2002, as amended (“Fair Fund distribution”). Regardless of whether any +such Fair Fund distribution is made, amounts ordered to be paid as civil money penalties pursuant +to this Order shall be treated as penalties paid to the government for all purposes, including all tax +9 + +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. + + G. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $50,000 based upon his agreement to cooperate in a Commission investigation and/or +related enforcement action. If at any time following the entry of the Order, the Division of +Enforcement (“Division”) obtains information indicating that Respondent knowingly provided +materially false or misleading information or materials to the Commission or in a related +proceeding, the Division may, at its sole discretion and with prior notice to the Respondent, +petition the Commission to reopen this matter and seek an order directing that the Respondent pay +an additional civil penalty. Respondent may contest by way of defense in any resulting +administrative proceeding whether he knowingly provided materially false or misleading +information, but may not: (1) contest the findings in the Order; or (2) assert any defense to liability +or remedy, including, but not limited to, any statute of limitations defense. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2014/AAER-3616.txt b/raw/aaer/2014/AAER-3616.txt new file mode 100644 index 0000000000000000000000000000000000000000..c5ac0a5180cf805aadcb1fedd7b3d6a941aec39e --- /dev/null +++ b/raw/aaer/2014/AAER-3616.txt @@ -0,0 +1,1394 @@ + + + + + + + + + + + + + + + + SEC.gov | Avon Products, Inc. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/516326","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 + + + Avon Products, Inc. + + + + + + + + + + + + Avon Products, Inc. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23159 / December 17, 2014 + Accounting and Auditing Enforcement Release No. AAER-3616 / December 17, 2014 + Securities and Exchange Commission v. Avon Products, Inc. , Civil Action No. 14-cv-9956 (KPF) (S.D.N.Y.) + + SEC Charges Avon Products, Inc. with Fcpa Violations + + + The Securities and Exchange Commission today charged Avon Products, Inc. (Avon), a global beauty products manufacturer and seller, with failing to put in place controls that could have detected and prevented payments made to Chinese government officials by employees and consultants at an Avon Chinese subsidiary from 2004 through the third quarter of 2008. In addition, Avon's books and records failed to accurately record the details and purpose of the payments. The SEC alleged that the conduct violated the Foreign Corrupt Practices Act (FCPA). Avon has agreed to pay more than $67 million in disgorgement and prejudgment interest to settle the SEC's charges. + + The SEC's complaint alleges that the Chinese subsidiary made $8 million worth of payments in cash, gifts, travel, and entertainment to various Chinese officials to gain access to officials drafting and implementing direct selling regulations in China, to be among the first allowed to test the regulations, to be the first to receive a direct selling license, and, subsequently to keep the clean corporate image required to retain the license. Avon received approval to test direct selling in China in 2005, and in March 2006, it received the first direct selling business license. + + Through an internal audit report, Avon management learned in late 2005 of potential FCPA problems in China. Management consulted an outside law firm, directed that reforms be instituted, and sent internal audit back to follow up. However, ultimately, no such reforms were instituted at the Chinese subsidiary. Avon began a full-blown internal investigation in 2008, after its CEO received a letter from a whistleblower in China. + + Some examples of payments alleged in the complaint include payments for travel within China or to the United States or Europe, corporate box tickets to the China Open tennis tournament, gifts of Louis Vuitton merchandise, Gucci bags, and Tiffany pens, and $1.65 million for meals and entertainment. The complaint also alleges payments made to avoid fines or negative news articles that might have impacted Avon's corporate image and affected the Chinese subsidiary's direct selling license. In some instances, the payments were concealed by falsely recording the transactions as employee business expenses or as re-imbursement of a third-party vendor. In other instances, the records for the payments set forth almost no detail at all. The resulting books and records did not allow a reviewer to ascertain the government official or state-owned entities that received the payments or the purpose for which the payments were made. + + The SEC's complaint charges Avon with violating Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934 -- the books and records and internal controls provisions of the FCPA. Avon consented to the entry of a proposed final judgment ordering the company to pay disgorgement of $52,850,000 in benefits resulting from the alleged misconduct, plus prejudgment interest of $14,515,013.13, permanently enjoining the company from violating Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B), and requiring the company to retain an independent compliance monitor to review its FCPA compliance program for a period of 18 months, followed by an 18-month period of self-reporting on its compliance efforts. The settlement is subject to the approval of the U.S. District Court for the Southern District of New York. + + In reaching the proposed settlement, the SEC took into account Avon's cooperation and significant remedial measures, including its implementation of an enhanced compliance program and worldwide FCPA training. + + In related criminal proceedings, the U.S. Department of Justice and the United States Attorney's Office for the Southern District of New York today announced a deferred prosecution agreement with Avon and criminal charges against Avon's Chinese subsidiary. Avon entities agreed to pay over $67 million in criminal penalties in connection with those proceedings. + + The SEC appreciates the assistance of the Fraud Section of the Department of Justice, the United States Attorney's Office for the Southern District of New York, 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. 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Dunn, et al. + + + + + + + + + + + + Frank A. Dunn, et al. + + + + + + + + + + + + + + + + + + + U.S. SECURITIES AND EXCHANGE COMMISSION + Litigation Release No. 23165 / December 19, 2014 + Accounting and Auditing Enforcement Release No. 3617 / December 19, 2014 + Securities and Exchange Commission v. Frank A. Dunn, et al. , Civil Action No. 07-CV-2058 (S.D.N.Y.) + + headline --> + + + On December 19, 2014, the Securities and Exchange Commission filed Stipulations of Dismissal that dismiss with prejudice all claims against the remaining five defendants in SEC v. Dunn, et al., Civil Action No. 07 CV 2058 (S.D.N.Y.) -- Frank A. Dunn, Douglas C. Beatty, Michael J. Gollogly, MaryAnne E. Pahapill (a.k.a. Mary Anne Poland), and Douglas A. Hamilton -- arising out of their alleged role in accounting misconduct at Nortel Networks Corporation. The Commission's case, filed in 2007, has been stayed since 2009. In January 2013, a Canadian court acquitted Dunn, Beatty and Gollogly of all criminal charges brought against them for the same earnings management allegations charged by the Commission. + + The dismissals filed today conclude the Commission's litigation in this matter. The distribution of the Fair Fund established in 2009 from the Commission's related enforcement actions, which consists of approximately $35 million, is nearly complete. + + + + + + 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/2017/AAER-3841.txt b/raw/aaer/2017/AAER-3841.txt new file mode 100644 index 0000000000000000000000000000000000000000..72680093b45f4e74b37b20937aa46ff58086834d --- /dev/null +++ b/raw/aaer/2017/AAER-3841.txt @@ -0,0 +1,246 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79753 / January 6, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3841 / January 6, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17759 + +In the Matter of + +CADBURY LIMITED and +MONDELĒZ +INTERNATIONAL, INC., + + +Respondents. + +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS, PURSUANT TO SECTION +21C OF THE SECURITIES EXCHANGE ACT +OF 1934, MAKING FINDINGS AND +IMPOSING CEASE-AND-DESIST ORDERS +AND A CIVIL PENALTY + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Cadbury Limited f/k/a Cadbury plc (“Cadbury”) +and Mondelēz International, Inc. (“Mondelēz”) as the acquirer of Cadbury’s stock (collectively +“Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, Respondents consent to the entry of this Order Instituting Cease- +and-Desist Proceedings, Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings and Imposing Cease-and-Desist Orders and a Civil Penalty (“Order”), as set forth below. + +2 + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +Summary + +1. Mondelēz, formerly known as Kraft Foods Inc., is a U.S.-based food, beverage, and +snack manufacturer with securities registered with the Commission. In February 2010, Mondelēz +acquired Cadbury, a U.K.-based confectionary and snack beverage company that had securities +registered with the Commission. In early 2010, Cadbury India Limited (“Cadbury India”), a +subsidiary of Cadbury, retained an agent (“Agent No. 1”) to interact with Indian government +officials to obtain licenses and approvals for a chocolate factory in Baddi, Himachal Pradesh, India. +Cadbury India’s failure to conduct appropriate due diligence on, and monitor the activities of, Agent +No. 1 created the risk that funds paid to Agent No. 1 could be used for improper or unauthorized +purposes. In addition, Cadbury India’s books and records, which were consolidated into the books +and records of Cadbury, did not accurately and fairly reflect the nature of the services rendered by +Agent No. 1. Cadbury did not devise and maintain an adequate system of internal accounting +controls sufficient to provide reasonable assurances that access to assets and transactions were +executed in accordance with management’s authorization and specifically to detect and prevent +payments that may be used for improper or unauthorized purposes. +2. As a result, Cadbury violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Securities +Exchange Act of 1934 (“Exchange Act”). As a result of Mondelēz’s subsequent acquisition of +Cadbury’s stock, Mondelēz is also responsible for Cadbury’s violations. +Respondents + +3. Cadbury Limited f/k/a Cadbury plc (“Cadbury”), an English company +headquartered in London, England, was a multi-national manufacturer and distributor of +confectionaries and snack beverages. Cadbury’s American Depositary Shares (“ADSs”) were +registered with the Commission under Section 12(b) of the Exchange Act and traded on the New +York Stock Exchange under the ticker symbol “CBY.” After being acquired by Mondelēz, on +February 2, 2010, Cadbury terminated the registration of its ADSs with the Commission, which +became effective on September 6, 2010. +4. Mondelēz International, Inc. (“Mondelēz”) is a Virginia company with its +principal executive offices in Deerfield, Illinois. During 2010, Mondelēz was known as Kraft +Foods Inc. (“Kraft”). Kraft was a global manufacturer and marketer of food, beverage and snack +products. Kraft’s common stock was registered with the Commission under Section 12(b) of the +Exchange Act and it traded on the New York Stock Exchange under the ticker symbol “KFT.” + +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 + +5. On February 2, 2010, Kraft acquired Cadbury and its subsidiaries, including +Cadbury India. In October 2012, Kraft re-named itself Mondelēz International, Inc. and spun off its +North American grocery business into a new company called Kraft Foods Group, Inc. Mondelēz +retained the global snacking business, including Cadbury India, which later became Mondelēz India +Foods Private Ltd. Mondelēz has common stock that is registered with the Commission under +Section 12(b) of the Exchange Act and that trades on the NASDAQ under the ticker symbol +“MDLZ.” +Other Relevant Entities and Individuals +6. Mondelēz India Foods Private Limited f/k/a Cadbury India Limited (“Cadbury +India”) is Mondelēz’s subsidiary in India. It operates six manufacturing plants and four sales offices +in India and its headquarters are in Mumbai. +7. Agent No. 1 is a local business person and tile and marble vendor in Himachal +Pradesh, India, whom Cadbury India retained as an agent to obtain licenses and approvals for a +chocolate manufacturing facility in Baddi, India. Agent No. 1 formed a sole proprietorship on +January 1, 2010, located on the same premises as the tile and marble business. On February 25, +2010, Agent No. 1 opened a bank account for his new business at the State Bank of India. +Facts + +8. Cadbury India manufactures and sells chocolate products and other confectionaries +in India. It operates six manufacturing plants in India and is headquartered in Mumbai. In 2005, +Cadbury India built a major plant in Baddi, Himachal Pradesh, India. Cadbury India obtained +licenses and approvals from the state government in Himachal Pradesh that were necessary to +operate its new factory. Cadbury India’s employees at the Baddi plant drafted and submitted the +applications for these licenses and approvals. +9. In 2008, Cadbury India decided to increase production capacity in Baddi. It called +the additional facilities “Unit II.” +10. Cadbury India estimated that it may require more than 30 different licenses and +approvals for Unit II. In or around November 2009, Cadbury India decided to obtain outside +assistance in securing these various licenses and approvals. In January 2010, Cadbury India +employees met with Agent No. 1 to discuss potentially retaining Agent No. 1 to obtain the licenses +and approvals. As part of these discussions, Cadbury India employees at Baddi and Agent No. 1 +negotiated the prices of Agent No. 1’s services. Agent No. 1 issued at least two quotations detailing +the fees for each license and approval. Shortly after this meeting, in late January 2010, Cadbury +India employees at Baddi recommended the retention of Agent No. 1, which management approved +without further due diligence. Agent No. 1 began its work shortly thereafter and on February 23, +2010, Cadbury India executed a letter of authorization authorizing Agent No. 1 to represent +Cadbury India before government bodies. +4 + +11. From February 2010 to July 2010, Agent No. 1 submitted five invoices totaling +$110,446 to Cadbury India for “providing consultation, arrange statutory/government prescribed +formats of applications to be filed for the various statutory clearances, documentation, preparation +of files and the submission of the same with govt. authorities” for specific licenses. In contrast +Cadbury India employees at Baddi, not Agent No. 1, prepared these license applications. Cadbury +India paid Agent No. 1 a total of $90,666 after deducting withholding tax upon receipt of the +invoices. After receiving each payment, Agent No. 1 withdrew from its bank account most or all of +the funds in cash. During this time period Cadbury India obtained some of the licenses and +approvals for Unit II. This included a de-amalgamation approval to designate the property on which +Unit II was built as legally distinct from that of the existing manufacturing facility. +12. Besides the meetings described above, Cadbury India performed no further due +diligence on Agent No. 1. Other than the invoices from Agent No. 1, which contained a description +of the specific licenses or approvals obtained as support for that invoice, Cadbury India did not +receive documentary support for Agent No. 1’s services and did not have any written contract with +Agent No. 1 when it paid Agent No. 1. +13. Cadbury India’s books and records did not accurately and fairly reflect the nature of +the services rendered by Agent No. 1. Cadbury did not implement adequate FCPA compliance +controls at its Cadbury India subsidiary, which created the risk that funds paid to Agent No. 1 could +be used for improper or unauthorized purposes. +14. On February 2, 2010, Mondelēz acquired Cadbury. Because of the nature of the +acquisition, Mondelēz was unable to conduct complete pre-acquisition due diligence, including anti- +corruption due diligence. +15. Between April 2010 and December 2010, Mondelēz engaged in substantial, risk- +based, post-acquisition compliance-related due diligence reviews of Cadbury’s business, which +involved reviews in 24 countries, including India. This post-acquisition due diligence review did +not identify the relationship between Agent No. 1 and Cadbury India. +16. In October 2010, upon commencement of an internal investigation related to Agent +No. 1, Mondelēz required Cadbury India to end the relationship with Agent No. 1 and no further +payments were made. +17. Mondelēz conducted an internal investigation, which included the retention of +external counsel and forensic accountants and cooperated with the SEC’s investigation. Mondelēz +also undertook extensive remedial actions with respect to Cadbury, including implementing +Mondelēz’s global compliance program at Cadbury and conducting a comprehensive review of the +use of third parties in Cadbury India’s business. +Legal Standards and Violations +18. 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 +5 + +would be the cause of the violation, due to an act or omission the person knew or should have +known would contribute to such violation. +19. Under Section 13(b)(2)(A) of the Exchange Act, issuers are required 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)]. +20. Under Section 13(b)(2)(B) of the Exchange Act, issuers are required to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that: +(i) transactions are executed in accordance with management’s general or specific authorization; (ii) +transactions are recorded as necessary (I) to permit 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 existing assets at reasonable intervals and appropriate action is taken with respect +to any differences. [15 U.S.C. § 78m(b)(2)(B)]. +21. As described above, Cadbury India, a subsidiary of Cadbury, retained Agent No. 1 +to interact with Indian government officials to obtain licenses and approvals for Unit II in Baddi, +India. Cadbury India did not conduct appropriate due diligence on, and properly monitor the +activities of, Agent No. 1, which created the risk that funds paid to Agent No. 1 could be used for +improper or unauthorized purposes. In addition, Cadbury India’s books and records did not +accurately and fairly reflect the nature of the services rendered by Agent No. 1. As a result of the +conduct described above, Cadbury violated Section 13(b)(2)(A) of the Exchange Act, by failing to +keep accurate books, records and accounts, and Section 13(b)(2)(B) of the Exchange Act, by failing +to devise and maintain internal accounting controls that were sufficient to provide reasonable +assurances that access to assets and transactions were executed in accordance with management’s +authorization and specifically to detect and prevent payments that may be used for improper or +unauthorized purposes. As a result of Mondelēz’s acquisition of Cadbury stock, Mondelēz is also +responsible for Cadbury’s violations. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondents Mondelēz and Cadbury +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 Mondelēz shall, within 14 days of the entry of this Order, pay a civil +penalty in the amount of $13 million to the Securities and Exchange Commission +for transfer to the general fund of the United States Treasury, subject to Exchange +6 + +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 Mondelēz may transmit payment electronically to the +Commission, which will provide detailed ACH transfer/Fedwire +instructions upon request; +(2) Respondent Mondelēz 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 Mondelēz 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 +Cadbury and Mondelēz 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 Brian O. Quinn, +Assistant Director, Division of Enforcement, Securities & 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/2017/AAER-3848.txt b/raw/aaer/2017/AAER-3848.txt new file mode 100644 index 0000000000000000000000000000000000000000..a7c89933079141451c8d1eeb6bee8657c8df9adb --- /dev/null +++ b/raw/aaer/2017/AAER-3848.txt @@ -0,0 +1,391 @@ + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79820 / January 18, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3848 / January 18, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-17794 + +In the Matter of +KENNETH MACK and BRYAN +McMILLAN +Respondents. + ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING CEASE-AND- +DESIST ORDERS AND PENALTIES + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”), against Kenneth Mack (“Mack”) and Bryan +McMillan (“McMillan”) (collectively “Respondents”). +II. + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, and except as provided in Section IV.E herein, +Respondents consent to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing +Cease-and-Desist Orders and Penalties (“Order”), as set forth below. + + + +2 + + + +III. +On the basis of this Order and Respondents’ Offers, the Commission finds +1 that: +SUMMARY + This matter concerns the conduct of Kenneth Mack (“Mack”) and Bryan McMillan +(“McMillan”) in connection with a financial restatement that occurred at Orthofix International, +N.V. (“Orthofix”). During the relevant period, McMillan served as the President of Orthofix’s +largest segment – its Spine Segment – and Mack reported to him as a Vice President of Global +Sales and Development responsible for the international portion of Orthofix’s Spine Segment. +During the relevant period, Orthofix had an unwritten policy requiring that any modifications +made to contractual, payment, or other related terms with international distributors be approved +by the Chief Financial Officer of Orthofix’s Spine Segment (“Spine CFO”) before any final +agreement occurred. During the relevant period, however, Respondents agreed to terms on two +transactions with one of Orthofix’s largest distributors without the Spine CFO’s approval. Mack +additionally negotiated transactions with two other international distributors containing various +concessions without the Spine CFO’s knowledge or approval. Moreover, in connection with a +fiscal year 2012 audit conducted by Orthofix’s independent auditors, Mack provided an +inaccurate representation. +As a result of the foregoing conduct, Mack and McMillan violated Exchange Act Section +13(b)(5) and Rule 13b2-1 and were a cause of Orthofix’s violations of the reporting and books +and records provisions of the federal securities laws. Mack additionally violated Exchange Act +Rule 13b2-2(b) through his inaccurate representation to Orthofix’s independent auditors. +RESPONDENTS +Kenneth Mack, age 45, served as the Vice President of Global Sales and Development +for the international portion of Orthofix’s Spine Segment from March 2011 until May 2013 and +is no longer employed at Orthofix. +Bryan McMillan, age 46, served as Orthofix’s Spine Segment President from November +2011 through November 2012 and is no longer employed at Orthofix. + + + +1 The findings herein are made pursuant to Respondents’ Offer and are not binding on any other person or +entity in this or any other proceeding. + +3 + + + +FACTS +A. Orthofix’s Business and Structure + +1. Orthofix’s business was primarily divided into two Global Business Segments during the +relevant period – Spine and Orthopedics. During the relevant period, Spine was +Orthofix’s largest segment and contributed two-thirds of the company’s overall revenues. +2. Spine had several operating divisions during the relevant period including Orthofix +Spinal Implants (“OSI”), which was responsible for international sales of spinal implants +and related instruments. +3. Spine sold products through various methods, including selling its products to +international distributors who then sold the products to hospitals and physicians. +4. As Spine Segment President, McMillan was in charge of Spine’s sales and overall +management. McMillan had several sales persons who worked under him, including +Mack. +5. As Spine’s Vice President of Global Sales and Development, Mack was in essence the +relationship manager for a number of relationships that OSI had with certain international +distributors. Mack had a sales team of approximately four employees who reported to +him and had day-to-day responsibility for certain distributor relationships. +B. Distributor Business and Revenue Recognition Practices +6. Orthofix entered into written agreements with distributors of its product. These +distributor agreements provided, among other things, standard payment terms for +purchase of products. These standard payment terms ranged typically from 90 to 180 +days. +7. During the relevant period, Spine had an unwritten policy requiring that modifications to +the terms in existing distributor agreements be approved by the Chief Financial Officer of +the Spine Segment (“Spine CFO”). The Spine CFO reported directly to McMillan and +indirectly to the Orthofix CFO who was a principal executive officer of the company. +8. The Spine CFO’s approval authority in this regard extended to all aspects of distributor +agreement terms, including pricing, commissions, discounts, extensions of payment +terms, payment plans, returns, and exchanges. +9. With limited exceptions, Orthofix recognized revenue during the relevant period based on +the “sell-in” method, which provides for revenue recognition upon shipment of products +to the distributor. + +4 + + + +10. ASC 605-10-25-1 provides that revenue may be recognized only when it is both realized +or realizable and earned. Consistent with the authoritative literature, Orthofix’s financial +statements disclosed four criteria as its revenue recognition policy. +11. The four criteria are: (i) persuasive evidence of an arrangement exists; (ii) delivery has +occurred or services have been rendered; (iii) the seller’s price to the buyer is fixed and +determinable; and (iv) collectability is reasonably assured. +C. McMillan and Mack Imposed Pressure to Meet Internal Sales Targets + +12. During the relevant period, Orthofix had a culture of aggressively setting internal sales +targets and imposing pressure upon its sales personnel to meet those targets. For +example, on October 22, 2011, McMillan emailed Mack and others concerning the need +for OSI to meet its fourth quarter forecast of $6 million in revenue. McMillan wrote “if +we fail at this endeavor then the company will be at risk and next year will be Hell on +Earth for all of us.” +13. Less than one year later – and again reflecting the pressure imposed to meet revenue +targets – Mack sent the following email on August 28, 2012 to his sales team with the +subject line “September Gut:” +I need your gut feeling on the revenue we can generate in September. We need $2 +million in addition to what is on the portal . . .based on the feedback I have received I +have gotten so far, we are off about $1.5 million. I know what people say they need, +but as you know this is important. We need to ask everyone to purchase just a bit +more . . .if I have to walk into [McMillan’s] office and tell him we are short again, +that is going to be a major problem. +14. After receiving the above email, one of the sales persons who reported to Mack emailed a +colleague separately and wrote: +I was just speaking with [Mack] and had finance listened to us last year we wouldn’t +be in this mess. We all predicted our markets could not sustain this growth but they +got greedy. Found this budget brutal because here we are for another year just +estimating the dollars. +D. Mack and McMillan Negotiate Transactions and Term Amendments with Brazilian +Distributor + +15. OSI had several international distributors during the relevant period, but its largest +distributor of product was located in Brazil (hereinafter “the Brazilian Distributor”). In +fact, for eight of the nine quarters from Q1 2011 to Q1 2013, the Brazilian Distributor +was the Company’s second largest customer on a revenue per quarter basis. + +5 + + + +16. Entering 2012, the Brazilian Distributor’s amounts payable to Orthofix was +approximately $11 million. In March 2012, McMillan and Mack had discussions with +the Brazilian Distributor to address this issue. The Brazilian Distributor agreed to pay +approximately $4.2 million of the amounts payable by the end of FY 2012 but only if the +company delivered certain products by the end of April 2012. Orthofix did not, however, +deliver the products by the end of April 2012. +17. In late May 2012, the Brazilian Distributor President and McMillan had a face-to-face +meeting. As reflected in June 2012 email communications among the Brazilian +Distributor President, McMillan, Mack, and other employees, the Brazilian Distributor +President and McMillan discussed two things at that meeting. +18. First – since Orthofix had not delivered the products that the Brazilian Distributor had +insisted upon by the end of April 2012 – the Brazilian Distributor President informed +McMillan (and later Mack through June 2012 emails memorializing those discussions) +that it would only pay $1.6 million of its amounts payable in December 2012 and $2.6 +million in February 2013. +19. Second, McMillan discussed a product launch plan with the Brazilian Distributor to +purchase approximately $2.5 million of an FDA approved Orthofix product called +Firebird. This product, however, had not yet been approved by ANVISA (the Brazilian +equivalent of the U.S. Food and Drug Administration), and therefore, could not be +shipped into Brazil until such approval was obtained by the Brazilian Distributor. +Neither Mack nor McMillan knew exactly when ANVISA would grant approval. +20. As reflected by June 2012 emails between the Brazilian Distributor, Mack, and +McMillan, the Brazilian Distributor agreed to place the Firebird order on the following +conditions: (i) one year to pay for the product contingent on ANVISA approval and (ii) +210 days to pay on all subsequent product orders. +21. Mack and McMillan agreed to the payment plan proposal and the Firebird order terms +without approval from the Spine CFO. +22. The Spine CFO learned of the Firebird transaction a few weeks after the Firebird product +had already been shipped. In particular, on July 24, 2012 Mack forwarded the Spine +CFO an email describing the transaction along with a series of emails containing prior +discussions among him, McMillan, other employees, and the Brazilian Distributor’s +President. +23. The Spine CFO replied to both McMillan and Mack “[Ken], can you please address how +we ended up with a full year to pay for the June order. I have a hard time managing that +with a lot of pressure to reduce our ballooning [Days Sales Outstanding].” Mack replied, +“we accepted this due to the need for that size of an order.” + +6 + + + +24. Orthofix recognized over $2 million in revenue from this transaction immediately upon +shipping the implants to the Brazilian Distributor’s U.S. based subsidiary located in +Atlanta, Georgia. In particular, Orthofix’s recognition of revenue in this regard was +improper because the Brazilian Distributor’s obligation to pay, and the payment terms +themselves, were contingent upon ANVISA approval and, therefore, revenue recognition +was inconsistent with Orthofix’s accounting policy because it did not meet the fixed or +determinable criteria or the collectability criteria. +25. On December 1, 2012, Mack emailed the Brazilian Distributor’s President and the Spine +CFO and wrote “I believe you have been speaking with [the Spine CFO] about the end of +the year payment of $4 million. They are all extremely anxious about this. This has to +happen as agreed.” By this time, McMillan had left the company. +26. The Brazilian Distributor’s President replied “No [the Spine CFO] did not communicate +with me, certainly because it is quite clear this was agreed with [McMillan]. We will pay +$1.6 million in December.” +27. Mack forwarded this email to the Spine CFO, writing “this is a disaster,” despite the fact +that Mack had been informed in June 2012 that the Brazilian Distributor would only pay +$1.6 million in December 2012 as a result of the failure to deliver certain products by +April 30, 2012. +28. Ultimately, Orthofix filed its FY 2012 Form 10-K in March 2013 and did not, among +other things, adequately assess the collectability of the significant receivables it had with +the Brazilian Distributor. +E. Mack Improperly Negotiates Transactions with Spanish and Mexican Distributors +29. In July 2012, Mack, without getting the approval of the Spine CFO, solicited a Spanish +Distributor of Orthofix product to place an $810,000 order in which he offered the +distributor certain concessions, which he characterized as the “deal of the century.” The +concessions included extended payment terms on the order and the right to return +$250,000 of excess distributor inventory that resulted from the order. The Spanish +Distributor placed this order. +30. In September 2012, Mack, again without getting the approval of the Spine CFO, solicited +a Mexican Distributor of Orthofix product to place a $300,000 order in which he offered +the Distributor a number of concessions. The concessions included extended payment +terms on the order, payment of $60,000 in taxes for the Distributor to the Mexican tax +authorities, expansion of sales territory and reduction in sales quotas for the next year. +The Mexican Distributor placed this order. +31. Orthofix recognized revenue from these transactions upon shipment of the products. This +was improper because payment terms and timing were contingent upon certain extra- + +7 + + + +contractual concessions and, therefore, revenue recognition was inconsistent with +Orthofix’s accounting policy because it did not meet the fixed or determinable criteria or +the collectability criteria. +F. Mack Makes Inaccurate Representation to Auditors +32. Mack made an inaccurate representation to Orthofix’s independent auditors in connection +with their audit of the fiscal year 2012 financial statements. +33. In particular, under the direction of the-then Spine President (who was a principal +executive officer of the company), Mack provided a misleading written representation to +the independent auditor that stated inaccurately that the sales for which Mack was +responsible did not include side agreements outside the terms of the sales contracts, +extended payment terms, rights of return, or concessions. +G. Orthofix’s Restatement +34. Orthofix materially misstated several of its annual and quarterly filings and +corresponding earnings releases, failed to make and keep books and records which, in +reasonable detail, accurately and fairly reflected the transactions and dispositions of the +assets of the issuer, and failed to devise and maintain a system of internal accounting +controls sufficient to provide reasonable assurance that transactions are recorded as +necessary to permit the preparation of financial statements in conformity with generally +accepted accounting principles. +35. Accordingly – in late March 2014 – Orthofix restated its financial statements for the first +quarter of fiscal year 2013, all quarterly and annual periods in fiscal years 2012 and 2011, +and the annual period for fiscal year 2010 and acknowledged certain material weaknesses +in its internal control over financial reporting. +VIOLATIONS +36. Under Section 21C of the Exchange Act, the Commission may impose a cease-and-desist +order upon any person who is violating, has violated, or is about to violate any provision +of the Exchange Act and upon any person that is, was, or would be a cause of the +violation, due to an act or omission the person knew or should have known would +contribute to such violation. +37. Section 13(a) of the Exchange Act requires issuers to file such periodic and other reports +as the Commission may prescribe and in conformity with such rules as the Commission +may promulgate. Exchange Act Rules 13a-1, 13a-11, and 13a-13 require the filing of +annual, current, and quarterly reports, respectively. In addition to the information +expressly required to be included in such reports, Rule 12b-20 of the Exchange Act +requires issuers to add such further material information, if any, as may be necessary to +make the required statements, in the light of the circumstances under which they are + +8 + + + +made not misleading. “The reporting provisions of the Exchange Act are clear and +unequivocal, and they are satisfied only by the filing of complete, accurate, and timely +reports.” SEC v. Savoy Industries, 587 F.2d 1149, 1165 (D.C. Cir. 1978) (citing SEC v. +IMC Int’1, Inc., 384 F. Supp. 889, 893 (N.D. Tex. 1974)). A violation of the reporting +provisions is established if a report is shown to contain materially false or misleading +information. SEC v. Kalvex, Inc., 425 F. Supp. 310, 316 (S.D.N.Y. 1975). +38. Section 13(b)(2)(A) of the Exchange Act requires issuers to “make and keep books, +records, and accounts, which, in reasonable detail, accurately and fairly reflect the +transactions and dispositions of the assets of the issuer.” +39. 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 Exchange Act Section 13(b)(2). +40. Exchange Act Rule 13b2-1 prohibits any person from, directly or indirectly, falsifying or +causing to be falsified, any book, record, or account subject to Exchange Act Section +13(b)(2)(A). +41. Exchange Act Rule 13b2-2(b) prohibits any officer or director of an issuer or any other +person acting under the direction thereof from directly or indirectly taking any action to +mislead an accountant engaged in the performance of an audit if that person knew or +should have known that such action, if successful, could result in rendering the issuer’s +financial statements materially misleading. +42. As a result of the conduct described above, Mack and McMillan violated Exchange Act +Section 13(b)(5) and Rule 13b2-1 and were a cause of Orthofix’s violations of Exchange +Act Sections 13(a) and 13(b)(2)(A) and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +thereunder. Mack additionally violated Exchange Act Rule 13b2-2(b). +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondents shall 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)(5) and Rules 12b-20, 13a-1, 13a-11, 13a-13, and 13b2-1 thereunder. +Respondent Mack shall further cease and desist from committing or causing any violations and +any future violations of Exchange Act Rule 13b2-2(b). + +9 + + + +B. Within 30 days of the entry of this order, Mack shall pay a civil money penalty of +$40,000 and McMillan shall pay a civil money penalty of $25,000. 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 three ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request +2 +; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofin.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying 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 Antonia Chion, Division of Enforcement, +Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-5720. +D. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the penalties referenced in paragraph IV.B above. This Fair Fund may be added +to or combined with the fair fund established in In the Matter of Orthofix International, N.V., (AP +File No. 3-17791; Release No.10281, January 18, 2017) and/or may be added to or combined with +fair funds established for the civil penalties paid by other Respondents for conduct arising in relation +to the violative conduct at issue in this proceeding or the Orthofix proceeding, in order for the +combined fair funds to be distributed to harmed investors affected by the same violative conduct. +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 + +2 + The minimum threshold for transmission of payment electronically is $1,000,000. For amounts below the +threshold, respondents must make payments pursuant to option (2) or (3) above. + +10 + + + +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. 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 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 + + +DMS4415287v7 \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3852.txt b/raw/aaer/2017/AAER-3852.txt new file mode 100644 index 0000000000000000000000000000000000000000..9cb7e74e3c04f1738de581320bf21a12715bfdc5 --- /dev/null +++ b/raw/aaer/2017/AAER-3852.txt @@ -0,0 +1,570 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 79844 / January 19, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3852 / January 19, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17801 + +In the Matter of + +HOMESTREET, INC. and +DARRELL VAN AMEN, + +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 HomeStreet, Inc. (“HomeStreet” or “the +Company”) and Darrell van Amen (collectively, “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”), which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over 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 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a +Cease-and-Desist Order (“Order”), as set forth below. + 2 +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +Summary + +1. This matter concerns books and records and internal accounting control violations +arising from HomeStreet’s accounting related to certain commercial loans and related swaps +designated as accounting hedges (the “Hedges”) under GAAP (ASC 815). HomeStreet’s Chief +Investment Officer and Treasurer, Darrell van Amen, caused the Company’s violations by +overseeing a practice of changing the inputs to an accounting test designed to measure the +effectiveness of the Hedges and, in some instances, instructing employees to follow that practice. +Changing the inputs meant HomeStreet, a diversified financial services company, could +demonstrate that certain Hedges were highly effective and thus allowed for the use of fair value +hedge accounting. The application of hedge accounting, in turn, meant HomeStreet could offset +changes in the fair value of the interest rate swaps with the changes in the fair value of the loans +attributable to the hedged risk. Given this accounting treatment, fair value hedge accounting can +reduce income statement volatility for companies who use it. For nearly three years, from the third +quarter of 2011 to the second quarter of 2014, Treasury employees provided the adjusted inputs +and test results to HomeStreet’s accounting department for purposes of preparing the financial +statements, resulting in inaccurate accounting entries. The manner in which the Treasury +department implemented the hedge effectiveness testing, approved by van Amen, was also +inconsistent with the Company’s internal policies and procedures and involved the creation of +inaccurate books and records. + + 2. In addition to the conduct described above, in violation of the Securities +Whistleblower Protection provisions of the Exchange Act, HomeStreet took actions to impede +employees who were involved in or knowledgeable about the Company’s hedge accounting from +communicating directly with the Commission staff about possible securities law violations and +included language in employee severance agreements that removed the financial incentives +intended to encourage individuals to communicate directly with Commission staff about possible +securities law violations. + +Respondents + + 3. HomeStreet, based in Seattle, Washington, is a diversified financial services +company servicing customers primarily in the Pacific Northwest, California, and Hawaii. +HomeStreet’s common stock trades on the NASDAQ and has been registered with the +Commission pursuant to Section 12(b) of the Exchange Act since February 10, 2012. + + +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 + 4. Darrell van Amen, 51, joined HomeStreet in 2003 as Treasurer. He has served as +Executive Vice President, Chief Investment Officer and Treasurer for HomeStreet from 2012 to +the present. Van Amen is a treasury professional, but not an accountant. + +Facts + +A. HomeStreet’s Improper Hedge Accounting + +HomeStreet’s Accounting for Hedges and Effectiveness Testing + + 5. From 2006 to 2008, HomeStreet originated approximately 20 fixed rate commercial +loans. For each of these loans, HomeStreet entered into interest rate swaps to hedge the exposure +to changes in the fair value of the commercial loans attributable to the benchmark interest rate +(“designated hedged risk”). + +6. Under GAAP (ASC 815), an issuer may elect hedge accounting and designate the +hedged item (here, the fixed rate commercial loans) and the hedging instrument (the interest rate +swaps) in a fair value hedging relationship. ASC 815 requires companies to recognize in income, +in the period that the changes in fair value occur, gains or losses from a derivative. In addition, +changes in the fair value of the hedged item, attributable to the risk designated as being hedged, +must also be recognized in income as an adjustment to the carrying amount of that hedged item. +Given this accounting treatment, fair value hedge accounting can reduce income statement +volatility that might exist absent hedge accounting treatment. Among other requirements, in order +to maintain hedge accounting under ASC 815, an issuer must assess the hedging relationship +periodically (at least every quarter) to ensure that the changes in fair value of the hedging +instruments are highly effective in offsetting changes in fair value of the hedged item attributable +to the risk designated as being hedged. If a hedging relationship is no longer highly effective, the +issuer must cease hedge accounting treatment for the relationship. The issuer would continue to +recognize changes in fair value of the derivative (interest rate swaps) in current period earnings +(but the hedged item would no longer be adjusted), thus not providing an offset in the income +statement for the hedging instrument, resulting in potential income statement volatility. + + 7. HomeStreet designated each of the approximately 20 hedging relationships as +accounting hedges and documented that it would conduct its periodic assessment of effectiveness +testing using the Periodic Dollar Offset Method and perform this assessment on a quarterly basis. +This methodology required HomeStreet to value each of the loans and each of the swaps and +compare the ratio of the change in fair value of the swap with the change in fair value of the loan +attributable to the risk designated as being hedged. Under this test, if the effectiveness ratio fell +between 80% and 125%, the hedging relationship was considered effective and HomeStreet could +continue to use hedge accounting. However, if the effectiveness ratio fell outside of that range, +hedge accounting no longer applied and the relationship was supposed to be de-designated. This +would have required HomeStreet to record the loans at amortized cost, adjusted for previous fair +value hedging marks, on its balance sheet, but would not have allowed any additional adjustments +to the hedged item. + + 4 +8. At the time that HomeStreet originated these hedging relationships, it also +prepared inception documentation for each of the Hedges, as required by GAAP to describe how +the hedge effectiveness assessment should be done for purposes of periodic testing. Specifically, +it stated, “[o]n a quarterly basis, effectiveness will be assessed by updating the analysis +performed at the inception of the hedge to reflect the change in interest rate.” The memo did not +mention updating the analysis with an adjustment to any other variable. + 9. HomeStreet went public in 2012. In connection with preparation of its S-1 filing in +mid-2011, the Company put into place a new hedge effectiveness testing program that involved +independently calculating the fair value of the loans attributable to the risk designated as being +hedged and the fair value of the swaps using a valuation software program. + + 10. HomeStreet’s Treasury group was responsible for developing the new testing +program, conducting the valuations used for the effectiveness testing and conducting the testing +itself. As head of that group, van Amen oversaw implementation of the new valuation process and +supervised a Treasury employee (who was not an accountant) in designing the new process and +setting forth a process for performing valuations in an April 8, 2011 memorandum addressed to +van Amen. + + 11. The memorandum described the various inputs to be used in conducting the +valuations of the loans and the swaps, and indicated that no variable other than benchmark interest +rate should be changed in the periodic testing. Van Amen received a draft of the memo from the +Treasury employee and sent it to the Accounting department. At or around the time the memo was +drafted, the Treasury employee also showed van Amen how to conduct the periodic valuations of +the loans and the swaps, changing only the benchmark interest rate. + + 12. Subsequently, a different Treasury employee prepared a document entitled +“Valuation Procedures for Hedged Customer Loans.” The Valuation Procedures document +detailed each of the steps to value the loans and swaps using the Company’s valuation software. +According to the Valuation Procedures, the person conducting the test should update the +benchmark interest rate, and then compare the value of the loan to the value of the swap for +purposes of calculating the ratio required by the effectiveness testing. The Valuation Procedures +made no mention of changing any other variable. + + 13. The April 8, 2011 memorandum, the inception documentation, and the Valuation +Procedures comprised the written policies and procedures HomeStreet used to ensure that its +Hedges were appropriately accounted for under GAAP. + + 14. Van Amen oversaw the testing process and was responsible for reviewing the +testing work performed by Treasury employees and the results. From 2008 until the third quarter +of 2014, various HomeStreet Treasury personnel who reported to van Amen conducted the +periodic effectiveness testing. After performing the valuations of the loans and swaps and the +resulting effectiveness testing, the Treasury employee responsible for performing the testing in that +quarter had a general practice of providing van Amen, for approval: (1) an Excel workbook +(which contained the valuations of the loans, the valuations of the swaps, each input supporting +those two valuations, the ratios of the two, and the resulting hedge effectiveness calculation) and + 5 +(2) a memo from the relevant Treasury employee to the “File” stating that the valuation of the +loans and swaps had been conducted “using the dollar-offset method,” that the relationships were +“deemed highly effective,” and identifying the precise ratio for each relationship. + + 15. After van Amen or his designee approved the two documents, the Treasury +employee who conducted the testing sent the documents to the Accounting department. The +Accounting department used these documents to ensure, as well as to support HomeStreet’s +conclusion that, the Hedges were appropriately accounted for under GAAP. During the year-end +audit of HomeStreet’s financial statements, the Company’s independent auditor also requested +both documents on its “Prepared by Client” schedule in order to test the Company’s hedge +effectiveness testing results. + +Van Amen Adjusted the Results of the Effectiveness Testing, In Violation of +the Company’s Written Policies and Procedures + + 16. There were instances between Q3 2011 and Q2 2014 in which the results of the +hedge effectiveness testing fell outside of the highly effective threshold. In these instances, van +Amen instructed the Treasury employee performing the testing to make unsupported adjustments +to a variable in the loan fair value calculation for the purpose of making the testing results +“effective,” or oversaw a practice in which this occurred. Van Amen or his designee then +approved sending the revised input and calculations to HomeStreet’s Accounting group for +purposes of supporting the conclusion that the Hedges were highly effective in accordance with +ASC 815. Regardless of any difference in the economic value of the loan or swap, these +adjustments were inconsistent with the Company’s documented method for assessing effectiveness +of the hedging relationship and therefore not consistent with the application of GAAP. + + 17. According to van Amen, he instructed his employees to change the results of the +accounting test because he believed that the loans and swaps were correlated, from an economic +perspective, and therefore assumed the Hedges could not be ineffective on an accounting basis. +However, he did not identify any basis or criteria that were applied to determine the specific +change made to the variable in the loan fair value calculation, other than that the change made was +large enough to bring the test result within the highly effective threshold required by GAAP. + + 18. In October 2014, van Amen again instructed a lower-level Treasury employee to +adjust the results of the hedge effectiveness testing. The lower-level Treasury employee, along +with two other Treasury employees with whom he consulted (collectively, the “Treasury +Employees”), were uncomfortable about adjusting the fair value calculation to achieve an +accounting result and refused to make the changes that van Amen requested. Van Amen suggested +that the Treasury Employees speak with HomeStreet’s Accounting Department to resolve their +concerns. The Treasury Employees then reported to HomeStreet’s Human Resources department +that van Amen had instructed them to adjust the fair value calculation, without any specific +underlying basis, to make the Hedges achieve effectiveness. + + 19. The Treasury Employees also informed a Company executive (“Executive A”) about +the issue, including the concern that the fair value calculations had been adjusted in previous + 6 +reporting periods and, as a result, there may be historical accounting errors in HomeStreet’s +financial statements. + + 20. In a series of separate meetings and conversations over a period of several days, the +Treasury Employees and Executive A communicated the Treasury Employees’ concern about +potential historical accounting errors in hedge effectiveness accounting to HomeStreet’s senior +management and requested that the Company conduct an independent investigation. + + 21. HomeStreet’s Board convened a Special Committee to investigate the hedge +accounting issues. Although HomeStreet determined that the adjustments to its hedge +effectiveness tests were incorrect, the Special Committee found no indication that van Amen acted +with any intent to deceive or defraud. The Special Committee’s investigation was assisted by +independent outside counsel and completed in early November 2014. + + 22. Between March and May 2015, each of the three Treasury Employees mentioned in +Paragraph 17 resigned. Executive A gave notice of his resignation and began negotiating his +separation with the Company in March 2015. He left HomeStreet in June 2015. + +HomeStreet’s Reporting and Disclosures Regarding Hedge Effectiveness Were Inaccurate + + 23. In total, from 2011 through the discovery of the hedge effectiveness errors in +October 2014, HomeStreet’s Treasury group adjusted the loan fair value calculations 64 times, +which resulted in an effective test result. + + 24. HomeStreet’s practice of adjusting the fair value calculations used in the periodic +testing in order to achieve hedge effectiveness was not consistent with its hedge documentation +when employing the Periodic Dollar Offset Method to assess hedge effectiveness. ASC 815 +requires an entity to define at the time it designates a hedge relationship the method it will use to +assess the hedges effectiveness in achieving offsetting changes in fair value of the risk being +hedged and use that defined method consistently throughout the hedge period. Accordingly +HomeStreet’s adjustments to calculate changes in fair value of the hedged item attributable to the +hedged risk were inconsistent with its hedge documentation required under GAAP. HomeStreet’s +balance sheet and income statement were both misstated because hedge accounting was applied for +each of the Loans, even though certain of the Hedges ceased to qualify for hedge accounting in +some periods. For the Hedges that were not effective under ASC 815, the overall change in fair +value of the hedging instrument for that current period should have been recognized in earnings but +the change in fair value of the hedged item should not have been recognized in earnings for that +period and the carrying amount of the hedged item should not have been adjusted on the balance +sheet. + +HomeStreet Announces its Improper Hedge Accounting + + 25. On November 13, 2014, the Company disclosed in its Form 10-Q for the third +quarter of 2014 that management had “discovered errors in the Registrant’s analysis of hedge +effectiveness” related to 14 of the Hedges. Specifically, according to the Company’s filing, the + 7 +loans and related swaps had “not been evaluated in accordance with the appropriate fair value +hedging methodology,” which resulted in “inaccurate calculations of changes in the loan fair +values related to changes in the benchmark interest rate.” Management, in consultation with +HomeStreet’s outside auditor, determined that the hedge accounting errors were not material to any +reporting period and therefore no restatement of the Company’s financial statements was required. +HomeStreet did not restate its financial statements. + + 26. The Company also disclosed that management had determined that “management +of the hedging effectiveness analysis and loan valuation by the Treasury Department had been +ineffective and that there was insufficient oversight provided by the Accounting Department to +ensure adherence to the relevant accounting principles and to provide for an effective system of +internal controls relating to these assets and liabilities.” + + 27. Finally, the Company disclosed that management determined that the circumstances +relating to the hedge effectiveness errors reflected a deficiency in its internal accounting controls +and that, after evaluating the deficiency based upon the potential maximum errors that could have +resulted from the deficiency, it concluded that the Company had “experienced a material weakness +in its internal accounting controls as of September 30, 2014.” + +B. HomeStreet Took Actions to Impede Communication with the Commission + + 28. The Division of Enforcement Staff served a voluntary document request on the +Company in April 2015 in connection with the hedge accounting issues. HomeStreet assumed that +this could have been in response to a whistleblower complaint and, shortly thereafter, began taking +steps to determine the identity of the presumed “whistleblower.” According to HomeStreet, it did +this in order to understand the nature of the Staff’s investigation. + + 29. After HomeStreet received the Division of Enforcement’s document request, a +senior executive at the Company asked the only one of the Treasury Employees then remaining at +HomeStreet whether he had brought information about the hedge accounting issues to the +Commission’s attention. When that employee said that he had not, the senior executive asked him +if he knew who the “whistleblower” was. In that Treasury Employee’s exit interview, another +senior executive told him that he believed he knew who had “done this” to the Company. That +same senior executive next called Executive A to his office to ask if Executive A was a +Commission “whistleblower,” and if he wasn’t, if he knew who the whistleblower was. Executive +A said he was not a whistleblower and that he didn’t know who the whistleblower was. + +30. Executive A also resigned from HomeStreet. After he left, the Commission’s +Division of Enforcement staff requested that he provide it with certain information. Executive A +retained a lawyer, and that lawyer requested that HomeStreet advance costs under Executive A’s +indemnification agreement, which HomeStreet agreed to do within 20 days of submission of the +invoices. + + 31. Although Executive A had already told HomeStreet management that he was not a +whistleblower before he left the company, HomeStreet made multiple requests that he reaffirm he + 8 +was not the whistleblower before the Company advanced costs under his indemnification +agreement. + + 32. First, in response to a request from Executive A’s counsel that the Company pay +outstanding invoices for legal services rendered in July and August in connection with the Staff’s +investigation, and following up on a phone call about that request on October 23, 2015 during +which HomeStreet’s counsel (“Company Counsel) told Executive A’s counsel that HomeStreet +had raised an issue with respect to whether certain provisions of Executive A’s indemnification +agreement entitled him to advancement of fees if he had been a whistleblower, Company Counsel +emailed Executive A’s counsel later on October 23, 2015 that: + +[I]In connection with the issue we discussed relating to [the certain +provisions in Executive A]’s indemnity agreement, I think we agree that +there is no need to debate the meaning of those sections if you can +confirm that: (1) [Executive A] stands by his representations to +Homestreet and to me that he did not initiate or trigger the current SEC +investigation by bringing the matter to the SEC’s attention; and (2) you +are unaware of any facts that [Executive A] brought the matter to the +SEC’s attention or caused others to do so. + + 33. Executive A’s counsel refused to provide the requested confirmation. Among other +arguments, he asserted in an email on October 27, 2015 that (1) “[e]ntering into, or threatening to +enforce, an agreement that would deny advancement to an employee who communicates with the +SEC would almost certainly violate” Exchange Act Rule 21F-17 and (2) Executive A already had +told two members of HomeStreet’s senior management that he did not provide any information to +the SEC prior to the commencement of the SEC investigation. + + 34. In a response on October 27, Company Counsel asked if Executive A would “stand +by the representations he previously made” to executives at HomeStreet that he was not the +whistleblower. Executive A’s counsel refused to provide the requested confirmation. + + 35. Next, Company Counsel asked Executive A’s counsel again, also on October 27, +2015, if the Company could take “as a current representation” Executive A’s counsel’s statement +from his email earlier that day that “Even if [Executive A] were a whistleblower (he is not, as set +forth below)…” Executive A’s counsel declined to respond, and HomeStreet paid Executive A’s +counsel’s invoices in full the following day, October 28, 2015. + + 36. HomeStreet advanced legal costs for multiple other witnesses who provided +voluntary interviews or subpoenaed testimony to the Division of Enforcement Staff. However, +HomeStreet did not ask any of the other witnesses for whom the Company advanced legal costs or +those witnesses’ counsel whether or not they had brought the hedge accounting issues to the Staff’s +attention or made a whistleblower submission to the Commission before it paid their costs. + + 37. The Commission is unaware of any instance in which any current or former +employee of HomeStreet did not communicate directly with Commission staff about the hedge + 9 +accounting errors described above. However, by taking actions to determine the identity of an +individual whom HomeStreet suspected had brought the hedge accounting errors to the +Commission staff, including suggesting that the terms of an indemnification agreement could allow +them to deny payment to an individual who HomeStreet believed to be a whistleblower, +HomeStreet acted to impede individuals from communicating directly with the Commission staff +about a possible securities law violation. + +C. HomeStreet’s Severance and Release Agreements + + 38. HomeStreet has historically entered into voluntary severance agreements with +certain employees who were leaving the company and receiving severance or other post- +employment consideration from HomeStreet. A severance agreement is a contract between an +employer and a former employer documenting the rights and responsibilities of both parties +incidental to the employee’s departure. HomeStreet’s severance agreements required the departing +employees to waive, as a condition of being paid monetary severance payments and receiving other +consideration from HomeStreet, various potential claims against HomeStreet. + + 39. However, one form of HomeStreet’s severance agreements also stated: + +This release shall not prohibit Employee from filing a charge with the +Equal Employment Opportunity Commission or discussing any matter +relevant to Employee’s employment with any government agency with +jurisdiction over the Company but shall be considered a waiver of any +damages or monetary recovery therefrom. + +This form of severance agreement was used at least two times, in April 2016. + + 40. Although the Commission is unaware of any instances in which a current or former +employee of HomeStreet did not communicate directly with Commission staff about potential +securities law violations, the Company – in using the Severance Agreements described in +paragraph 39 above – removed the critically important financial incentives that are intended to +encourage persons to communicate directly with the Commission staff about possible securities +law violations. Such restrictions on accepting financial awards for providing information +regarding potential securities law violations to the Commission undermine the purpose of Section +21F and Rule 21F-17(a), which is to “encourage[e] individuals to report to the Commission,” +[Adopting Release at p. 201]. + +HomeStreet’s Remedial Efforts +41. In determining to accept the Offer, the Commission considered remedial +acts undertaken by HomeStreet. As disclosed in its November 13, 2014 Form 10-Q, the +Company implemented certain changes in its internal accounting controls and other +actions, based on management’s assessment of the hedge effectiveness errors and related +internal accounting control weakness. Specifically, HomeStreet disclosed that it +terminated “the swaps related to the affected loans” during the fourth quarter of 2014 + 10 + and terminated “any remaining fair value hedge accounting relationships.” In addition, +HomeStreet “ceased the lending and hedging practices from 2008 that give rise to these +errors and management has no plans to reestablish any similar practices or products.” +42. In addition to the remedial steps described above, HomeStreet also +disclosed in its November 13, 2014 Form 10-Q that it had implemented “enhanced +oversight by the Accounting Department of complex accounting for financial instruments +within the Company’s Treasury Department” and hired a Chief Financial Officer to +provide comprehensive oversight of both the Treasury and Accounting functions. +43. On October 15, 2016, HomeStreet’s standard severance agreements were +revised to incorporate the following language: +Employee understands that nothing contained in this Agreement +limits Employee’s ability to file a charge or complaint with any +federal, state or local governmental agency or commission +(“Government Agencies”). Employee further understands that this +Agreement does not limit Employee’s ability to communicate with +any Government Agencies or otherwise participate in any +investigation or proceeding that may be commenced by any +Government Agency including providing documents or other +information without notice to the Company. This Agreement does +not limit the Employee’s right to receive an award for information +provided to any Government Agencies. +Legal Standards and Violations + + 44. As a result of the conduct described above, HomeStreet violated and van Amen +caused HomeStreet’s violation of Exchange Act Section 13(b)(2)(A), which requires all issuers to +make and keep books, records and accounts, which, in reasonable detail, accurately and fairly +reflect the transactions and dispositions of the assets of the issuer. + + 45. As a result of the conduct described above, HomeStreet violated and van Amen +caused HomeStreet’s violation of Exchange Act Section 13(b)(2)(B), which requires all issuers 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. + + 46. As a result of the conduct described above, van Amen violated Exchange Act Rule +13b2-1, which prohibits any person from directly or indirectly falsifying, or causing to be falsified, +any book, record, or account subject to Exchange Act Section 13(b)(2)(A). + + 47. As a result of the conduct described above, HomeStreet violated Rule 21F-17(a) of +the Exchange Act, which prohibits any person from taking an action to impede an individual from +communicating directly with the Commission staff about a possible securities law violation. + 11 + +Undertakings + + 48. HomeStreet has agreed that, within 60 days from the date the Commission enters +this Order, it will make reasonable efforts to contact former HomeStreet employees who signed +the severance agreements identified in paragraph 38 above, and provide them with an Internet +link to the order2 and a statement that HomeStreet does not prohibit former employees from +reporting information to the Securities and Exchange Commission or from seeking and obtaining +a whistleblower award from the Commission pursuant to Section 21F of the Exchange Act. + + 49. HomeStreet has agreed to 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 HomeStreet agrees to provide such evidence. The certification and supporting +material shall be submitted to Erin Schneider, no later than sixty (60) days from the date of +completion of the 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 that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent HomeStreet 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 21F-17 thereunder. + + B. Pursuant to Section 21C of the Exchange Act, Respondent van Amen 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 13b2-1 thereunder. + + C. Respondent HomeStreet shall comply with the undertakings enumerated in Section +III above. + +D. Respondent HomeStreet shall, within thirty (30) 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. + +E. Respondent van Amen shall, within thirty (30) days of the entry of this Order, pay a +civil money penalty in the amount of $20,000 to the Securities and Exchange Commission for + +2 HomeStreet further agrees to provide a paper copy of the Order to any former employee who requests it. + 12 +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. + +Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +HomeStreet or van Amen 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 Schneider, +San Francisco Regional Office, Securities and Exchange Commission, 44 Montgomery Street, +Suite 2800, San Francisco, CA 94104. + + 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 agrees that in any Related Investor +Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondents’ payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondents by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + 13 + +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/2017/AAER-3859.txt b/raw/aaer/2017/AAER-3859.txt new file mode 100644 index 0000000000000000000000000000000000000000..b0a194df0a4eac2f75a861b024672544b96b2fc4 --- /dev/null +++ b/raw/aaer/2017/AAER-3859.txt @@ -0,0 +1,1396 @@ + + + + + + + + + + + + + + + + SEC.gov | Ixia and Victor Alston + + + + + + + + !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\/519206","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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Thomas Miller and William Liang , Civil Action No. 17-cv-00897 (C.D. Cal. filed Feb.2, 2017) + + In the Matter of Ixia and Victor Alston , Administrative Procedure File No. 3-17825 (Feb. 3, 2017) + + Company and Executives Charged with Financial Reporting Violations + + + The Securities and Exchange Commission today charged two former executives of a computer network testing company with violations related to their financial reporting obligations to investors. + + The SEC's complaint, filed in federal court in Los Angeles, alleges that the former CFO and director of accounting at Calabasas, California-based Ixia, Thomas Miller and William Liang, participated in a scheme to prematurely recognize certain revenues and concealed the improper revenue recognition practice from the company's auditors. The SEC's complaint charges Miller and Liang with violating Exchange Act Sections 13(b)(5) and Rules 13b2-1 and 13b2-2, aiding and abetting Ixia's violations of Exchange Act Sections 13(b)(2)(A) and (B), and Miller for violating Exchange Act Rule 13a-14. The SEC's complaint seeks financial penalties and permanent injunctive relief against Miller and Liang. + + The SEC separately announced settled administrative proceedings against Ixia and Victor Alston, Ixia's former CEO, arising from the same alleged misconduct. + + The SEC's order finds that Victor Alston, who was elevated to top executive at Calabasas, Calif.-based Ixia in 2012, made changes in the company's revenue and other financial metrics in an effort to meet market expectations. Alston ordered changes to Ixia's practice of deferring revenue recognition from its sales of software combined with training and professional services until the customer actually received the training or other services, which often occurred many months after the sale. + + According to the SEC's order, Alston issued a directive to split artificially the software and the professional services into separate purchase orders, which gave the false appearance that customers were buying Ixia's professional services in stand-alone sales rather than as components of the software sales. This allowed Ixia improperly to recognize software revenues earlier than allowed under Generally Accepted Accounting Principles (GAAP) and the company's own stated revenue recognition policy. + + The SEC's order further finds that the practice of splitting purchase orders exploited a material weakness in the company's internal controls over financial reporting (ICFR) that was concealed from investors and Ixia's outside auditors. As CEO, Alston was obligated to disclose material weaknesses in Ixia's 2012 annual report but failed to do so. Similarly, he wasn't truthful in his periodic representation letter to Ixia's auditors. + + Without admitting or denying the findings, Ixia consented to the SEC's order alleging violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of 1934 and Rules 12b-20 and 13a-1 thereunder and agreed to pay a $750,000 penalty. Alston, without admitting or denying the findings, consented to the SEC order alleging violations of Section 17(a)(3) of the Securities Act of 1933 and Exchange Act Sections 10(b) and 13(b)(5) and Rules 10b-5(b), 10b-5(c), 13b2-1, 13b2-2, and 13a-14 thereunder, causing Ixia's violations, and agreed to a five-year officer-and-director bar and payment of a $100,000 penalty. + + The SEC's investigation was conducted by Jason P. Lee and Dora Zaldivar and supervised by Finola H. Manvelian and John Berry of the Los Angeles office. The SEC's litigation will be led by Gary Y. 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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/2017/AAER-3865.txt b/raw/aaer/2017/AAER-3865.txt new file mode 100644 index 0000000000000000000000000000000000000000..ebf3e1fba764665b1b02d8faff0ea6d8e117f8af --- /dev/null +++ b/raw/aaer/2017/AAER-3865.txt @@ -0,0 +1,566 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10337 / April 10, 2017 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80407 / April 10, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3865 / April 10, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17911 + + +In the Matter of + +GALENA BIOPHARMA, INC. +AND MARK J. AHN, + +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 Galena Biopharma, Inc. (“Galena”) and Mark J. Ahn (“Ahn”) (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 + + +2 + +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 (the “Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1: + +SUMMARY + + From January 2012 to February 2014, Galena and its then-CEO Mark Ahn engaged in a +scheme to mislead investors by commissioning over 100 internet publications promoting Galena +that purported to be independent and objective when, in fact, they were paid promotions funded by +Galena. As CEO, Ahn, on behalf of Galena, engaged two firms, Lidingo Holdings and the +DreamTeam Group, that paid writers to communicate about Galena on investment websites through +articles and/or postings without disclosing that Galena had funded the communications. On over +forty occasions, the writers affirmatively misrepresented that they were not receiving payment for +their articles other than from the website on which their articles appeared. These omissions and +misrepresentations about Galena’s funding of the articles and postings created the misleading +impression that the opinions they contained were objective and independently formed.2 Some of +the articles and postings that Galena funded constituted unlawful prospectuses transmitted while +Galena was preparing to offer or offering securities. As a consequence of this conduct, Galena and +Ahn violated the anti-fraud provisions of the federal securities laws, caused violations of the anti- +touting provisions, and engaged in improper “gun-jumping.” + + Galena also violated the periodic reporting and books-and-records provisions of the federal +securities laws in connection with stock options it granted to one of the firms , and , with Ahn, +violated the securities registration provisions in connection with its issuance of shares to the firm +after the firm exercised its options.3 Galena sold securities to Lidingo in an unregistered transaction +when it included stock options as part of Lidingo’s compensation for its promotional activities in +the third quarter of 2013. Thereafter, Galena sold shares to Lidingo in unregistered, non -exempt +transactions upon Lidingo’s exercise of those stock options without taking reasonable care to +prevent further distribution of the shares. As a result of Ahn’s involvement in the unregistered +transactions with Lidingo, Ahn participated in the sale of securities to Lidingo. Galena and Ahn +misstated in Galena’s applicable periodic reports that the company had not issued unregistered + +1 The findings herein are made pursuant to Respondents’ Offers and are not binding on any other person or +entity in this or any other proceeding. + +2 The information about Galena in the articles and postings is not, itself, alleged to have been false or misleading. + +3 Ahn also caused violations by Galena of the periodic reporting and books-and-records provisions. + + +3 + +securities. In the third quarter of 2013, Galena also did not record the expense of the stock options +granted to Lidingo. + +RESPONDENTS + +1. Galena Biopharma, Inc., is a biopharmaceutical company incorporated in +Delaware. During the relevant time period, Galena was headquartered in Oregon; it is now +headquartered in California. Galena’s common stock is registered with the Commission +pursuant to Exchange Act Section 12(b) and trades on the NASDAQ Capital Market. + +2. Mark J. Ahn, 54, resides in Lake Oswego, Oregon. Ahn served as Chief +Executive Officer and a director of Galena from 2007 to 2014. + +OTHER RELEVANT INDIVIDUALS AND ENTITIES + +3. Lidingo Holdings, LLC, a Nevada limited liability company formed in 2011 and +dissolved in 2014, provided services to numerous issuers, including Galena, that included the +generation of more than 400 articles on investment websites that described its clients’ securities. +Lidingo was owned and operated by Kamilla Bjorlin (“Bjorlin”). The Commission has charged +Lidingo and Bjorlin for their roles in the misconduct described in this Order and for other +misconduct unrelated to Galena. + +4. Michael A. McCarthy, 47, resides in San Antonio, Texas. McCarthy founded The +DreamTeam Group, LLC, a Florida limited liability company headquartered in Indianapolis, +Indiana, in 2004. The DreamTeam Group, LLC and other entities owned and controlled by +McCarthy, including Mission Investor Relations, LLC, a Delaware limited liability company +headquartered in Atlanta, Georgia, provided services to numerous issuers, including Galena, that +included the generation of more than 30 articles and 20 blog posts on investment websites that +described their clients’ securities. DreamTeam Group, LLC and Mission Investor Relations, LLC, +which described themselves as being part of a “Family of Businesses,” will be referred to together +in this Order as “DreamTeam.” The Commission has charged McCarthy and DreamTeam for their +roles in the misconduct described in this Order and for other misconduct unrelated to Galena. + +FACTS + +Galena Paid Firms to Generate Articles and other Communications Describing its +Securities that Falsely Purported to be Independent from Galena + +5. In January 2012, Ahn signed a contract with Lidingo pursuant to which Lidingo +would, among other things, “help generate independent research coverage for [Galena] through +third parties.” From January 2012 through April 2013, Galena paid Lidingo $20,000 per month for +these services. Ahn signed a second contract with Lidingo, effective August 1, 2013, that provided + + +4 + +that Galena would not only pay Lidingo $20,000 per month, which Galena did through February +2014, but would also grant Lidingo certain stock options. The second contract with Lidingo was +signed around the time that Galena began preparing for an offering that Galena announced on +September 12, 2013 (the “September 2013 Offering”). In total, in addition to the stock options, +Galena paid Lidingo at least $460,000 in monthly fees and a $20,000 bonus. + +6. On July 23, 2013, a week before signing the second contract with Lidingo, Ahn +signed a contract with DreamTeam for 90 days of social media, marketing and branding services +that stated, “[r]etail trading will be the target ….” Ahn signed a second contract with DreamTeam +on December 2, 2013 for an additional 150 days of coverage. In total, Galena paid DreamTeam +$50,000 for its services. + +7. Lidingo paid writers to publish, give publicity to, or circulate articles describing +Galena securities via investment websites, and to ghostwrite such articles that Lidingo itself +published, gave publicity to, or circulated via investment websites using pseudonyms. Overall, +Lidingo and writers it paid generated more than 90 articles describing Galena securities. None of +those articles disclosed the direct or indirect compensation from Galena, and more than 40 +contained affirmative misrepresentations that such compensation was not received. For example, +after Galena wired a $60,000 payment to Lidingo in November 2013 for three months of services, +Lidingo paid a writer for an article describing Galena securities on Seeking Alpha’s website.4 The +article failed to disclose the writer’s indirect compensation from Galena and contained the +following misrepresentation: “I am not receiving compensation for [this article] (other than from +Seeking Alpha).” + +8. Lidingo also generated messages describing Galena securities on stock message +boards without disclosing that Galena had directly or indirectly funded the posts. For example, on +September 12, 2013, the day Galena announced its September 2013 Offering, Ahn emailed +Lidingo with “[k]ey messages re: today’s financing,” which included a comparison of Galena to +Insys Therapeutics, Inc., and stated: “Please own the boards!” Lidingo forwarded the email to one +of its paid writers with the message, “Pls post on boards . . . .” + +9. DreamTeam paid writers for four articles describing Galena securities that appeared +on investment websites. None of those articles disclosed that the writers indirectly received +compensation from Galena, and three contained affirmative misrepresentations that the writer did +not receive such compensation. For example, after Galena made its first payment ($25,000) to +DreamTeam in July 2013, DreamTeam paid a writer for an article describing Galena securities that + +4 Seeking Alpha maintains a website (www.seekingalpha.com) that describes itself as “a platform for +investment research . . . .” The article, entitled “Will Galena's Post-Holiday Charm Continue?,” appeared on +Seeking Alpha’s website on December 19, 2013. + + + +5 + +appeared on Seeking Alpha’s website.5 The article did not disclose that the writer had been or +would be indirectly compensated by Galena, and contained the following misrepresentation: “I am +not receiving compensation for [this article] (other than from Seeking Alpha).” The next day, +DreamTeam featured the article in a post on its blog on Seeking Alpha’s website entitled, “Seeking +Alpha Publishes Article Featuring Galena Biopharma, Inc. (GALE).” The blog post, which +described and provided a hyperlink to the article, disclosed Galena’s compensation of DreamTeam, +but did not disclose that DreamTeam had generated the article by agreeing to pay the writer as part +of its work for Galena. + +10. Ahn signed the agreements with Lidingo and DreamTeam. He provided the firms +with ideas for certain articles and message board posts, reviewed certain articles before +publication, and on occasion suggested the website on which an article should appear. + +11. Over the course of the engagements, Ahn exchanged a number of emails with +Lidingo and DreamTeam regarding the price of Galena shares and their desire to move the price +higher. For example, on July 29, 2013, at about the time that Galena began preparing for the +September 2013 Offering, Ahn proposed contract terms with Lidingo that included the following: +“$20K/mo for three months. If the price is >$3.00 in 90 days [Galena’s stock closed at $1.78/share +on the day Ahn sent the email], then another 9 months.” And on July 31, 2013, DreamTeam’s +McCarthy sent Ahn a message with the subject “Great day!” that listed the increasing closing +prices of Galena’s shares since DreamTeam started work five days earlier, and stated, “$2.00 here +we come!” Ahn replied, “Great start!” + +12. Ahn understood during the relevant period that a writer who receives direct or +indirect compensation from an issuer to write about the issuer’s securities must disclose that +compensation. He also knew or was reckless in not knowing that the articles and postings +generated by Lidingo, and the articles generated by DreamTeam, did not disclose the direct or +indirect compensation from Galena or misrepresented that such compensation was not being +received. + +13. Numerous communications between Ahn and Lidingo discussed payments to +Lidingo writers. For example, in an April 4, 2012 email to Ahn, Bjorlin wrote, “I would like to +revisit bonus for the writers, as they have done a lot of hard work and have taken the brunt of the +criticism.” Ahn responded, “Don’t worry, I never forget . . . . submit another invoice for $20K.” +Galena paid Lidingo the $20,000 bonus on April 9, 2012. + +14. The failures of the writers/publishers of the articles and message board posts to +disclose the compensation they received directly or indirectly from Galena, and their affirmative +misrepresentations denying the receipt of that compensation, were material. + +5 The article, entitled “Galena Biopharma Presents an Attractive Investment Opportunity,” appeared on +Seeking Alpha’s website on August 6, 2013. + + +6 + + +15. The articles that appeared on Seeking Alpha’s website described Galena securities, +and certain of them operated as offers to buy the company’s securities. Seeking Alpha operates a +widely-read website that holds itself out as a “platform for investment research, with broad +coverage of stocks, asset classes, ETFs and investment strategy,” where “articles frequently move +stocks, due to a large and influential readership which includes money managers, business leaders, +journalists and bloggers.” + +16. On January 27, 2014, while the price of Galena shares was inflated by the +promotion scheme, Ahn sold 796,765 shares of Galena stock. + +Galena Indirectly Transmitted Unlawful Prospectuses + +17. By early August, 2013, Galena had reached an understanding with a broker/dealer +that the broker/dealer would serve as the managing underwriter for an upcoming public offering by +Galena. The restrictions on offering communications imposed by the “gun jumping” prohibitions +of the federal securities laws commenced no later than when Galena and the broker/dealer reached +this understanding.6 + +18. Between that time and the closing of the September 2013 Offering, Galena directly +or indirectly compensated Lidingo, DreamTeam, and/or their writers to transmit articles and blog +posts about the company using means of communication in interstate commerce.7 These + +6 The September 2013 Offering was made pursuant to a delayed shelf registration on Form S-3 that Galena +filed on May 24, 2013, and a prospectus supplement thereunder. Galena was not “in registration” with respect to the +offering, and the offering-communications restrictions of Securities Act Section 5(b)(1) did not apply, until Galena +began the process of offering the securities off the shelf. See, e.g., Use of Electronic Media, Securities Act Release +No. 7856, 65 Fed. Reg. 25843, 25845 n.10 (May 4, 2000) (“ ‘In registration’ is a term that refers to the entire +registration process under the Securities Act, ‘at least from the time an issuer reaches an understanding with the +broker-dealer which is to act as managing underwriter [before] the filing of a registration statement’ until the end of +the period during which dealers must deliver a prospectus. See Securities Act Release No. 5180, at n. 1 (Aug. 16, +1971) [36 FR 16506]. An issuer will not be considered to be ‘in registration’ at any particular point in time solely +because it . . . has on file a registration statement for a delayed shelf offering on Form S-3 . . . and has not +commenced or is not in the process of offering or selling securities ‘off of the shelf.’ ”) + +7 See, e.g., “Galena Biopharma Presents an Attractive Investment Opportunity” (Seeking Alpha, 8/6/13) +(generated by DreamTeam); “Galena Biopharma: Best and Worst Case Scenario” (Seeking Alpha, 8/14/13) (generated +by Lidingo); “Seeking the Best Opportunities in Biotech by Value” (Seeking Alpha, 8/20/13) (generated by Lidingo); +“Galena Biopharma: Ready for a Jump?” (Seeking Alpha, 8/22/13) (generated by Lidingo); “Galena Biopharma, Inc. +(GALE) Backed With High Expectations For Upcoming Abstral Launch” (MissionIR’s Instablog on Seeking Alpha’s +website, 9/10/13) (generated by DreamTeam); and “2 Small Cap Biotechnology Stocks with Big Promise” (Wall +Street Cheat Sheet, 9/11/13) (generated by Lidingo). + + + +7 + +communications constituted prospectuses because they were written offers to sell Galena securities +in a public offering, but they did not comply with the requirements of Securities Act Section 10.8 + +Galena and Ahn Offered and Sold Unregistered Securities to Lidingo and Galena Did Not +Disclose and Properly Account for the Sales + +19. The 2013 contract between Galena and Lidingo included as part of Lidingo’s +compensation options to purchase 250,000 shares of Galena stock. Ahn signed the contract on +behalf of Galena. From November 2013 through March 2014, Galena issued stock to Lidingo on +five occasions after Lidingo paid Galena to exercise vested stock options. Prior to exercising its +vested options, Lidingo conveyed to Ahn that its costs had exceeded the cash amount Galena had +paid “and that the equity stake is where we [Lidingo] generate our income.” Notwithstanding the +receipt of this information, neither Galena nor Ahn exercised reasonable care to prevent Lidingo +from reselling the shares it received in the public market soon after receiving them – such as by +placing a restrictive legend on the shares or putting in place a stop-transfer order – and Lidingo +did in fact resell its shares on each occasion within a week of receiving them. These issuances +constituted sales of securities that resulted in public distributions that were neither registered +with the Commission nor exempt from registration.9 + +20. After selling unregistered securities to Lidingo, Galena did not disclose the sales +as required.10 Galena’s Form 10-Q for the quarter ended September 30, 2013, which Ahn signed, +incorrectly stated, “[t]here were no stock options granted during the three months ended September +30, 2013,” and its Form 10-K for the year ended December 31, 2013, which Ahn also signed, +stated that there had been no sales of unregistered securities during the period covered by the +annual report that were not previously reported (which the sales to Lidingo were not). Galena’s +Form 10-Q for the first quarter of 2014, and its 2014 Form 10-K, did not disclose Galena’s sale of +stock in connection with Lidingo’s exercise of stock options in 2014, which constituted +unregistered, non-exempt sales of securities, and the Form 10-K for 2014 stated that there had been +no sales of unregistered securities during the period covered by the annual report that were not + +8 See 15 U.S.C §§ 77b(3), 77b(10), 77j. + +9 Galena purportedly issued the stock options under its 2007 Incentive Plan. Galena registered with the +Commission, via Form S-8 filings, the sale of common stock issuable upon exercise of the stock options under that +plan, but sales of stock to a consultant may be registered via a Form S-8 only if the stock is issued to a natural person. +See Form S-8, Instruction A.1.(a)(1)(i). Also, grants of options to a consultant may be registered via a Form S-8 only if +“the services [provided by the consultant] . . . do not directly or indirectly promote . . . the registrant’s securities.” +Form S-8, Instruction A.1.(a)(1)(iii). Because Lidingo was not a natural person, and because its services promoted +Galena securities, the sale of stock to Lidingo was not registered with the Commission on a Form S-8. + +10 Item 2 of Part II of Form 10-Q, and Item 5 of Part II of Form 10-K, require disclosure pursuant to Item 701 +of Regulation S-K of information regarding “all securities of the registrant sold by the registrant within the past +three years which were not registered under the Securities Act of 1933.” Regulation S-K, Item 701. + + + +8 + +previously reported (which the sales to Lidingo were not). + +21. One-hundred-thousand stock options Galena sold to Lidingo in the third quarter +of 2013 vested immediately. Galena did not record an expense in that quarter related to the +vesting of those stock options. + +GALENA’S REMEDIAL EFFORTS + +22. In determining to accept Galena’s Offer, the Commission considered remedial +acts promptly undertaken by Galena and cooperation afforded the Commission staff. + +VIOLATIONS + +23. As a result of the conduct described above, Galena and Ahn violated Securities +Act Section 17(a)(1) and (3) and Exchange Act Section 10(b) and Rule 10b-5(a) and (c) +thereunder, which prohibit fraudulent conduct in the offer or sale of securities and in connection +with the purchase or sale of securities, and Ahn caused Galena’s violations of those provisions. +Galena and Ahn also caused violations of those provisions, and of Securities Act Section +17(a)(2) and Exchange Act Rule 10b-5(b), by Lidingo and certain writers paid by Lidingo and +DreamTeam, and of Securities Act Section 17(a)(2) and (3) by DreamTeam.11 + +24. As a result of the conduct described above, Galena and Ahn caused Lidingo’s, +DreamTeam’s, and certain writers’ violations of Securities Act Section 17(b), which prohibits +any person from publishing, giving publicity to, or circulating any communication that describes +a security in exchange for direct or indirect consideration from an issuer, underwriter, or dealer +without fully disclosing the past or prospective consideration and the amount. + +25. As a result of the conduct described above, Galena and Ahn violated Securities +Act Section 5(b)(1), which prohibits any person from directly or indirectly using interstate means +to carry or transmit a prospectus relating to any security with respect to which a registration +statement has been filed unless such prospectus complies with Securities Act Section 10. The +articles and blog post that Galena and Ahn indirectly transmitted via Lidingo and DreamTeam +while preparing for and during the September 2013 Offering were prospectuses that did not meet +the requirements of Securities Act Section 10. + + +11 Securities Act Section 17(a)(2) and (3) make it unlawful for any person, in the offer or sale of securities, by +the use of communication in interstate commerce, “to obtain money or property by means of any untrue statement of +a material fact or any omission to state a material fact necessary in order to make the statements made, in light of the +circumstances under which they were made, not misleading,” and “to engage in any transaction, practice, or course +of business which operates or would operate as a fraud or deceit upon the purchaser.” + + +9 + +26. As a result of the conduct described above, Galena and Ahn violated Sections 5(a) +and 5(c) of the Securities Act, which prohibit the offer and sale of unregistered securities absent +an applicable exemption from registration. + +27. As a result of the conduct described above, Galena violated Section 13(a) of the +Exchange Act and Rules 13a-1, 13a-13 and 12b-20 thereunder, which require every issuer of a +security registered pursuant to Section 12 of the Exchange Act to file annual and quarterly +reports that disclose certain information, including information regarding “all securities of the +registrant sold by the registrant within the past three years which were not registered under the +Securities Act,”12 and to include such further information as may be necessary to make the +required statements, in the light of the circumstances under which they are made, not misleading. +Ahn caused Galena’s violation of Section 13(a) and Rules 13a-13 and 12b-20 thereunder in +connection with the disclosure failures in Galena’s 10-Q for the third quarter of FY2013. + +28. As a result of the conduct described above, Galena violated Exchange Act Section +13(b)(2)(A), which requires every issuer of a security 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. Ahn caused +Galena’s violation of Exchange Act Section 13(b)(2)(A). + +UNDERTAKINGS BY GALENA + +Respondent Galena has undertaken to: + + In connection with this action and any related judicial or administrative proceeding or +investigation commenced by the Commission or to which the Commission is a party, (i) agree to +appear and be interviewed by Commission staff at such times and places as the staff requests upon +reasonable notice; (ii) accept service by mail, email, or facsimile transmission of notices or +subpoenas issued by the Commission for documents or testimony at depositions, hearings, or trials, +or in connection with any related investigation by Commission staff; (iii) appoint Respondent +Galena’s counsel in these proceedings as agent to receive service of such notices and subpoenas; +(iv) with respect to such notices and subpoenas, waive the territorial limits on service contained in +Rule 45 of the Federal Rules of Civil Procedure and any applicable local rules, provided that the +party requesting the testimony reimburses Galena’s travel, lodging, and subsistence expenses at the +then-prevailing U.S. Government per diem rates; and (v) consent to personal jurisdiction over +Galena in any United States District Court for purposes of enforcing any such subpoena. + + In determining whether to accept the Offer, the Commission has considered the +undertaking set forth above. + +12 Regulation S-K, Item 701. + + +10 + +UNDERTAKINGS BY AHN + +Respondent Ahn has undertaken to: + +A. For a period of five years from the date of this Order, refrain from (1) hiring or +causing to be hired for pay any third party to engage in a promotional campaign, on behalf 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, that involves publishing, +giving publicity to, or circulating any form of written communication, whether electronic or hard +copy, which, though not purporting to offer a security for sale, describes such security or +(2) directly or indirectly participating in any such paid promotional campaign; provided, however, +that nothing herein prohibits Ahn from drafting or editing press releases or public filings of issuers +with which he is associated, or otherwise commenting upon such press releases or public filings +before they are finalized. + +B. 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, as appropriate, by exhibits sufficient to demonstrate compliance. The +Commission staff may make reasonable requests for further evidence of compliance, and +Respondent Ahn agrees to provide such evidence. The certification and supporting material shall +be submitted to Rami Sibay, Assistant Director, with a copy to the Office of Chief Counsel of the +Enforcement Division, no later than sixty (60) days from the date of the completion of the +undertakings. + +C. In connection with this action and any related judicial or administrative proceeding +or investigation commenced by the Commission or to which the Commission is a party, agree to +(i) appear and be interviewed by Commission staff at such times and places as the staff requests +upon reasonable notice; (ii) accept service by mail, email or facsimile transmission of notices or +subpoenas issued by the Commission for documents or testimony at depositions, hearings, or trials, +or in connection with any related investigation by Commission staff; (iii) appoint Respondent +Ahn’s counsel in these proceedings as agent to receive service of such notices and subpoenas; +(iv) with respect to such notices and subpoenas, waive the territorial limits on service contained in +Rule 45 of the Federal Rules of Civil Procedure and any applicable local rules, provided that the +party requesting the testimony reimburses Respondent Ahn’s travel, lodging, and subsistence +expenses at the then-prevailing U.S. Government per diem rates; and (v) consent to personal +jurisdiction over him in any United States District Court for purposes of enforcing any such +subpoena. + + In determining whether to accept Ahn’s Offer, the Commission has considered the +undertakings enumerated in Paragraph C. + + + +11 + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 8A of the Securities Act and 21C of the Exchange Act, +Respondents Galena and Ahn cease and desist from committing or causing any violations and any +future violations of Sections 5(a), 5(b), 5(c), 17(a) and 17(b) of the Securities Act and Sections +10(b), 13(a), 13(b)(2)(A) of the Exchange Act and Rules 10b-5, 12b-20 and 13a-13 thereunder, and +Respondent Galena cease and desist from committing or causing any violations and any future +violations of Exchange Act Rule 13a-1. + + B. Respondent Ahn be, and hereby 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. + + C. Within 14 days of the entry of this Order, Respondent Ahn shall pay disgorgement +of $677,250, prejudgment interest of $67,181, and a civil monetary penalty in the amount of +$600,000, and Respondent Galena shall 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 of disgorgement and prejudgment +interest is not made, additional interest shall accrue pursuant to SEC Rule of Practice 600, and if +timely payment of civil money penalty is not made, interest shall accrue pursuant to 31 U.S.C. +§3717. + +Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + + +12 + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying the payor as +a respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Melissa Hodgman, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + +D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor +Action, they shall not argue that they are entitled to, nor shall it benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondents’ payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent(s) 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. Ahn shall comply with the undertakings enumerated in Paragraphs A and B of his +undertakings set forth above. + + + + + + +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 Ahn, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent Ahn 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 Ahn 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/2017/AAER-3871.txt b/raw/aaer/2017/AAER-3871.txt new file mode 100644 index 0000000000000000000000000000000000000000..5a0c483c6e62ee559b6727911b110ae3e1c6bca7 --- /dev/null +++ b/raw/aaer/2017/AAER-3871.txt @@ -0,0 +1,420 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80750 / May 23, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3871 / May 23, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17997 + + +In the Matter of + +LISA HANMER, 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 AND NOTICE OF +HEARING. + + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against Lisa Hanmer (“Hanmer” 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 censure a person or deny, temporarily or permanently, the +privilege of appearing or practicing before it . . . to any person who is found . . . +to have engaged in unethical or improper professional conduct. + 2 +II. + After an investigation, the Division of Enforcement alleges that: + +Summary +1. This matter involves improper professional conduct by RSM US LLP (“RSM”) +engagement manager Hanmer, while performing the 2011 audit of Madison Capital Energy +Income Fund I LP (“Fund I”), a fund formed for the general purpose of acquiring oil and gas +royalty interests to generate a return for its investors. During the course of the Fund I engagement, +Hanmer 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”). + +2. Hanmer was aware but failed to adequately respond to the fact that the Fund I +financial statements failed to separately report the fair value of the investment in each oil and gas +royalty interest held by Fund I, as required by Generally Accepted Accounting Principles +(“GAAP”). In addition, Hanmer knew that adequate procedures had not been performed in +auditing the fair value of the investment in the underlying royalty interests and took steps to +conceal this fact from RSM personnel. Hanmer also did not perform adequate audit procedures on +Fund I’s schedule of investments to obtain sufficient evidence for their fair value. Finally, Hanmer +failed to adequately plan and assess the risk of the Fund I audit before commencing field work for +the audit. + +Respondent +3. 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. As a +result of the Commission’s investigation into this matter, which caused RSM to conduct its own +internal review, RSM’s Quality Control Inquiry Committee (“QCIC”) convened on February 7, +2015 and recommended that Hanmer’s employment with RSM be terminated, which prompted +Hanmer’s March 31, 2015 resignation from RSM. After resigning, Hanmer performed accounting +consulting work. + +Other Relevant Parties +4. RSM US LLP, a limited liability partnership with its headquarters in Chicago, +Illinois, is a public accounting firm registered with the Public Company Accounting Oversight +Board (“PCAOB”). Founded in 1926, RSM has about 80 offices in the United States with annual +revenue totaling approximately $1.4 billion. Fund I engaged RSM, through its 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. + 3 + +5. 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. + +6. Derik J. Todd (“Todd”), age 51, currently resides in Madison, Wisconsin. Since +2007, Todd has served as the President of Madison Capital Investments LLC (“MCI”). Todd has +organized private placements of equity interests in oil and gas limited partnerships through MCI +and other entities. Todd, on behalf of Fund I, retained RSM to perform the Fund I audit and served +as RSM’s primary contact with Fund I. +7. Madison Capital Investments LLC (“MCI”) is a Wisconsin limited liability +company, controlled by Todd, based in Madison, Wisconsin. MCI organized a number of private +placements of equity interests in oil and gas limited partnerships since 2009, including Fund I. +These private placements were marketed to accredited investors under Regulation D Rule 506 +through separate broker-dealers and investment advisers. +8. Madison Capital Energy Income Fund I LP (“Fund I”) is a Delaware limited +partnership, controlled by Todd, based in Madison, Wisconsin. Fund I was formed for the general +purpose of acquiring oil and gas royalty interests to generate a return for its investors. Fund I +raised almost $3 million from approximately 50 investors. +Background + Fund I Audit + +9. MCI pitched its funds to broker-dealers and investments 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, +including audited financial statements. Thus, MCI engaged RSM on May 16, 2012 to perform an +audit of Fund I’s statement of net assets 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”).3 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 net assets and a review conclusion, +made in accordance with AICPA standards, on the other financial statements issued by Fund I. + +10. In the Fund I audit report, RSM opined that the Fund I statement of net assets +“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.” + + +3 This Order references the American Institute of Certified Public Accountants (“AICPA”) standards in +effect at the time of the Fund I audit. These standards are encompassed in GAAS. + 4 +11. The Fund I audit report was subsequently distributed by MCI to broker-dealers and +investment advisers. These broker-dealers and investment advisers reviewed the Fund I audit +report in connection with their due diligence review for MCI’s later funds and placed MCI’s later +funds on their investment platforms with the impression that RSM properly and adequately audited +Fund I’s statement of net assets. RSM generally understood how MCI intended to utilize the final +Fund I 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 Fund I statement of net assets audit. + +12. 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. + +13. 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 oil and gas fund prior to +the Fund I audit. + +14. 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 “Financial Services Practice”). At the time of the Fund I audit, Millmann and Hanmer +were not on RSM’s preapproved list for Financial Services Practice audits. This list identifies +competent individuals to perform audits for the Financial Services Practice, the purpose of which is +to provide reasonable assurance that such audits are performed according to firm and professional +standards. Because Millmann and Hanmer were not on the preapproved list for Financial Services +Practice audits, the Regional Professional Practices Officer (“RPPO”) for the RSM Great Lakes +Region was required, according to RSM policy, to approve the staffing of Millmann and Hanmer +on the engagement, which the RPPO ultimately did, but only after audit field work had been +substantially completed. + +Relevant RSM Quality Control Policies and Procedures + +15. 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. + +16. RSM’s client acceptance and continuation policies and procedures require the +engagement partner to carefully evaluate the prospective client prior to acceptance by: (i) +evaluating the integrity and competence of top management and majority owners; (ii) evaluating +the prospective client’s financial condition; (iii) reviewing RSM’s independence requirements to + 5 +determine compliance with respect to the prospective client; (iv) ensuring that qualified +professional staff and other functional and industry specialists are available; and (v) +communicating directly with the predecessor auditor. Acceptance of all prospective clients must +be approved by the regional assurance leader or his or her designee. +17. RSM uses the RSM Risk Assessment Model (“MRAM”), an internally developed +electronic tool that assists engagement teams in performing consistent and comprehensive +evaluations of risk. 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 and engagement staffing, the MRAM identifies potential +risks of material misstatement, the need for the involvement of subject matter experts, matters +requiring consultation, and other engagement risks, which allows RSM to plan and perform more +effective and efficient risk-based audits. RSM’s policies in this area are designed to provide +reasonable assurance that RSM will undertake or continue 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. +18. 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. RSM’s National Office of Risk Management (“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 RPPO has the ability to approve RSM staff, who are not +on the preapproved list, for a given audit. +19. 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 identified in the +MRAM. + 6 +20. RSM has also implemented a QCIC, which is charged with reviewing engagements +selected based on certain triggering events such as engagements identified in PCAOB or internal +inspections. +Withdrawal of Fund I Audit Report +21. 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 QCIC 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. +22. 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. +Fund I Audit Failures +23. Hanmer failed to conduct the Fund I audit in conformity with GAAS. +24. Contrary to RSM’s client acceptance and engagement performance policies +described above, field work for the Fund I audit had begun before (i) RSM’s audit planning +documents were approved and (ii) RSM had cleared the Fund I engagement through the MRAM. +As a result, RSM did not appropriately assess the risk for the Fund I engagement and effectively +plan procedures for the audit that would be responsive to the risks of material misstatement +identified in the MRAM, and consequently, the Fund I audit was conducted without effective audit +procedures that were expected to reduce the audit risk of material misstatement. +25. In addition, contrary to RSM’s engagement staffing policy described above, +Millmann and Hanmer, who were not included on the preapproved list for Financial Services +Practice audits, were not approved by the RPPO before they began working on the audit. +Consequently, RSM had no assurance that competent personnel were staffed on the audit before +substantive audit procedures were performed. +26. RSM issued an audit report containing an unqualified opinion on the Fund I +statement of net assets; however, the Fund I financial statements, including the statement of net +assets, 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 are more +than 5 percent of total net assets. Notwithstanding this GAAP disclosure requirement, the final +Fund I schedule of investments 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. +27. 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 + 7 +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. 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, +including the Fund I schedule of investments that did not include a proposed adjustment to break- +out individual royalty interests, to MCI. 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. +28. Hanmer 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. Hanmer 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. +29. Hanmer failed to adequately plan the Fund I audit before beginning field work for +the Fund I. This field work, performed without the benefit of an audit plan, was done before +Hanmer had an understanding of Fund I and its business. As a result, the Fund I audit was +conducted without effective audit procedures that were expected to reduce the audit risk of material +misstatement. +30. Hanmer failed to adequately assess the risk of the Fund I audit (through RSM’s +MRAM process) before commencing field work for the audit. As a result, the Fund I audit was +conducted without effective audit procedures that were expected to reduce the audit risk of material +misstatement. +31. The Fund I audit had other significant deficiencies. For example, the required work +program for subsequent events was never completed and no tests were performed to determine +whether there were unrecorded liabilities that needed to be disclosed at year end. As engagement +manager, Hanmer had responsibility for performing this required work program. +Violations of Professional Standards + Failure to exercise due professional care (AU § 230) +32. 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 + 8 +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. 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. Id. § 230.07. +33. As a result of the conduct described above, Respondent failed to exercise due +professional care, as required by AU Section 230, when conducting the Fund I audit. +Failure to adequately plan the audit (AU § 311) +34. 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. +35. As a result of the conduct described above, Respondent failed to adequately plan +the Fund I audit within the meaning of AU Section 311. +Failure to consider audit risk and materiality in conducting the audit (AU § 312) +36. According to AICPA standards, the auditor must consider audit risk and must +determine a materiality level for the financial statements taken as a whole for the purpose of: (i) +determining the extent and nature of risk assessment procedures; (ii) identifying and assessing the +risks of material misstatement; (iii) determining the nature, timing, and extent of further audit +procedures; and (iv) evaluating whether the financial statements taken as a whole are presented +fairly, in all material respects, in conformity with GAAP. AU § 312.11. The auditor should +perform risk assessment procedures to assess the risks of material misstatement both at the +financial statement and the relevant assertion levels. Id. §312.12. +37. As a result of the conduct described above, Respondent did not properly consider +audit risk, as required by AU Section 312, when planning the Fund I audit. +Failure to obtain sufficient appropriate audit evidence (AU § 326) +38. 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, + 9 +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. +39. As a result of the conduct described above, Respondent did not obtain sufficient +appropriate audit evidence for the Fund I audit within the meaning of AU Section 326. +Failure to ascertain the occurrence of subsequent events (AU § 560) +40. The independent auditor should perform other auditing procedures with respect to +the period after the balance-sheet date for the purpose of ascertaining the occurrence of subsequent +events that may require adjustment or disclosure essential to a fair presentation of the financial +statements in conformity with GAAP. AU § 560.12. These procedures should be performed at or +near the date of the auditor's report. Id. +41. As a result of the conduct described above, Respondent did not comply with AU +Section 560. +Violations + +42. 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) (i.e., negligent conduct +consisting of a single instance of highly unreasonable conduct 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). + +III. + In view of the allegations made by the Division of Enforcement, the Commission deems it +necessary and appropriate that public administrative proceedings be instituted to determine: + + A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondent an opportunity to establish any defenses to such allegations; and + + B. Whether, pursuant to Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, Respondent should be censured or denied, temporarily or +permanently, the privilege of appearing or practicing before the Commission as an accountant. + +IV. + + IT IS ORDERED that a public hearing for purposes of taking evidence on the questions set +forth in Section III hereof shall be convened at a time and place to be fixed and before an +Administrative Law Judge to be designated by further order as provided by Rule 110 of the +Commission’s Rules of Practice, 17 C.F.R. § 201.110. + + 10 + IT IS FURTHER ORDERED that Respondent shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission's Rules of Practice, 17 C.F.R. § 201.220. + + If Respondent fails to file the directed answer, or fails to appear at a hearing after being duly +notified, the Respondent may be deemed in default and the proceedings may be determined against +him upon consideration of this Order, the allegations of which may be deemed to be true as +provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's Rules of Practice, 17 C.F.R. +§§ 201.155(a), 201.220(f), 201.221(f) and 201.310. + + This Order shall be served forthwith upon Respondent as provided for in the Commission’s +Rules of Practice. + + IT IS FURTHER ORDERED that, pursuant to Rule 360(a)(2) 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/2017/AAER-3872.txt b/raw/aaer/2017/AAER-3872.txt new file mode 100644 index 0000000000000000000000000000000000000000..dad1121728699528ee912c4ab98c4a3b4e0ba006 --- /dev/null +++ b/raw/aaer/2017/AAER-3872.txt @@ -0,0 +1,112 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 10368 / June 1, 2017 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80839 / June 1, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3872 / June 1, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18005 + + + + +In the Matter of + +David R. Humphrey, CPA + +Respondent. + + + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS. + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against David +R. Humphrey (“Respondent” or “Humphrey”) 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 the rules and regulations thereunder. + 2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission's +jurisdiction over him and the subject matter of these proceedings, and the findings contained in +paragraph III. 2 below and consents to the entry of this Order Instituting Public Administrative +Proceedings Pursuant to Rule 102(e) of the Commission's Rules of Practice, Making Findings, +and Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Humphrey, age 60, previously held a license as a Certified Public Accountant in +Colorado, which expired on May 31, 2000. He has not had an active license since that time. + +2. On May 23, 2017, a final judgment was entered by consent against Humphrey, +permanently enjoining him from future violations of Section 17(a) of the Securities Act of 1933 +and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder in the civil +action entitled Securities and Exchange Commission v. David R. Humphrey, Civil Action Number +17:CV:850, in the United States District Court for the District of Columbia. The Court ordered +Humphrey to pay $56,591 in disgorgement and prejudgment interest and a $51,917 civil money +penalty. + +3. The Commission’s complaint alleged that Humphrey, a former Commission +employee, ignored the ethics rules and engaged in a multi-year scheme to trade in options and +other prohibited securities on his own behalf and on behalf of his mother and a childhood friend +(“Friend”). During this time, Humphrey took affirmative steps to conceal his trading from the +Ethics Office and others. Significantly, he never sought pre-clearance from the Ethics Office for +these trades and he filed forms with the Ethics Office that falsely represented his securities +holdings. He also made misleading representations on forms filed with broker-dealers and he +failed to disclose to his Friend that this trading violated government ethics rules and would result in +his submitting false annual certifications of his trading activity to the Commission. When +confronted by agents of the Commission’s Office of Inspector General in 2014, Humphrey falsely +denied that he had traded in options or in his mother’s brokerage account while employed at the +Commission. + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Humphrey’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. David R. Humphrey 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/2017/AAER-3874.txt b/raw/aaer/2017/AAER-3874.txt new file mode 100644 index 0000000000000000000000000000000000000000..e68b6aab7bc0e5b469f7a5eedcadc7e4331db5a3 --- /dev/null +++ b/raw/aaer/2017/AAER-3874.txt @@ -0,0 +1,811 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10369 / June 9, 2017 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80901 / June 9, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3874 / June 9, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18020 + + + +In the Matter of + +MICHAEL B. HAYFORD, +KEVIN D. McCLELLAND, +CPA, and DANIEL L. +ROTHBAUM, CPA. +Respondents. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT +TO SECTIONS 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 CEASE- +AND-DESIST ORDERS + + + + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the +Securities Act of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of +1934 (“Exchange Act”), against Michael B. Hayford, Kevin D. McClelland, CPA and Daniel L. +Rothbaum, CPA (collectively, “Respondents”), and that public administrative proceedings be, + +2 + + +and hereby are, instituted against McClelland and Rothbaum pursuant to Section 4C1 of the +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, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondents +consent to the entry of this Order Instituting Administrative and Cease-and-Desist Proceedings +Pursuant to 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 Cease-and-Desist Orders (“Order”), as set forth below. +III. + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +SUMMARY +1. UniTek Global Services, Inc. (“UniTek”) was until August 2014 a NASDAQ- +listed U.S. company that provided infrastructure services to telecommunications, broadband +cable, wireless, transportation and other industries. In April 2011, UniTek purchased Pinnacle + + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character +or integrity, or to have engaged in unethical or improper professional conduct; or (3) to have +willfully violated, or willfully aided and abetted the violation of, any provision of the securities +laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + +The Commission may . . . 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 + + +Wireless, Inc. (“Pinnacle”),4 a company whose largest source of revenue was a contract with the +Port Authority of New York and New Jersey to provide equipment and services for rebuilding +portions of the World Trade Center. As part of this project, Pinnacle entered into numerous +long-term contracts with subcontractors to provide equipment and systems for use in the +construction. +2. Between October 2011 and November 2012 (the “Relevant Period”), UniTek +materially overstated its earnings in public filings with the Commission by improperly +recognizing revenue generated by Pinnacle. The inaccuracies in UniTek’s publicly filed +financial statements arose from the premature recognition of revenue based on goods and +services purchased from subcontractors using the percentage of completion accounting model. +These misstatements were the result of Respondents’ conduct described below and UniTek’s +lack of sufficient internal accounting controls regarding proper revenue recognition for such +goods and services. +3. On April 12, 2013, UniTek filed a Form 8-K with the Commission disclosing that +several Pinnacle employees had engaged in “fraudulent activities that resulted in improper +revenue recognition.” The activities included requesting invoices from six different +subcontractors retained to provide goods and services to the company, and prematurely +recognizing revenue. As a result, UniTek announced that its previously issued consolidated +financial statements for each of the quarters from October 1, 2011 through September 29, 2012, +and the fiscal year ended December 31, 2011 should no longer be relied on. For reporting +purposes, Pinnacle’s financial information was consolidated with UniTek’s Engineering & +Construction Segment, which was one of two segments broken out separately in UniTek’s +quarterly and annual financial statements. UniTek also announced that it had terminated certain +employees which included Respondents, among others. The price of UniTek stock shares +dropped 50%, from $3.01 per share to $1.52 per share on the trading day following this +announcement. +4. On August 12, 2013, UniTek filed a 10-K restating its financial information for +the aforementioned periods, and disclosing material weaknesses in its internal control over +financial reporting related to: entity level monitoring controls over the Pinnacle division; internal +audit monitoring controls for the investigation and reporting of significant matters to the audit +committee and board of directors; revenue and cost recognition under the percentage-of- +completion method of accounting; and maintaining sufficiently experienced accounting +personnel. The combination of the above internal material weaknesses resulted in material +misstatements of UniTek’s financial statements that were not prevented or detected on a timely +basis. + + +4 After the acquisition, Pinnacle Wireless, Inc. became Pinnacle Wireless, USA, a division of UniTek. +Pinnacle, as used herein, refers to the division, not the predecessor company. + +4 + + +5. Throughout the Relevant Period, UniTek utilized the percentage of completion +(“POC”) method as a model for recognizing revenue. POC accounting is an accounting method +for incrementally recognizing revenue in connection with long-term contracts as progress is +achieved toward contract completion. UniTek measured progress using the cost-to-cost method +under which costs incurred to date for the contract are divided by the total amount of costs +expected to be incurred upon completion of the contract. The percentage completion figure is +then multiplied by the total project revenue to compute the amount of revenue that can be +recognized as of that date. +6. During the Relevant Period UniTek set internal quarterly financial targets and, as +Pinnacle’s President, Hayford was responsible for setting and monitoring Pinnacle’s internal +forecasts. Hayford, who did not have a background in accounting and had no independent +knowledge of the POC method of accounting, approached Rothbaum, Pinnacle’s Controller, and +McClelland, UniTek’s Corporate Controller/Chief Accounting Officer to inquire whether costs +and associated revenue could be recognized based upon the receipt of an invoice from a +subcontractor under a long-term contract prior to the final delivery of goods or services. This +inquiry was significant because under the POC method for long-term contracts, revenue is +incrementally recognized based on a ratio of costs incurred to date compared with estimated +contract costs. In these facts and circumstances, recognizing costs based on receipt of an invoice +would have had the effect of allowing the company to recognize revenue earlier than it would +have if it properly waited to do so until goods and services were actually delivered. +7. McClelland, who received a Certified Public Accountant (“CPA”) certificate, and +Rothbaum, who is a CPA, were inexperienced in the POC method of accounting as applied to +costs incurred for custom goods, and did not fully understand the relevant accounting principles +with respect to this issue. Furthermore, neither individual sought advice from outside experts, +conducted research, or sought training on the issue. As a result, they gave Hayford advice that +was vague and erroneously indicated that costs and associated revenue could be recognized +based upon the receipt of an invoice rather than upon the delivery of goods or services, provided +that the invoice matched the corresponding purchase order and certain other conditions were met. +Hayford, in turn, knew or should have known that, notwithstanding the advice he had received +from McClelland and Rothbaum, it was improper to recognize revenue based on several of the +invoices at issue because they contained inaccurate information about the value of goods +delivered, payment terms, and quantity of work already completed. +8. Not only was this accounting advice incorrect, McClelland, Rothbaum and +Hayford knew or should have known that UniTek lacked sufficient internal accounting controls +over its process for recording and monitoring Pinnacle purchase orders. Hayford, as Pinnacle’s +President, was most knowledgeable about the inability to accurately track purchase orders for +comparison to invoices, yet he did not seek clarifying advice from Rothbaum, McClelland, or +anyone else, to determine whether the invoices could still be relied upon as a basis for +recognizing revenue. +9. Based on this erroneous advice, Hayford, Rothbaum, and others working at their +direction, contacted subcontractors with whom UniTek had contracted to build custom ordered +equipment or provide services, and requested they send invoices prematurely; i.e. before all, or in + +5 + + +some cases any, of the invoiced equipment or services had been delivered and without regard to +the costs incurred by the subcontractor. In many instances the invoices were also facially +inaccurate. Erroneously believing to be in compliance with Generally Accepted Accounting +Principles (“GAAP”), the Respondents relied on these invoices as a basis to recognize revenue. +Because they misapplied GAAP and failed to confirm the accuracy of certain invoices, their +negligent conduct resulted in UniTek prematurely recognizing revenue and filing false and +misleading financial statements. +10. In the course of the foregoing, and by their respective acts and omissions detailed +below, Hayford, McClelland and Rothbaum committed or caused various violations of the +antifraud, internal accounting controls, books-and-records, and reporting provisions of the +federal securities laws. +RESPONDENTS +11. Michael B. Hayford, age 48, is a resident of El Cajon, CA. Hayford was +President and one of the founders of Pinnacle Wireless, Inc. In April 2011, Pinnacle Wireless, +Inc. was acquired by UniTek and became Pinnacle Wireless, USA, a division of UniTek. From +April 2011 through April 2013, Hayford served as Division President of Pinnacle Wireless, +USA. In April 2013, UniTek terminated Hayford’s employment. +12. Kevin D. McClelland, age 53, is a resident of Newtown Square, PA. From 2009 +through 2013, McClelland served as UniTek’s Chief Accounting Officer and Corporate +Controller. In April 2013, UniTek terminated McClelland’s employment. He passed the CPA +exam and received a CPA certificate from the State of Illinois in 1987. +13. Daniel L. Rothbaum, age 49, is a resident of Stamford, CT. From September +2011 through December 2012, Rothbaum served as Pinnacle’s Controller. Between December +2012 and February 2013, Rothbaum served as Pinnacle’s Accounting Manager. Rothbaum +reported to McClelland on accounting related matters, including revenue recognition issues. In +April 2013, Rothbaum was terminated by UniTek. He is a CPA licensed in New York. + +OTHER RELEVANT ENTITIES +14. UniTek was a publicly traded company incorporated in Delaware with its +principal executive offices in Blue Bell, PA. From 2010 to 2014, UniTek’s common stock was +registered with the Commission pursuant to Section 12(b) of the Exchange Act and quoted under +the symbol “UNTK” on the NASDAQ Stock Market. The Company’s shares were delisted from +NASDAQ in August 2014, and the company filed for bankruptcy protection in November 2014. +The company is now privately owned. At all relevant times, UniTek’s fiscal year coincided with +the calendar year. +15. Pinnacle is a wholly owned subsidiary of UniTek that was acquired by the +company in April 2011. Before being bought by UniTek, Pinnacle was privately owned by + +6 + + +several individuals, including Hayford. Pinnacle’s financial results and disclosures were +incorporated into UniTek’s public filings. +APPLICABLE GAAP PROVISIONS AND UNITEK’S POLICY FOR +PERCENTAGE OF COMPLETION METHOD OF ACCOUNTING +16. Throughout the Relevant Period, UniTek utilized the POC method of accounting +as the revenue recognition model for its long-term construction-type contracts. Prior to the +Pinnacle acquisition in 2011, UniTek had limited experience with contract accounting for long- +term construction-type contracts. +17. FASB Accounting Standards Codification 605 (“ASC 605”) states that the POC +methodology is one of two generally acceptable accounting methods for revenue recognition +over long-term construction-type contracts. The POC method recognizes income incrementally +as progress is achieved toward contract completion using reasonably dependable estimates about +the extent of progress toward completion, contract revenues and contract costs. +18. Pursuant to GAAP, income is recognized as a percentage of estimated total +income either (a) that incurred costs to date bear to estimated total costs after giving effect to +estimates of costs to complete based on most recent information; or (b) that may be indicated by +another measure of progress toward completion as may be appropriate based on work performed. +See ASC 605-35-25-52. When calculating progress toward completion, costs incurred that do +not relate to contract performance are not included in calculating progress toward completion. +These include the costs of items such as uninstalled materials not specifically produced or +fabricated for the project or of subcontracts that have not been performed. ASC 605-35-25-75. +19. Using the POC method, UniTek applied the cost-to-cost method of measuring +progress toward contract completion. Pursuant to this method, progress (the percentage +complete) is determined using cost input measures and involves dividing costs incurred to date +for the contract by the total amount of costs expected to be incurred for the contract. The +percentage completed figure is then multiplied by the total project revenue to compute revenue to +date. The difference between revenue to date and costs incurred to date is the profit earned to +date. +20. UniTek’s internal accounting policy addressing its use of the cost-to-cost method +stated that with respect to the wireless portion of the Engineering and Construction Segment, +which included Pinnacle, “revenue from infrastructure equipment construction and installation +contracts is recorded under the percentage of completion method based on the percentage that +total direct costs incurred to date bear to estimated total costs at completion.” The policy for +revenue recognition stated “revenue is recognized on a percentage of completion basis based on +costs incurred and invoiced upon completion of the job. Revenue is recorded as Unbilled AR +until invoiced.” +21. Contract costs generally include all direct costs, such as materials, direct labor and +subcontracts, and indirect costs identifiable with or allocable to the contracts. See ASC 605-35- +25-34. Costs are recognized under a POC model in the period in which the acquired asset is used + +7 + + +to produce output.5 ASC 605-35-25-32 requires that contract costs be identified, estimated, and +accumulated with a reasonable degree of accuracy in determining income earned. GAAP +requires that entities using the cost-to-cost method periodically review and confirm cost inputs +using alternative measures that involve observation and inspection. See ASC 605-35-25-78. +FACTS +Premature Revenue Recognition +22. In April 2011, UniTek acquired Pinnacle for an aggregate purchase price of up to +$50.7 million, consisting of a base purchase price of $20.7 million in cash and UniTek securities +and earn out payments up to $30.0 million in contingent consideration pursuant to the Asset +Purchase Agreement (“Agreement”). Under the terms of the Agreement, UniTek agreed to pay +Pinnacle’s prior owners, including Hayford, additional compensation if the division met certain +milestones. Specifically, the Agreement provided that the owners would receive up to three +separate earn-out payments in an amount not to exceed an aggregate of $30 million in cash and +UniTek securities if they met performance milestones during the period April 3, 2011 to +September 30, 2011, April 3, 2011 to March 31, 2012, and April 1, 2012 to March 31, 2013. +23. During the Relevant Period, Pinnacle provided internal forecasts estimating +revenue for each quarter. Because completion of the World Trade Center project was taking +longer than anticipated, it became apparent to Hayford and Rothbaum that Pinnacle would not +meet its late 2011 internal forecasts. +24. Hayford approached Rothbaum and McClelland to discuss whether Pinnacle +could recognize revenue based upon the receipt of an invoice from a subcontractor who had +agreed to provide custom equipment for Pinnacle, but had not yet performed under the contract. +Despite their inexperience with POC accounting, neither Rothbaum nor McClelland sought +advice from experts on the issue. Rothbaum, Pinnacle’s Controller, did not do any independent +research on the topic nor did he review UniTek’s internal policies regarding revenue recognition. +Instead, Rothbaum, who reported to McClelland, relied entirely upon McClelland, UniTek’s +Chief Accounting Officer and Controller, for information on the topic. McClelland did not +consult with outside experts or conduct independent research and instead provided advice to +Rothbaum that was vague and incorrect. Rothbaum, in turn, provided that vague and incorrect +advice to Hayford. +25. McClelland told Rothbaum that it was acceptable to recognize revenue based +upon the receipt of an invoice for goods or services that had not yet been delivered so long as the +invoice “matched” the purchase order. McClelland did not properly explain what this meant and +Rothbaum did not seek clarification. McClelland further advised Rothbaum that if goods are not +received or shipped prior to the receipt of the invoice, Rothbaum needed to ensure the invoice + + +5 See FASB Statement of Concepts 6, Elements of Financial Statements. + +8 + + +followed the purchase order terms, the goods were not cancellable and the materials were 100% +custom for the World Trade Center project. Rothbaum told Hayford that to recognize revenue +based upon receipt of the invoice, he needed to make sure the invoice stated “that the materials +are for custom built equipment for the World Trade Center project.” +26. Notwithstanding the guidance he received from McClelland and Rothbaum, +Hayford knew or should have known that it was improper to recognize revenue based on the +invoices because they contained inaccurate information about the value of goods delivered, +payment terms, and quantity of work already completed. In particular, it was unreasonable for +Hayford to push for revenue recognition based on invoices that he knew: (a) inaccurately +reflected that goods had already been shipped or services had already been performed; or (b) +contained material terms that were inconsistent with the corresponding purchase orders. +27. Based on this advice, beginning in late 2011, in certain instances, UniTek +recorded costs as incurred for POC purposes upon receipt of invoices from subcontractors rather +than basing recognition of costs properly upon the related goods being received or services +rendered or upon the subcontractors incurring costs related to contract performance necessary to +allow UniTek to recognize the associated revenue. Hayford, Rothbaum, and other Pinnacle +employees acting at their direction solicited invoices from six different subcontractors who were +in the process of building equipment or providing services to the company in connection with the +World Trade Center project. +28. This had the effect of increasing the cost-to-cost percentage complete calculation +and thus increased the revenue and resulting profit for UniTek’s Engineering and Construction +segment each fiscal quarter. Hayford and Rothbaum solicited these invoices knowing that not all +of the billed costs were incurred by UniTek. The invoices in question prematurely billed +Pinnacle for amounts ranging from approximately $20,000 to $1.7 million. +29. UniTek first recorded costs as incurred for POC purposes upon the receipt of an +invoice rather than upon the goods or services themselves being provided in December 2011. In +this instance, Hayford requested the subcontractor issue an invoice for as much as possible +almost immediately after entering into a purchase agreement. No equipment had been shipped, +and the subcontractor had not yet provided any services or incurred any costs. UniTek +improperly recognized revenue of approximately $860,000 in the fourth quarter of 2011 based +upon the receipt of this invoice. +30. On March 27, 2012, after additional requests from Hayford and another Pinnacle +employee, this same subcontractor issued Pinnacle an invoice for approximately $310,000 +despite only having shipped approximately $166,000 worth of equipment to Pinnacle. UniTek +improperly recognized revenue of over $225,000 for the first quarter of 2012 based on this +invoice. +31. Further, Hayford knew or should have known that the invoices from this +subcontractor were inaccurate because the first invoice incorrectly stated that all equipment had +been delivered when it had not, and the second invoice over-reported the amount of equipment +that had been delivered. Despite these inaccuracies and the difficulties with identifying original + +9 + + +purchase order terms, Hayford did not seek clarifying information about whether inaccurate +invoices could be relied upon for purposes of POC accounting. +32. On several other occasions during the first three quarters of 2012, upon the +request of Hayford, Rothbaum and/or other Pinnacle employees, subcontractors issued invoices +to Pinnacle for dollar amounts in excess of the value of equipment provided to the company or +greater than Pinnacle was then obligated to pay. +33. For example, in the first quarter of 2012, Pinnacle hired a subcontractor to +produce custom radio and communications equipment. The purchase order for this equipment, +dated February 15, 2012, included the following term: “Request: IMPORTANT NOTE: SHIP +DATE MARCH 26, 2012.” The purchase order did not set forth a payment schedule or require +Pinnacle to make any payments prior to delivery of equipment. On March 12, 2012 this +subcontractor notified Rothbaum, Hayford, and others that it would not be shipping all of the +equipment by the “ship date” of March 26, or even the end of the month, i.e. end of the first +quarter, and that only a partial shipment would be made by quarter-end. +34. Hayford instructed a Pinnacle employee to request that the subcontractor issue an +invoice for the full amount of the order. On March 16, 2012, the subcontractor issued an invoice +to Pinnacle for the full $345,690. This invoice was premature because no equipment was +shipped as of that date. By month’s end, a partial delivery had been made, but not the full +amount reported in the invoice. As a result, UniTek improperly over-recognized revenue of +approximately $200,000 for the first quarter of 2012 based on the inflated costs associated with +this invoice. +35. In another instance, a subcontractor retained to provide engineering services to +Pinnacle in connection with the World Trade Center project issued invoices for services not yet +completed. Under the terms of the purchase order, dated March 1, 2012, Pinnacle agreed to pay +the subcontractor on a bi-monthly basis for all engineering services provided. The total costs to +Pinnacle for the agreed upon services was $565,275. +36. On May 25, 2012, the subcontractor issued an invoice to Pinnacle for $45,980; an +amount purporting to represent $19,980 of engineering services provided in May and $26,000 of +engineering services provided in June. Although, over time, the subcontractor provided some +services to Pinnacle, the portion of the invoice related to part of May and all of June should not +have been recorded as a cost incurred for POC purposes since the services had not yet been +provided. +37. A Pinnacle employee acting at the direction of Hayford and Rothbaum instructed +the subcontractor to issue invoices every month for as much as possible. From June 2012 +through September 2012, Pinnacle received monthly invoices for $103,859 with each of the +invoices seeking payment in advance for services to be performed the following month. For +example, the invoice issued July 27, 2012, stated it was for “August Office Engineering +Services.” + +10 + + +38. Respondents knew, or should have known, that the invoices created by the +subcontractor were issued prematurely. It was clear from the face of the invoices, which +Rothbaum and McClelland reviewed, that the invoices were sent monthly rather than bi-monthly +as agreed to, provided no detail about the work performed, were for future time periods, and +were for an identical amount of money each month. Further, Hayford and Rothbaum were told +by Pinnacle staff that this subcontractor had not yet completed the services reflected on the +invoices. UniTek overstated revenue of more than $150,000 in the second quarter of 2012 and +more than $350,000 in the third quarter of 2012 as a result of these invoices. +UniTek’s Public Filings Contained Material Misrepresentations +39. Because UniTek prematurely recognized revenue, its quarterly and annual reports +with the Commission contained material misrepresentations regarding the financial performance +of the Engineering and Construction segment, which included Pinnacle. The Engineering and +Construction segment represented 33% of UniTek’s fiscal year 2011 reported revenue and 30% +of UniTek’s fiscal year 2012 reported revenue. The Engineering and Construction segment +played a significant role in UniTek’s operations and profitability. +40. On March 7, 2012, UniTek filed its Form 10-K with the Commission which +incorporated the 2011 fourth quarter results. In its filing, UniTek included revenue from the +Engineering and Construction segment of approximately $143 million for the 2011 fiscal year of +which nearly $40 million related to revenue from the Engineering and Construction segment for +the last quarter of 2011. As a result of the conduct described herein, this figure over-reported the +segment’s quarterly revenues by 2.2%. Further, UniTek under-reported the Engineering and +Construction segment’s quarterly losses by 4.9%. +41. UniTek filed its Q1 2012 Form 10-Q with the Commission on May 9, 2012. In its +filing, UniTek reported revenue of approximately $38 million from the Engineering and +Construction segment. As a result of the conduct described herein, this figure over-reported the +segment’s quarterly revenues by 10.3%. Further, UniTek under-reported the segment’s quarterly +losses by 38.9%. +42. UniTek filed its Q2 2012 Form 10-Q with the Commission on August 8, 2012. In +its filing, UniTek reported revenue of approximately $43.5 million from the Engineering and +Construction segment. As a result of the conduct described herein, this figure over-reported the +segment’s quarterly revenues by 4.6%. Further, UniTek under-reported the segment’s quarterly +losses by 224.9%. +43. UniTek filed its Q3 2012 Form 10-Q with the Commission on November 8, 2012. +In its filing, UniTek reported revenue of approximately $47.5 million from the Engineering and +Construction segment. As a result of the conduct described herein, this figure over-reported the +segment’s quarterly revenues by 7.2%. Further, UniTek overstated the segment’s quarterly +income by 73.4%. + + + +11 + + +UniTek’s Lax Internal Accounting Control Environment +44. During the Relevant Period, UniTek had material weaknesses in its internal +control over financial reporting that compromised the company’s ability to prevent or detect +material misstatements of revenue and earnings on both a reportable segment and consolidated +basis. Specifically, UniTek lacked the sufficiently trained accounting personnel necessary to +ensure that revenue was appropriately recognized. +45. With respect to the POC method of accounting, UniTek failed to implement +alternative measures involving observation or inspection to periodically review and confirm cost +inputs. Neither UniTek nor Pinnacle had controls in place to verify cost inputs by validating the +receipt of goods and services invoiced by subcontractors or that the subcontractors had incurred +the costs necessary to allow UniTek to recognize the associated revenue. +46. UniTek also lacked the internal accounting controls necessary to track when +modifications to Pinnacle purchase orders were made and determine which version of the +purchase orders were final for purposes of determining UniTek’s costs incurred. In addition, +UniTek lacked internal accounting controls necessary to ensure that payment terms included on +the purchase orders were clear and ascertainable. In fact, many of Pinnacle’s purchase orders +were vague and unclear as to when the company would become financially liable to its +subcontractors. Several purchase orders, for example, included billing milestones and payment +terms that were inconsistent and ambiguous. +47. Further, purchase orders and invoices relevant to the World Trade Center project +were stored on an internal database maintained by Pinnacle employees. Although the terms of +purchase orders - including quantities ordered, delivery terms, and payment dates - were +modified by the parties over time, the internal database recorded the amended purchase orders +using the same date and purchase order number. Accordingly, the database contained multiple +versions of identically dated purchase orders such that users were unable to determine when +change orders had taken place and which version of the purchase order was the most current. +Because UniTek and Pinnacle lacked policies or procedures to track the change order process +and maintain control over its purchase orders, the company’s employees were unable to identify +and confirm the final terms of the purchase order. +Respondents Caused UniTek’s Failure to Devise and Maintain a Sufficient +System of Internal Accounting Controls +48. As Chief Accounting Officer and Corporate Controller, McClelland was +responsible for ensuring that he and his staff were adequately trained in revenue recognition, +including the POC method. Similarly, Rothbaum, as Pinnacle’s Controller, was responsible for +ensuring that he was adequately trained in revenue recognition, including the POC method. +49. McClelland was also responsible for the accuracy of UniTek’s financial +statements, and for establishing and maintaining its internal accounting control environment. +McClelland, however, relied on Hayford and Rothbaum, and failed to ensure that the company +properly recorded revenue in compliance with GAAP. McClelland also failed to implement + +12 + + +sufficient internal accounting controls related to revenue recognition, notwithstanding his +awareness that Rothbaum was inexperienced in the POC method of accounting and that Hayford +had an incentive to prematurely recognize revenue. +50. Rothbaum, as Pinnacle’s Controller, was responsible for completing entries in +Pinnacle’s general ledger, which tracked costs that could impact revenue recognition at the +Pinnacle division and result in inaccurate financial statements filed by UniTek. In addition, +Rothbaum was responsible for preparing the POC Checklist and POC Report, both of which +were reviewed by McClelland, and used by Rothbaum for completing the POC method +calculations. The POC Checklist, which functioned as an internal control, included a list of tasks +to be completed monthly to track costs incurred, calculate progress completed and compute +revenue for the period. For example, the POC Checklist required Rothbaum to review purchase +orders or signed contracts with subcontractors to determine whether UniTek could recognize +revenue based on costs incurred. +51. Rothbaum was aware that purchase order issues existed at Pinnacle that prevented +personnel from tracking change orders and confirming final contract terms. Rothbaum was also +aware purchase orders were vague, incomplete, and often drafts. Accordingly, Rothbaum knew +or should have known that Pinnacle could not reliably identify whether costs had been incurred +upon which UniTek could recognize revenue and that the POC Checklist was therefore +inherently flawed and could not satisfy its control objective. The POC Report, also an internal +control, was a spreadsheet Rothbaum maintained to track costs and associated revenue. Because +of the aforementioned change order tracking and purchase order issues and Rothbaum’s +inexperience in the POC method of accounting, Rothbaum and McClelland knew or should have +known that the POC Report was also inherently flawed and could not satisfy its control +objective. +52. Hayford, as Division President, was responsible for negotiating and approving +purchase orders and, at times, solicited premature invoices from Pinnacle’s subcontractors. +Hayford, like Rothbaum, was aware that final purchase orders were not easily identifiable within +the database, and that the payment terms identified in the purchase orders were often vague. +Further, Hayford knew that Rothbaum prepared the POC Checklist and POC Report based on +incomplete information saved on the database. Thus, Hayford should have known that the POC +Checklist and POC Report could not satisfy their control objectives. +53. Rothbaum and Hayford executed quarterly sub-certifications during the Relevant +Period attesting that “adequate controls are in place and operating effectively for us to certify +that the revenue and EBITDA reported for the quarter are accurate representation of the +operations of the business” despite knowing, for example, that purchase orders were not +accurately tracked and maintained as they should have been and that UniTek and/or Pinnacle +otherwise lacked the information necessary to identify, estimate, and accumulate costs with a +reasonable degree of accuracy for, among other things, purposes of revenue recognition under +the POC method of accounting. + + +13 + + +Respondents Caused UniTek’s Failure to Make and Keep Fair and Accurate Books and Records +54. During the Relevant Period, Respondents caused UniTek’s failure to maintain fair +and accurate books and records related to the POC method of accounting. Respondents were +responsible for ensuring that all POC method revenue calculations and associated accounting +entries were appropriately performed, documented, and recorded. Hayford and Rothbaum +solicited invoices that they knew did not accurately reflect timing of when the goods and services +were provided by the relevant subcontractors or when UniTek was obligated to pay the +associated costs, which led to the improper recording of revenue under GAAP. +55. Respondents were responsible for maintaining accurate records of transactions +with subcontractors and ensuring that the POC schedule was being properly maintained. They +failed to maintain adequate records demonstrating that: (a) services had been provided by a +subcontractor; (b) materials related to the World Trade Center project had been shipped; or (c) +UniTek had otherwise incurred costs related to the World Trade Center project. +56. As a result of the conduct described above, Hayford, Rothbaum, and McClelland +caused UniTek’s reporting, record keeping, and internal accounting controls violations. +UniTek Registered the Offering of UniTek Shares Previously Issued to Hayford and Others +57. During the relevant period, UniTek filed a registration statement on Form S-3 to +register the offering of UniTek shares previously issued to Hayford and others. The registration +statement incorporated certain filings, including, but not limited to, UniTek’s 2011 Form 10-K +and 2012 Form 10-Qs, which materially over-reported UniTek’s earnings and revenue. +VIOLATIONS +58. As a result of the conduct described above, Hayford violated Securities Act +Section 17(a)(3), Exchange Act Section 13(b)(5), and Exchange Act Rule 13b2-1, and caused +UniTek to violate Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, +13a-1 and 13a-13 thereunder. +59. As a result of the conduct described above, McClelland willfully6 violated +Securities Act Section 17(a)(3), and Exchange Act Rule 13b2-1, and caused UniTek to violate +Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules 12b-20, 13a-1 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)). + +14 + + +60. As a result of the conduct described above, Rothbaum willfully violated Securities +Act Section 17(a)(3), Exchange Act Section 13(b)(5), and Exchange Act Rule 13b2-1, and +caused UniTek to violate Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Rules +12b-20, 13a-1, and 13a-13 thereunder. +61. As a result of the conduct described above, McClelland and Rothbaum willfully +violated the federal securities laws or rules and regulations thereunder pursuant to Section 4C of +the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +IV. + In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanctions agreed to in Respondents’ Offers. Accordingly, pursuant to Section 8A +of the Securities Act, Sections 4C and 21C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, it is hereby ORDERED that: +A. Respondents Hayford, Rothbaum and McClelland cease and desist from +committing or causing any violations and any future violations of Section 17(a)(3) of the +Securities Act, Sections 13(a), 13(b)(2)(A) and (B) of the Exchange Act, and Rules 12b- +20, 13a-1, 13a-13, and 13b2-1 thereunder; and Respondents Hayford and Rothbaum +further cease and desist from committing or causing any violations and any future +violations of Section 13(b)(5) of the Exchange Act. +B. Respondent Hayford shall, within ten (10) days of the entry of this Order, +pay disgorgement of $35,000 and prejudgment interest in the amount of $3,500, 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). Respondent Hayford shall pay a +civil penalty of $125,000 to the Securities and Exchange Commission. Payment of the +civil penalty shall be made in the following installments: one installment of $50,000 due +within 10 days of the entry of this Order, and then three installments of $25,000 each plus +post-judgment interest calculated in accordance with 28 U.S.C §1961(a) due within 90, +180, and 270 days of the date of the entry of this Order. If any payment is not made by +the date the payment is required by this Order, the entire outstanding balance of +disgorgement, prejudgment interest, and civil penalties, plus any additional interest +accrued pursuant to SEC Rule of Practice 600 and/or 31 U.S.C. §3717, shall be due and +payable immediately, without further application. +C. Respondent McClelland shall pay a civil money penalty in the amount of +$75,000 to the Securities and Exchange Commission for transfer to the general fund of +the United States Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall be +made in the following installments: one installment of $25,000 due within 10 days of the +entry of this Order, and then two installments of $25,000 each plus post-judgment interest +calculated in accordance with 28 U.S.C §1961(a) due within 120, and 240 days of the +date of the entry of this Order. If any payment is not made by the date the payment is +required by this Order, the entire outstanding balance of civil penalties, plus any + +15 + + +additional interest accrued pursuant to 31 U.S.C. §3717, shall be due and payable +immediately, without further application. +D. Respondent Rothbaum shall, within ten (10) days of the entry of this +Order, pay a civil money penalty in the amount of $25,000, to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, +subject to Exchange Act Section 21F(g)(3). If payment of this civil penalty is not timely +made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +Payment must be made in one of the following ways: +1. Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; +2. Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +3. Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter +identifying Respondent as a Respondent in these proceedings, and the file number of +these proceedings. A copy of the cover letter and check or money order, or +documentation of whatever other form of payment is used, must be simultaneously sent +to G. Jeffrey Boujoukos, Regional Director, Division of Enforcement, Securities and +Exchange Commission, 1617 JFK Boulevard, Suite 520, Philadelphia, Pennsylvania +19103. +E. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice, Respondent McClelland is denied the privilege of +appearing and practicing before the Commission as an accountant. +1. After three (3) years from the date of this Order, Respondent +McClelland 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 + +16 + + +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 McClelland’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 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 application must satisfy the +Commission that: +(1) Respondent McClelland, 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; +(2) Respondent McClelland, 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; +(3) Respondent McClelland has resolved all disciplinary issues +with the Board, and has complied with all terms and +conditions of any sanctions imposed by the Board (other +than reinstatement by the Commission); and +(4) Respondent McClelland acknowledges his responsibility, +as long as Respondent McClelland appears or practices +before the Commission as an independent accountant, to +comply with all requirements of the Commission and the + +17 + + +Board, 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 Respondent +McClelland 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 McClelland’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. +F. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice, Respondent Rothbaum is denied the privilege of +appearing and practicing before the Commission as an accountant. +1. After three (3) years from the date of this Order, Respondent +Rothbaum 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 +Respondent Rothbaum’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 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 + +18 + + +role of the audit committee in financial and accounting matters; +and/or +c. An independent accountant. Such application must satisfy the +Commission that: +(1) Respondent Rothbaum, 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; +(2) Respondent Rothbaum, 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; +(3) Respondent Rothbaum has resolved all disciplinary issues +with the Board, and has complied with all terms and +conditions of any sanctions imposed by the Board (other +than reinstatement by the Commission); and +(4) Respondent Rothbaum acknowledges his responsibility, as +long as Respondent Rothbaum 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. +2. The Commission will consider an application by Respondent +Rothbaum 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 Rothbaum’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. + +19 + + +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, 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 any Respondent by or +on behalf of one or more investors based on substantially the same facts as alleged in the +Order instituted by the Commission in this proceeding. +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 Hayford, McClelland, and Rothbaum, and further, any debt for civil +penalty or other amounts due by each of the aforementioned 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 said 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/2017/AAER-3875.txt b/raw/aaer/2017/AAER-3875.txt new file mode 100644 index 0000000000000000000000000000000000000000..adc615ac1951f62023b4cbafd3bde77d9e1741fb --- /dev/null +++ b/raw/aaer/2017/AAER-3875.txt @@ -0,0 +1,395 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80904 / June 12, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3875 / June 12, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17997 + + +In the Matter of + +LISA HANMER, CPA, + +Respondent. + + + + +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. + + +I. + On May 23, 2017, the Securities and Exchange Commission (“Commission”) instituted +public administrative proceedings against Lisa Hanmer, CPA, (“Hanmer” or “Respondent”) +pursuant to Section 4C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. +II. + 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 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 +(“Order”), as set forth below. + + + + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that + +Summary +1. This matter involves improper professional conduct by RSM US LLP (“RSM”) +engagement manager Hanmer, while performing the 2011 audit of Madison Capital Energy +Income Fund I LP (“Fund I”), a fund formed for the general purpose of acquiring oil and gas +royalty interests to generate a return for its investors. During the course of the Fund I engagement, +Hanmer 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”). + +2. Hanmer was aware but failed to adequately respond to the fact that the Fund I +financial statements failed to separately report the fair value of the investment in each oil and gas +royalty interest held by Fund I, as required by Generally Accepted Accounting Principles +(“GAAP”). In addition, Hanmer knew that adequate procedures had not been performed in +auditing the fair value of the investment in the underlying royalty interests and took steps to +conceal this fact from RSM personnel. Hanmer also did not perform adequate audit procedures on +Fund I’s schedule of investments to obtain sufficient evidence for their fair value. Finally, Hanmer +failed to adequately plan and assess the risk of the Fund I audit before commencing field work for +the audit. + +Respondent +3. 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. As a +result of the Commission’s investigation into this matter, which caused RSM to conduct its own +internal review, RSM’s Quality Control Inquiry Committee (“QCIC”) convened on February 7, +2015 and recommended that Hanmer’s employment with RSM be terminated, which prompted +Hanmer’s March 31, 2015 resignation from RSM. After resigning, Hanmer performed accounting +consulting work. + +Other Relevant Parties +4. RSM US LLP, a limited liability partnership with its headquarters in Chicago, +Illinois, is a public accounting firm registered with the Public Company Accounting Oversight +Board (“PCAOB”). Founded in 1926, RSM has about 80 offices in the United States with annual +revenue totaling approximately $1.4 billion. Fund I engaged RSM, through its Madison, + +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 +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. + +5. 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. + +6. Derik J. Todd (“Todd”), age 51, currently resides in Madison, Wisconsin. Since +2007, Todd has served as the President of Madison Capital Investments LLC (“MCI”). Todd has +organized private placements of equity interests in oil and gas limited partnerships through MCI +and other entities. Todd, on behalf of Fund I, retained RSM to perform the Fund I audit and served +as RSM’s primary contact with Fund I. +7. Madison Capital Investments LLC (“MCI”) is a Wisconsin limited liability +company, controlled by Todd, based in Madison, Wisconsin. MCI organized a number of private +placements of equity interests in oil and gas limited partnerships since 2009, including Fund I. +These private placements were marketed to accredited investors under Regulation D Rule 506 +through separate broker-dealers and investment advisers. +8. Madison Capital Energy Income Fund I LP (“Fund I”) is a Delaware limited +partnership, controlled by Todd, based in Madison, Wisconsin. Fund I was formed for the general +purpose of acquiring oil and gas royalty interests to generate a return for its investors. Fund I +raised almost $3 million from approximately 50 investors. +Background + Fund I Audit + +9. MCI pitched its funds to broker-dealers and investments 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, +including audited financial statements. Thus, MCI engaged RSM on May 16, 2012 to perform an +audit of Fund I’s statement of net assets 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”).2 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 net assets and a review conclusion, +made in accordance with AICPA standards, on the other financial statements issued by Fund I. + + +2 This Order references the American Institute of Certified Public Accountants (“AICPA”) standards in +effect at the time of the Fund I audit. These standards are encompassed in GAAS. + 4 +10. In the Fund I audit report, RSM opined that the Fund I statement of net assets +“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.” + +11. The Fund I audit report was subsequently distributed by MCI to broker-dealers and +investment advisers. These broker-dealers and investment advisers reviewed the Fund I audit +report in connection with their due diligence review for MCI’s later funds and placed MCI’s later +funds on their investment platforms with the impression that RSM properly and adequately audited +Fund I’s statement of net assets. RSM generally understood how MCI intended to utilize the final +Fund I 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 Fund I statement of net assets audit. + +12. 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. + +13. Millmann was the engagement partner for the Fund I audit. At the time of the Fund +I audit, Millmann’s pr imary experience was in auditing privately-held manufacturing companies +and professional service organizations. Millmann had never worked on an oil and gas fund prior to +the Fund I audit. + +14. 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 “Financial Services Practice”). At the time of the Fund I audit, Millmann and Hanmer +were not on RSM’s preapproved list for Financial Services Practice audits. This list identifies +competent individuals to perform audits for the Financial Services Practice, the purpose of which is +to provide reasonable assurance that such audits are performed according to firm and professional +standards. Because Millmann and Hanmer were not on the preapproved list for Financial Services +Practice audits, the Regional Professional Practices Officer (“RPPO”) for the RSM Great Lakes +Region was required, according to RSM policy, to approve the staffing of Millmann and Hanmer +on the engagement, which the RPPO ultimately did, but only after audit field work had been +substantially completed. + +Relevant RSM Quality Control Policies and Procedures + +15. 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. + + 5 +16. RSM’s client acceptance and continuation policies and procedures require the +engagement partner to carefully evaluate the prospective client prior to acceptance by: (i) +evaluating the integrity and competence of top management and majority owners; (ii) evaluating +the prospective client’s financial condition; (iii) reviewing RSM’s independence requirements to +determine compliance with respect to the prospective client; (iv) ensuring that qualified +professional staff and other functional and industry specialists are available; and (v) +communicating directly with the predecessor auditor. Acceptance of all prospective clients must +be approved by the regional assurance leader or his or her designee. +17. RSM uses the RSM Risk Assessment Model (“MRAM”), an internally developed +electronic tool that assists engagement teams in performing consistent and comprehensive +evaluations of risk. 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 and engagement staffing, the MRAM identifies potential +risks of material misstatement, the need for the involvement of subject matter experts, matters +requiring consultation, and other engagement risks, which allows RSM to plan and perform more +effective and efficient risk-based audits. RSM’s policies in this area are designed to provide +reasonable assurance that RSM will undertake or continue 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. +18. 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. RSM’s National Office of Risk Management (“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 RPPO has the ability to approve RSM staff, who are not +on the preapproved list, for a given audit. +19. 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, + 6 +designing procedures that are responsive to the risks of material misstatement identified in the +MRAM. +20. RSM has also implemented a QCIC, which is charged with reviewing engagements +selected based on certain triggering events such as engagements identified in PCAOB or internal +inspections. +Withdrawal of Fund I Audit Report +21. 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 QCIC 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. +22. 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. +Fund I Audit Failures +23. Hanmer failed to conduct the Fund I audit in conformity with GAAS. +24. Contrary to RSM’s client acceptance and engagement performance policies +described above, field work for the Fund I audit had begun before (i) RSM’s audit planning +documents were approved and (ii) RSM had cleared the Fund I engagement through the MRAM. +As a result, RSM did not appropriately assess the risk for the Fund I engagement and effectively +plan procedures for the audit that would be responsive to the risks of material misstatement +identified in the MRAM, and consequently, the Fund I audit was conducted without effective audit +procedures that were expected to reduce the audit risk of material misstatement. +25. In addition, contrary to RSM’s engagement staffing policy described above, +Millmann and Hanmer, who were not included on the preapproved list for Financial Services +Practice audits, were not approved by the RPPO before they began working on the audit. +Consequently, RSM had no assurance that competent personnel were staffed on the audit before +substantive audit procedures were performed. +26. RSM issued an audit report containing an unqualified opinion on the Fund I +statement of net assets; however, the Fund I financial statements, including the statement of net +assets, 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 are more +than 5 percent of total net assets. Notwithstanding this GAAP disclosure requirement, the final +Fund I schedule of investments 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 +27. 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. 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, +including the Fund I schedule of investments that did not include a proposed adjustment to break- +out individual royalty interests, to MCI. 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. +28. Hanmer 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. Hanmer 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. +29. Hanmer failed to adequately plan the Fund I audit before beginning field work for +the Fund I. This field work, performed without the benefit of an audit plan, was done before +Hanmer had an understanding of Fund I and its business. As a result, the Fund I audit was +conducted without effective audit procedures that were expected to reduce the audit risk of material +misstatement. +30. Hanmer failed to adequately assess the risk of the Fund I audit (through RSM’s +MRAM process) before commencing field work for the audit. As a result, the Fund I audit was +conducted without effective audit procedures that were expected to reduce the audit risk of material +misstatement. +31. The Fund I audit had other significant deficiencies. For example, the required work +program for subsequent events was never completed and no tests were performed to determine +whether there were unrecorded liabilities that needed to be disclosed at year end. As engagement +manager, Hanmer had responsibility for performing this required work program. +Violations of Professional Standards + Failure to exercise due professional care (AU § 230) +32. 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 + 8 +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. 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. Id. § 230.07. +33. As a result of the conduct described above, Respondent failed to exercise due +professional care, as required by AU Section 230, when conducting the Fund I audit. +Failure to adequately plan the audit (AU § 311) +34. 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. +35. As a result of the conduct described above, Respondent failed to adequately plan +the Fund I audit within the meaning of AU Section 311. +Failure to consider audit risk and materiality in conducting the audit (AU § 312) +36. According to AICPA standards, the auditor must consider audit risk and must +determine a materiality level for the financial statements taken as a whole for the purpose of: (i) +determining the extent and nature of risk assessment procedures; (ii) identifying and assessing the +risks of material misstatement; (iii) determining the nature, timing, and extent of further audit +procedures; and (iv) evaluating whether the financial statements taken as a whole are presented +fairly, in all material respects, in conformity with GAAP. AU § 312.11. The auditor should +perform risk assessment procedures to assess the risks of material misstatement both at the +financial statement and the relevant assertion levels. Id. §312.12. +37. As a result of the conduct described above, Respondent did not properly consider +audit risk, as required by AU Section 312, when planning the Fund I audit. +Failure to obtain sufficient appropriate audit evidence (AU § 326) +38. 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. + 9 +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. +39. As a result of the conduct described above, Respondent did not obtain sufficient +appropriate audit evidence for the Fund I audit within the meaning of AU Section 326. +Failure to ascertain the occurrence of subsequent events (AU § 560) +40. The independent auditor should perform other auditing procedures with respect to +the period after the balance-sheet date for the purpose of ascertaining the occurrence of subsequent +events that may require adjustment or disclosure essential to a fair presentation of the financial +statements in conformity with GAAP. AU § 560.12. These procedures should be performed at or +near the date of the auditor's report. Id. +41. As a result of the conduct described above, Respondent did not comply with AU +Section 560. +Violations + +42. 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) (i.e., negligent conduct +consisting of a single instance of highly unreasonable conduct 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). + +Findings + +43. 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. + + +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 is denied the privilege of appearing or practicing before the +Commission as an accountant. + + + 10 + + 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/2017/AAER-3876.txt b/raw/aaer/2017/AAER-3876.txt new file mode 100644 index 0000000000000000000000000000000000000000..bdb4191a64e4f01f9d521f4361d16cc4ee0e92f7 --- /dev/null +++ b/raw/aaer/2017/AAER-3876.txt @@ -0,0 +1,781 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 80918 / June 14, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3876 / June 14, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-17857 +______ ______ + : + : ORDER MAKING FINDINGS AND + In the Matter of : IMPOSING REMEDIAL SANCTIONS + : AND A CEASE-AND-DESIST ORDER + : PURSUANT TO SECTIONS 4C +Edward Richardson Jr., CPA and : AND 21C OF THE SECURITIES +Edward Richardson Jr., : EXCHANGE ACT OF 1934 AND RULE + : 102(e) OF THE COMMISSION’S RULES + Respondents. : OF PRACTICE + : + : + + I. + + On February 24, 2017, the Securities and Exchange Commission (“Commission”) instituted +public administrative and cease-and-desist proceedings pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the +Commission’s Rules of Practice2 against Edward Richardson Jr., CPA (“Firm”) and Edward +Richardson Jr. (“Richardson”) (collectively, “Respondents”) (Rel. No. 34-80103). + +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 censure a person or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical +or improper professional conduct. + + + +2 + + + +II. + + In connection with these proceedings, Respondents have submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over them and the subject matter of these proceedings, which +are admitted, and except as provided herein in Section V, Respondents consent to the entry of +this Order Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist Order +Pursuant to Sections 4Cand 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offer, the Commission finds3 that: + +A. SUMMARY + +1. These proceedings arise out of Respondents’ improper professional conduct and +violations, and/or aiding and abetting and causing violations of, the federal securities laws in +connection with audit engagements for an issuer client and dozens of broker-dealer clients. +Specifically, Respondents failed to obtain Engagement Quality Reviews (“EQRs”) as required by +Public Company Accounting Oversight Board (“PCAOB”) auditing standards for the audits of an +issuer client and dozens of broker-dealer clients. For many of these broker-dealer clients, the Firm +falsely represented that its audits were conducted in accordance with PCAOB standards when +Respondents knew that EQRs were required by PCAOB auditing standards and had not been +performed. + +2. Respondents failed to comply with numerous additional PCAOB auditing standards +in connection with the financial statement audits of an issuer client and two broker-dealer clients. In +particular, Respondents failed to comply with PCAOB auditing standards concerning, among other +things, audit risk, related parties, the confirmation process, audit documentation, evaluating audit +results, communication with audit committees, and due professional care in the performance of +work. + + + 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’ Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + + +3 + + + +3. Respondents also violated the Commission’s auditor independence requirements in +connection with the financial statement audits of dozens of broker-dealer clients. For at least one +audit of each of these broker-dealer audit clients, the Firm prepared its audit clients’ financial +statements and/or notes to the financial statements that were filed with the Commission. + +4. As a result of this conduct, Respondents engaged in improper professional conduct, +violated rules of the Commission and PCAOB standards, and aided and abetted and caused an +issuer client and dozens of broker-dealer clients to file with the Commission financial statements +that included audit reports that falsely stated the audits had been conducted in accordance with +applicable professional standards. + +B. RESPONDENTS + +1. Edward Richardson Jr., age 69 and a resident of West Bloomfield, Michigan, is a +CPA licensed in Michigan. Richardson also holds accounting licenses and permits in several +additional states. Richardson, the sole owner of the Firm, was the engagement partner responsible +for all of the audits conducted by the Firm for the fiscal years ended January 1, 2010 through +December 31, 2015 (the “Relevant Period”). + +2. Edward Richardson Jr., CPA is an accounting and auditing firm registered with the +PCAOB since 2009. The Firm’s primary business is auditing small broker-dealers. The Firm is +located in Southfield, Michigan. During most of the Relevant Period, the Firm employed on a full- +time basis one professional staff member in addition to Richardson and one clerical assistant. + +C. RESPONDENTS FAILED TO OBTAIN ENGAGEMENT QUALITY REVIEWS +REQUIRED BY PCAOB STANDARDS + +1. PCAOB Auditing Standard No. 7, Engagement Quality Review, requires auditors to +obtain an EQR and concurring approval of issuance from a competent reviewer who is independent +from the audit client. + +2. The Firm served as the independent public accountant for an SEC registrant +(“Issuer A”) in connection with financial statement audits for the fiscal years ended December 31, +2012 and December 31, 2013. Respondents failed to obtain an EQR and concurring approval of +issuance in connection with each audit of Issuer A for the fiscal years ended 2012 and 2013. In +addition, the Firm issued an audit report in connection with each of its audits of Issuer A stating +that the audit had been conducted in accordance with PCAOB standards. + +3. The Firm served as the independent public accountant for over 80 broker-dealer +audit clients in connection with financial statement audits required under paragraph (d) of +Exchange Act Rule 17a-5 for the fiscal years ended after June 1, 2014 and through December 31, + + + +4 + + + 2014.4 Respondents failed to obtain an EQR and concurring approval of issuance in connection +with each of these audits. In addition, the Firm issued an audit report in connection with each of +these audits stating that the audit had been conducted in accordance with PCAOB standards. + +4. The Firm served as the independent public accountant for over 80 broker-dealer +audit clients in connection with financial statement audits required under paragraph (d) of +Exchange Act Rule 17a-5 for the fiscal years ended January 31, 2015 through December 31, 2015. +Respondents engaged an accountant to perform the required EQR with respect to a small number +of these audits, but failed to do so for the remaining audits. For each of these remaining audits, the +Firm issued an audit report stating that the audit had been conducted in accordance with PCAOB +standards when Respondents knew that EQRs were required under PCAOB standards and had not +been performed. + +5. As a result of Respondents’ conduct, Issuer A and dozens of the Firm’s broker- +dealer audit clients filed with the Commission financial statements that included audit reports that +falsely stated the audits had been conducted in accordance with PCAOB standards. +D. RESPONDENTS FAILED TO COMPLY WITH NUMEROUS OTHER PCAOB +STANDARDS AND/OR GENERALLY ACCEPTED AUDITING STANDARDS + +1. The Firm served as the independent public accountant for the financial statement +audits of Issuer A for the fiscal years ended December 31, 2012 and December 31, 2013, for the +financial statement audit of a broker-dealer (“Broker-Dealer A”) for the fiscal year ended December +31, 2014, and for the financial statement audit of a broker-dealer (“Broker-Dealer B”) for the fiscal +year ended May 31, 2012. In connection with these audits, Richardson and the Firm failed to +comply with numerous PCAOB auditing standards and/or generally accepted auditing standards +(“GAAS”), as described below. Taken together, these failures evidence a lack of due care by +Respondents. Respondents either did not possess the degree of skill commonly possessed by +auditors or did not exercise reasonable care and diligence in performing audit work. + +2. In 2012, 2013, and 2014 respectively, the Firm served as the independent public +accountant for the financial statement audits of over 75 clients each year that filed audited financial +statements with the Commission. A large percentage of these audit clients have fiscal years ending +on December 31. For example, the Firm audited over 75 broker-dealers with fiscal years ended +December 31, 2014, and approximately 70 of the audit reports signed by the Firm are dated +February 16, 2015. + +3. Auditing Standard No. 8, Audit Risk, discusses the auditor’s consideration of audit +risk and requires the auditor to plan and perform the audit to obtain reasonable assurance about +whether the financial statements are free of material misstatement due to error or fraud. Auditing +Standard No. 12, Identifying and Assessing Risks of Material Misstatement, establishes + +4 Audits of broker-dealers for fiscal years ending on or after June 1, 2014 are required to be performed in +accordance with PCAOB standards. See Exchange Act Rule 17 C.F.R. § 240.17a-5(g)(1); Broker-Dealer +Reports, SEC Release No. 34-70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, 2013). + + + +5 + + + requirements regarding the process of identifying and assessing risks of material misstatement of +the financial statements, thereby providing a basis for designing and implementing responses to +those risks. Auditing Standard No. 13, The Auditor’s Response to the Risks of Material +Misstatement, establishes requirements regarding designing and implementing responses to the +risks of material misstatement through appropriate overall audit responses and audit procedures. +Respondents did not appropriately perform risk assessment procedures during the audits of Issuer +A and/or Broker-Dealer A. For example, in instances where Respondents identified fraud risks +during their audits of Issuer A and/or Broker-Dealer A, the audit responses to such risks were +either inappropriate, inconsistent, or incomplete. During the audit of Broker-Dealer A, +Respondents identified revenue recognition and management override of controls as possible fraud +risks and documented that the audit responses were to confirm revenue and test controls. +Respondents, however, only subjected one of the client’s three revenue streams to confirmation +procedures, and the confirmation procedures that were performed were inadequate, including, but +not limited to, the design and timing of the confirmation procedures and the failure to address +exceptions and non-responses. In addition, Respondents did not obtain or document a sufficient +understanding of, or adequately test, internal controls, yet concluded that internal controls were +designed and implemented effectively and that the risk of material misstatement related to control +risk was low for all audit areas. In addition, when documenting opportunities for fraud, +Respondents identified a lack of segregation of duties due to the size of Broker-Dealer A as an +opportunity for fraud, but inappropriately noted that this risk was “offset by the fact that the +FINOP and FINRA auditors closely watches [sic] and reviews financial statement activity.” The +FINOP5 was an employee of Broker-Dealer A and FINRA does not perform the function noted by +Respondents. During the audits of Issuer A, Respondents inappropriately identified reliance upon +reviews by SEC staff as part of their risk assessment procedures, and inaccurately identified such +reviews as being a “key control.” Respondents also identified risks related to financial reporting +by stating: “Shortcomings in financial statements would be frowned [sic] by the SEC.” + +4. AU Section 334,6 Related Parties, provides guidance on procedures that should be +considered by the auditor to address related party transactions. Respondents did not obtain an +adequate understanding of the nature, purpose, or collectability of related party receivables during +the audit of Broker-Dealer A. Respondents also did not identify that required disclosures +concerning related party transactions were missing from the footnotes to Broker-Dealer A’s +financial statements despite being aware of the transactions. + +5. AU Section 330, The Confirmation Process, provides guidance about the +confirmation process in audits performed in accordance with PCAOB standards, including the +design of confirmations and performing alternative procedures when responses to confirmation + +5 A “FINOP” is a broker-dealer’s Financial and Operations Principal, who has responsibilities related to, +among other things, financial reporting and recordkeeping. + +6 The PCAOB adopted as interim standards, on a transitional basis, the auditing standards promulgated by +the Auditing Standards Board of the American Institute of Certified Public Accountants as in existence on +April 16, 2003, to the extent not superseded or amended by the PCAOB. See PCAOB Rule 3200T, Interim +Auditing Standards. Standards identified by the letters “AU” are such standards. + + + +6 + + + requests are not received. With respect to the audits of Issuer A and/or Broker-Dealer A, +Respondents did not appropriately design confirmations and performed insufficient procedures, +including, but not limited to, performing no procedures when confirmations were either returned +with discrepancies or not returned at all. + +6. Auditing Standard No. 3, Audit Documentation, establishes general requirements +for documentation the auditor should prepare and retain in connection with engagements +conducted pursuant to PCAOB standards. Audit documentation created and maintained by +Respondents during the audits of Issuer A and/or Broker-Dealer A, and created by staff under +Richardson’s supervision, was inadequate, incomplete, unclear, and contained numerous mistakes +and inconsistencies. For example, audit documentation frequently failed to indicate the source, +person responsible for the preparation and/or review of the document, and the dates of preparation +and/or review; details of conversations with clients’ management were not documented, even when +such conversation was the sole support for the completion of relevant audit steps; and certain +workpapers were dated after the date of the audit report, and there was no documentation of the +reason for adding such workpapers. In addition, an experienced auditor could not look at the audit +documentation and understand the procedures performed, evidence obtained, or conclusions +reached. + +7. Auditing Standard No. 14, Evaluating Audit Results, establishes requirements +regarding the auditor’s evaluation of the audit results and determination of whether he or she has +obtained sufficient appropriate audit evidence. Auditing Standard No. 15, Audit Evidence, explains +what constitutes audit evidence and establishes requirements regarding designing and performing +audit procedures to obtain sufficient appropriate audit evidence. Respondents failed to +appropriately evaluate audit results during the audits of Issuer A and/or Broker-Dealer A. For +example, Respondents’ workpapers for Broker-Dealer A include an Accumulated Misstatement +Evaluation Form, which purports to list, and evaluate, the misstatements or errors identified during +the audit. This workpaper is incomplete and inaccurate because it identifies only one misstatement +or error, although several misstatements or errors were identified by Respondents during the audit. +Moreover, the required evaluation of misstatements in their totality was neither performed nor +documented. In addition, Respondents signed off on the audit report prior to performing audit +procedures that were intended to respond to the identified fraud risk related to revenue recognition. + +8. Respondents also failed to comply with additional PCAOB auditing standards +during their audits of Issuer A and/or Broker-Dealer A, including, but not limited to, Auditing +Standard No. 16, Communication with Audit Committees, including, but not limited to, the lack of +required communications with the audit committee; PCAOB Rule 3526, including the lack of +communication with the audit committee concerning independence; AU Section 316, +Consideration of Fraud in the Financial Statement Process, including, but not limited to, deficient +testing of journal entries; AU Section 333, Management Representations, including, but not +limited to, the fact that Broker-Dealer A’s management representation letter is dated after the date +of the audit report; AU Section 508, Reports on Audited Financial Statements and AU Section 530, +Dating of Independent Auditor’s Report, including, but not limited to, inaccurate audit report dates; +and AU Section 550, Other Information in Documents Containing Audited Financial Statements, + + + +7 + + + including, but not limited to, the failure to read and consider information included in Issuer A’s +Form 10-K and Form 10-K/A filings, other than the audited financial statements, prior to filing +with the Commission. + +9. AU Section 230, Due Professional Care in the Performance of Work, imposes upon +an auditor the responsibility to observe the standards of field work and reporting and to exercise +professional skepticism. In addition to the foregoing, Respondents failure to comply with AU +Section 230 includes, but is not limited to, the use of outdated and inapplicable audit programs in +connection with audits of Issuer A. For example, Respondents used a superseded disclosure +requirements checklist for nonpublic businesses from January 2007 in connection with the audit of +Issuer A’s financial statements for the fiscal year ended December 31, 2012. Respondents’ +workpapers also reflect responses that were cut-and-pasted from the workpapers of other audit +clients. For example, some workpapers for the audit of Broker-Dealer B document discussions +with a different audit client’s President and some workpapers for the audit of Issuer A identify +clearing broker statements as a source document – as so identified in the workpapers for Broker- +Dealer B as well as other broker-dealer audit clients – although Issuer A was not in the brokerage +business. In total, the breadth and depth of the audit issues related to Respondents’ audits, +including the audit failures described above and the presence of numerous mistakes, errors, and/or +oversights in the workpapers, demonstrate a lack of due professional care in the performance of +work. + +10. As a result of Respondents’ conduct, Issuer A, Broker-Dealer A, and Broker-Dealer +B filed with the Commission financial statements that included audit reports that falsely stated the +audits had been conducted in accordance with PCAOB standards. + +E. RESPONDENTS PREPARED CLIENT FINANCIAL STATEMENTS FILED +WITH THE COMMISSION IN VIOLATION OF AUDITOR INDEPENDENCE +REQUIREMENTS + +1. The Firm served as the independent public accountant for the financial statement +audits of over 80 broker-dealer audit clients for the fiscal years ended January 1, 2010 through +December 31, 2012 (the “Relevant Period for Independence”). In connection with at least one +audit performed for each of these broker-dealer audit clients during the Relevant Period for +Independence, Respondents prepared the financial statements and/or notes to the financial +statements that were filed with the Commission under paragraph (d) of Exchange Act Rule 17a-5 +in violation of the Commission’s auditor independence regulations set forth in Rule 2-01(b) and (c) +of Regulation S-X. + +2. For example, during the audit of Broker-Dealer B for the year ended May 31, 2012, +Respondents were provided with financial documents generated by Broker-Dealer B. Respondents +reviewed and tested these documents, and the financial data contained therein, as part of the audit. +Respondents then utilized the information contained in these documents to create a set of financial +statements to be filed with the Commission. In particular, Firm personnel working on Firm +computers entered Broker-Dealer B’s financial data into the Firm’s engagement software and then + + + +8 + + + used that engagement software to generate a new set of financial statements, including the notes to +the financial statements, using the prior year’s financial statements as a template. Respondents +updated or revised the financial statements and notes to the financial statements as needed. +Respondents then provided the set of financial statements that Respondents had prepared to +Broker-Dealer B’s management for approval. + +3. In July 2012, Broker-Dealer B filed with the Commission an annual report required +under paragraph (d) of Exchange Act Rule 17a-5 for the fiscal year ended May 31, 2012. Included +in that filing is an audit report signed by the Firm and stating, among other things, that the Firm’s +audit of Broker-Dealer B was conducted “in accordance with auditing standards generally accepted +in the United States of America.” + +4. Section 17(e)(1)(A) of the Exchange Act requires that every registered broker or +dealer “shall annually file with the Commission a balance sheet and income statement certified by +an independent public accounting firm, or by a registered public accounting firm if the firm is +required to be registered under the Sarbanes-Oxley Act of 2002, prepared on a calendar or fiscal +year basis, and such other financial statements (which shall, as the Commission specifies, be +certified) and information concerning its financial condition as the Commission, by rule may +prescribe as necessary or appropriate in the public interest or for the protection of investors.” + +5. Exchange Act Rule 17a-5(e)(1)(i) states: “An audit shall be conducted by a public +accountant who shall be in fact independent as defined in paragraph (f)(3) of this section herein, +and he shall give an opinion covering the statements filed pursuant to paragraph (d) . . . .”7 +Exchange Act Rule 17a-5(f)(3) further states that, for such audits, “[a]n accountant shall be +independent in accordance with the provisions of Rule 2-01(b) and (c) of Regulation S-X.” + +6. Exchange Act Rule 17a-5(g) requires that “[t]he audit shall be made in accordance +with generally accepted auditing standards” and Exchange Act Rule 17a-5(i) requires that “[t]he +accountant’s report shall . . . [s]tate whether the audit was made in accordance with generally +accepted auditing standards.” GAAS require auditors to maintain strict independence from their +audit clients; an auditor “must be free from any obligation to or interest in the client, its +management or its owners.” See Statement on Auditing Standard No. 1, Section +220.03. 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 violated Exchange Act Rule 17a-5(i). +See In the Matter of Rosenberg Rich Baker Berman & Company and Brian Zucker, CPA, +Exchange Act Release No. 69765 at p. 5 (June 14, 2013). + +7 The provisions of Exchange Act Rule 17a-5 referred to in paragraphs III.E.5 and 6 are those in effect +during, and applicable to, the Relevant Period for Independence. On July 30, 2013, the Commission +adopted certain amendments to Rule 17a-5. See Broker-Dealer Reports, Exchange Act Release No. 34- +70073 (July 30, 2013), 78 Fed. Reg. 51910 (Aug. 21, 2013). Among other things, the amendments to Rule +17a-5 require that audits of brokers and dealers be performed in accordance with PCAOB standards, +effective for audits of fiscal years ending on or after June 1, 2014. 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 Period for Independence, prior to the amendments, that +requirement was set out in Rule 17a-5(f)(3). It is now set out in Rule 17a-5(f)(1). + + + +9 + + + +7. Rule 2-01(c)(4) of Regulation S-X provides that an accountant is not independent +if, at any point during the audit and professional engagement period, the accountant provides +prohibited non-audit services to an audit client. Rule 2-01(c)(4)(i) of Regulation S-X provides that +prohibited non-audit services include bookkeeping or other services related to the accounting +records or financial statements of the audit client, and defines such services as: + +Any service, unless it is reasonable to conclude that the results of these services will not be +subject to audit procedures during an audit of the audit client’s financial statements, +including: +(A) Maintaining or preparing the audit client’s accounting records; + +(B) Preparing the audit client’s financial statements that are filed +with the Commission or that form the basis of financial +statements filed with the Commission; or + +(C) Preparing or originating source data underlying the audit +client’s financial statements. + +8. Rule 2-01(c)(4)(i) of Regulation S-X specifically prohibits an audit firm from +preparing an audit client’s financial statements that are filed with the Commission. With respect to +the audit of Broker-Dealer B described above, Respondents violated this rule by, among other +things: aggregating line items from internal books and records to the financial statements; +changing line item descriptions; drafting or editing notes to the financial statements; and +converting FOCUS reports or bookkeeping software program reports into financial statements. + +9. Respondents engaged in substantially similar conduct in connection with at least +one audit for dozens of additional broker-dealer clients during the Relevant Period for +Independence. + +10. As a result of Respondents’ conduct in preparing the financial statements, including +the notes thereto, Respondents were not independent of their broker-dealer audit clients under the +independence criteria established by Rule 2-01(c)(4) of Regulation S-X, which Exchange Act Rule +17a-5 makes applicable to the audits of broker-dealer financial statements. As a result, each such +broker-dealer client filed with the Commission financial statements that included an audit report +that falsely stated the audit had been conducted in accordance with GAAS. +F. VIOLATIONS + + 1. As a result of the conduct described above, the Firm willfully violated, and +Richardson willfully aided and abetted and caused the Firm’s violations of, Rule 2-02(b)(1) of + + + +10 + + + Regulation S-X, which requires an accountant’s report to state whether the audit was made in +accordance with generally accepted auditing standards.8 + +2. As a result of the conduct described above, the Firm willfully violated, and +Richardson willfully aided and abetted and caused the Firm’s violations of, Exchange Act Rule +17a-5, which requires an accountant’s report to state (1) whether the audit was made in accordance +with PCAOB standards,9 or (2) with respect to the Relevant Period for Independence, whether +the audit was made in accordance with GAAS. + +3. As a result of the conduct described above, the Firm and Richardson willfully aided +and abetted and caused Issuer A to file with the Commission annual reports that contained false +and misleading information in violation of Exchange Act Sections 13(a) and 15(d) and Rules 13a-1 +and 15d-1 promulgated thereunder.10 + +4. As a result of the conduct described above, the Firm and Richardson willfully aided +and abetted and caused dozens of broker-dealer audit clients to file with the Commission annual +reports that were not audited by an independent accountant and/or that contained false and +misleading information in violation of Exchange Act Section 17(a) and Rule 17a-5 promulgated +thereunder. + +5. Rule 102(e) of the Commission’s Rules of Practice allows the Commission to +censure a person or deny the privilege of appearing or practicing before it to any person if it finds +that such person has engaged in “improper professional conduct” or has willfully violated or +willfully aided and abetted the violation of any provision of the federal securities laws. Exchange +Act §§ 4C(a)(2) and (3); Rules 102(e)(1)(ii) and (iii). Rule 102(e) defines improper professional +conduct, in part, as either: + +(1) A single instance of highly unreasonable conduct that results in a violation of +applicable professional standards in circumstances in which the registered + +8 “[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 Commission Guidance Regarding the Public +Company Oversight Board’s Auditing and Related Professional Practice Standard No. 1, SEC Exchange +Act Release No. 34-49708 (May 14, 2004). + +9 As part of the Rule 17a-5 amendments adopted by the Commission on July 30, 2013, see supra note 7, +Rule 17a-5(i)(2)(i) was amended to state: “The independent public accountant’s reports must . . . [s]tate +whether the examinations or review, as applicable, were made in accordance with standards of the Public +Company Accounting Oversight Board.” + +10 At the time Issuer A filed its Form 10-K for the year ended December 31, 2013, Issuer A had securities +registered pursuant to Exchange Act Section 12(g) and therefore filed annual reports with the Commission +pursuant to Exchange Act Section 13(a). At the time Issuer A filed its Form 10-K for the year ended +December 31, 2012, Issuer A was required to file annual reports with the Commission pursuant to +Exchange Act Section 15(d). + + + +11 + + + public accounting firm or associated person knows, or should know, that +heightened scrutiny is warranted. + +(2) Repeated instances of unreasonable conduct, each resulting in a violation of +applicable professional standards, that indicate a lack of competence to +practice before the Commission. + +Exchange Act § 4C(b)(2); Rule 102(e)(1)(iv)(B). + +6. 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) (codified at 17 C.F.R. Part 201). The Commission has defined the “highly +unreasonable” standard as: + +an intermediate standard, higher than ordinary negligence but lower than the +traditional definition of recklessness used in cases brought under Section +10(b) of the Exchange Act and Rule 10b-5 of the Exchange Act. The highly +unreasonable standard is an objective standard. The conduct at issue is +measured by the degree of the departure from professional standards and not +the intent of the accountant. + +Id. at 57,167. + +7. As a result of the conduct described above, the Firm and Richardson engaged in +improper professional conduct subject to Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + +8. As a result of the conduct described above, the Firm and Richardson willfully +violated and/or willfully aided and abetted violations of the federal securities laws, which +constitute conduct subject to Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice. + +G. FINDINGS + + 1. Based on the foregoing, the Commission finds that the Firm willfully violated, +and Richardson willfully aided and abetted and caused the Firm’s violations of, Exchange Act +Rule 17a-5(i) and Rule 2-02(b)(1) of Regulation S-X. + +2. Based on the foregoing, the Commission finds that Richardson and the Firm +willfully aided and abetted and caused Issuer A’s violations of Exchange Act Sections 13(a) and +15(d) and Rules 13a-1 and 15d-1 promulgated thereunder, and willfully aided and abetted and +caused dozens of broker-dealers’ violations of Exchange Act Section 17(a) and Rule 17a-5 +promulgated thereunder. + + + + +12 + + + 3. Based on the foregoing, the Commission finds that Richardson and the Firm +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, and willfully violated, and/or willfully aided +and abetted violations of, the federal securities laws within the meaning of Exchange Act Section +4C(a)(3) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +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. Richardson and the Firm shall cease and desist from committing or causing any +violations and any future violations of Sections 13(a), 15(d), and 17(a) of the Exchange Act and +Rules 13a-1, 15d-1, and 17a-5 promulgated thereunder and Rule 2-02(b)(1) of Regulation S-X. + + B. Richardson is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After seven years from the date of this Order, Richardson 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 +Richardson’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: + + + +13 + + + + (a) Richardson, 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) Richardson, 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 Richardson’s or the firm’s quality control system that would +indicate that Richardson will not receive appropriate supervision; + (c) Richardson 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) Richardson 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. + + D. The Commission will consider an application by Richardson 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 Richardson’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. The Firm is denied the privilege of appearing or practicing before the +Commission as an accountant. + +F. After seven years from the date of this Order, the Firm 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 +Securities Exchange Act of 1934). Such an application must satisfy the Commission that the +Firm’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 + + + +14 + + + +2. an independent accountant. + +Such an application must satisfy the Commission that: + +(a) The Firm is registered with the PCAOB in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + +(b) The Firm 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 the Firm’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 the Firm’s +employees will not receive appropriate supervision. The Firm 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 the +Firm, or any of its present or former affiliates, directors, officers, employees, or agents acting in +their capacity. The agreement will also provide that the consultant will require that any firm with +which he/she is affiliated or of which he/she is a member, and any person engaged to assist the +consultant in performance of his/her duties under this Order shall not, without prior written +consent of the staff, enter into any employment, consultant, attorney-client, auditing or other +professional relationship with the Firm, 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) The Firm 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) The Firm 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. + + G. The Commission will consider an application by the Firm 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 the Firm’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 + + + +15 + + + and circumstances basis with due regard for protecting the integrity of the Commission’s +processes + + H. Richardson and the Firm shall pay, jointly and severally, a civil money penalty in +the amount of $35,000 to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall +be made in the following installments: $8,750 within ten days of the entry of this Order; $8,750 +within 120 days of the entry of this Order; $8,750 within 240 days of the entry of this Order; and +$8,750 within 360 days of the entry of this Order. If any payment is not made by the date the +payment is required by this Order, the entire outstanding balance of civil penalties, plus any +additional interest accrued pursuant to 31 U.S.C. § 3717, shall be due and payable immediately, +without further application. Payment must be made in one of the following ways: + +(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 +Richardson and/or the Firm as Respondent(s) in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Melissa R. +Hodgman, Associate Director, Division of Enforcement, Securities and Exchange Commission, +100 F St., NE, Washington, DC 20549-5553. + + I. 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 + + + +16 + + + 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 or audit clients based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + +V. + + It is 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 Richardson, and further, any debt for disgorgement, prejudgment interest, civil penalty +or other amounts due by Respondent Richardson 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 Richardson 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/2017/AAER-3882.txt b/raw/aaer/2017/AAER-3882.txt new file mode 100644 index 0000000000000000000000000000000000000000..4a317b1a2172b6261bf42bd5530972d35d2f4d7b --- /dev/null +++ b/raw/aaer/2017/AAER-3882.txt @@ -0,0 +1,1377 @@ + + + + + + + + + + + + + + + + SEC.gov | Ryan Petersen + + + + + + + + !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\/519871","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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Ryan Petersen, No. 15-cv-04599 (N.D. Cal. filed Oct. 6, 2015) + + SEC Obtains Final Judgment Against CEO Charged with Accounting Fraud and Other Accounting Failures + + + + + The Securities and Exchange Commission announced that it has obtained a final judgment against Ryan Petersen, the former chief executive officer of OCZ Technology Group Inc. whom the SEC charged with an accounting fraud at the now-bankrupt seller of computer memory storage and power supply devices. + + The final judgment, entered by the Honorable Richard Seeborg, U.S. District Judge, U.S. District Court for the Northern District of California on June 30, 2017, permanently enjoins Petersen from violating Section 17(a) of the Securities Act of 1933, Sections 10(b) and 13(b)(5) of the Securities Exchange Act of 1934, and Exchange Act Rules 10b-5, 13a-14, 13b2-1, and 13b2-2, and aiding and abetting violations of Exchange Act Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B), and Exchange Act Rules 12b-20, 13a-1, 13a-11, and 13a-13. The judgment also bars Petersen from acting as an officer or director of a public company, and orders him to pay $121,600 in disgorgement and relief pursuant to Section 304(a) of the Sarbanes-Oxley Act of 2002, prejudgment interest on the disgorgement of $18,400, and a civil penalty in the amount of $100,000. Petersen consented to the final judgment. + + The court's entry of the judgment against Petersen resolves this litigation in its entirety. + + The SEC charged Petersen with engaging in a scheme to materially inflate OCZ's revenues and gross margins from 2010 to 2012. The agency separately charged OCZ's former chief financial officer, Arthur Knapp , with certain accounting, disclosure, and internal accounting controls failures at OCZ. Knapp agreed to settle the SEC's charges without admitting or denying the allegations against him and, on October 23, 2015, the SEC suspended Knapp from appearing or practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies. On August 29, 2106, the SEC suspended Thomas Dulek , a California-based accountant, from appearing and practicing before the SEC as an accountant, which includes not participating in the financial reporting or audits of public companies, based on his violations of important auditing standards. The SEC's investigation found that Dulek conducted deficient audits of OCZ's financial statements for fiscal years 2011 and 2012. + + + + + + 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/2017/AAER-3884.txt b/raw/aaer/2017/AAER-3884.txt new file mode 100644 index 0000000000000000000000000000000000000000..71230fb1a7825e5832add9dd9dbf8b3d70e86cc7 --- /dev/null +++ b/raw/aaer/2017/AAER-3884.txt @@ -0,0 +1,632 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81222 / July 27, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3884 / July 27, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18080 + +In the Matter of + + Halliburton Company and + Jeannot Lorenz, + +Respondents. + + ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER + + +I. + + The Securities and Exchange Commission (“SEC” or “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 Halliburton Company +(“Halliburton”) and Jeannot Lorenz (collectively, the “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement which the Commission has determined to accept. Solely for the purpose of these +proceedings and any other proceedings brought by or on behalf of the Commission, or to which +the Commission is a party, and without admitting or denying the findings herein, except as to the +Commission’s jurisdiction over them and the subject matter of these proceedings, which are +admitted, Respondents consent to the entry of this Order Instituting Cease-and-Desist +Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, +and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + + +2 + +III. + + On the basis of this Order and Respondents’ Offers of Settlement, the Commission finds1 +that: + +SUMMARY + +1. This matter concerns violations of the books and records and internal accounting +controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Halliburton, a global +oilfield services company, headquartered in Houston, Texas, and its former Vice-President, +Jeannot Lorenz, a citizen of France and permanent resident of the United States. + +2. From April 2010 through April 2011, Halliburton paid $3,705,000 to a local +Angolan company that Halliburton had proposed to a Sonangol Official to fulfill local content +obligations. The local Angolan company was owned by a former Halliburton employee and a +friend and neighbor of the Sonangol government official and some of the payments were made in +advance of Halliburton obtaining lucrative oilfield services contracts. The Sonangol official, +who had authority to veto or reduce subcontracts awarded to Halliburton by large international +oil companies, approved Halliburton’s local content proposal. + +3. The payments to the local Angolan company were made under two contracts +arranged and negotiated by Lorenz and others: (i) a September 2009 Interim Consulting +Agreement, and (ii) a May 2010 Real Estate Transaction Management Agreement. Halliburton +entered into these contracts in violation of its own internal accounting controls and did not record +the true nature of the transactions in its books and records. Specifically, the two contracts were +entered into for the purpose of paying the local Angolan company to satisfy local content +requirements, not for the stated scope of work set forth in each contract. In addition, Halliburton +entered into the contracts without following all of the terms of its internal accounting controls +governing such transactions. + +4. Lorenz negotiated and entered into the agreements with the local Angolan +company while knowingly circumventing certain Halliburton internal accounting controls. Also, +Lorenz falsified books and records by knowingly providing inaccurate scopes of work and other +information contained in the agreements. Lorenz, therefore, personally violated provisions that +prohibit knowingly circumventing internal accounting controls and falsifying books and records, +and also caused Halliburton’s violations of the books and records and internal accounting +controls provisions of the FCPA. + +RESPONDENTS + +5. Halliburton Company is a Delaware oilfield services corporation, headquartered +in Houston, Texas. Its common stock is registered under Section 12(b) of the Exchange Act and +trades on the NYSE. During the relevant time period, Halliburton had more than 70,000 + +1 The findings herein are made to pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. +3 + +employees operating in over 70 countries with country managers that report to regional +managers. In February 2009, Halliburton entered into a settlement with the Commission over a +bribery scheme executed by Halliburton’s former wholly-owned subsidiary, KBR, Inc. (by then a +separate U.S. issuer), and KBR’s former CEO, and consented to the entry of a final judgment +enjoining it from violating the books and records and internal accounting controls provisions of +the FCPA and, jointly and severally with KBR, disgorged $177 million of ill-gotten gains. +Separately, as a result of a parallel investigation with the Department of Justice, KBR paid a +criminal fine of $382 million. + +6. Jeannot C. Lorenz (age 65) is a French citizen with permanent residence status +in the United States who is currently residing in Angola. He is a former Halliburton Vice- +President who had been the country manager in charge of Halliburton’s operations in Angola +from 1993 to 2002. He returned to Angola to serve as interim country manager from mid-2004 +through early-2005. Beginning in April 2008, while officially working for Halliburton in Brazil, +Lorenz was appointed to lead the company’s local content efforts in Angola. Lorenz left the +company in late 2013. + +FACTS + +7. In early 2008, Sonangol officials told Halliburton management that Sonangol was +considering vetoing further subcontract work for Halliburton in Angola because Halliburton had +insufficient local content and was not compliant with Angola’s local content regulations +governing foreign companies operating in Angola. Sonangol officials made it clear that +Halliburton needed to partner with more local Angolan-owned businesses in order to satisfy local +content requirements. In response, starting in April 2008, Halliburton tasked Lorenz to +spearhead efforts to find local content in Angola that would be acceptable to Sonangol. Lorenz +previously worked for Halliburton in Angola where he had established relationships and +networks with many Angolans, including Sonangol and other government officials. During 2008 +and early 2009, Lorenz and Halliburton considered a variety of potential local content projects +and kept Sonangol officials apprised of their progress. In 2008, Halliburton finalized and +commenced one separate local content project not involving the local Angolan company. This +separate project fulfilled Halliburton’s local content obligations for contracts that were up for bid +in 2008. + +8. By April 2009, another round of contracts for other joint Sonangol/international +oil company projects was coming up for bid. Halliburton understood that the 2008 local content +efforts would not count for this new round of contract bids. Halliburton also learned from a +variety of sources, including the head of an international oil company’s operations in Angola, +that Sonangol remained extremely dissatisfied with Halliburton’s local content efforts and that +Sonangol might veto the international oil company’s recommendations that Halliburton be +awarded certain contracts in Angola. In response, Lorenz proposed that Halliburton offer to +outsource approximately $15 million of unspecified services to a local Angolan company that +was owned by a former Halliburton employee who was a friend and neighbor of the government +official who would on Sonangol’s behalf approve the award of the contracts in question to +Halliburton. Lorenz knew of the relationship between the owner of the local Angolan company +and the Sonangol government official. On April 29, 2009, Halliburton senior executives met +4 + +with the Sonangol government official at Sonangol’s headquarters in Luanda and discussed +Lorenz’s proposal for local content. Thereafter, Lorenz began a lengthy effort to retain this local +Angolan company in order to fulfill Halliburton’s proposal, making three attempts to do so. + +9. Lorenz first proposed retaining the local Angolan company as a commercial agent +and paying a fee equal to 2% of Halliburton’s existing revenue earned in Angola. Lorenz +projected that Halliburton would pay a fee of approximately $4 million for the remaining 6 +months in 2009 which would rise to $15 million by 2013. However, Lorenz’s proposal to pay a +fee on existing revenues (as opposed to newly obtained business) was rejected by Lorenz’s direct +management because (i) Halliburton declined to add any agents in Africa during that time period, +and (ii) Halliburton generally retained commercial agents to obtain new business for Halliburton +and paid the agent a percentage of the new business as a commission or fee. As outlined by +Halliburton’s legal department, to retain the local Angolan company as a commercial agent, it +would be required to undergo a lengthy due diligence and review process that included retaining +outside U.S. legal counsel experienced in FCPA compliance to conduct interviews. +Halliburton’s in-house counsel noted that “[t]his is undoubtedly a tortuous, painful +administrative process, but given our company’s recent US Department of Justice/SEC +settlement, the board of directors has mandated this high level of review.” As a result of the +internal disapproval, Lorenz abandoned the idea of retaining the local Angolan company as a +commercial agent. + +10. Lorenz then proposed to directly outsource some of Halliburton’s in-house +functions to the local Angolan company without competitive bidding. However, in order to +comply with the company’s internal accounting controls, Halliburton’s procurement personnel +required a competitive bidding process to outsource real estate maintenance, travel and ground +transportation services in which the preferred local Angolan company would compete. +Halliburton personnel in Angola and procurement specialists from Houston conducted the +competitive bidding. As the bidding process would take several months to complete, Lorenz +considered it imperative to show “good faith” by beginning to engage and pay the local Angolan +company some money. Accordingly, in July 2009 – before the initial request for quotes in the +bidding process was issued in October 2009 – Lorenz began negotiating a “bridge agreement.” +The initial draft was a six-month “consulting agreement” beginning in September 2009 for +$30,000 per month. By late October 2009, after further negotiations, the amount was increased +to $45,000 per month. The effective date of the agreement remained September 2009, despite +that November was about to begin and the contract had not been signed. + +11. The real reason for the interim consulting agreement – to provide bridge payments +as a show of good faith to the Sonangol government official and the local Angolan company +until the latter successfully emerged from the bidding process – did not appear in the agreement. +Rather, the scope of work falsely stated that the local Angolan company would be “developing +reports with respect to findings and recommendations” addressing local content requirements +and how Halliburton could meet those requirements with respect to areas of travel, local +logistics, and real estate. In order to secure approval for the draft agreement in the fall of 2009, +Lorenz made false statements that led other Halliburton employees to believe that the local +Angolan company had already provided and would continue to provide actual services under the +5 + +consulting agreement. However, the agreement was not executed and payments under the +agreement were not made until beginning in February 2010. + +12. Halliburton’s internal accounting controls required that the supplier qualification +process begin with an assessment of the criticality or risk of a material or service, not with a +particular supplier. Instead, Lorenz started with a particular supplier (the local Angolan +company) and then backed into a list of services it could provide. Lorenz also violated +Halliburton internal accounting controls by entering into the interim consulting agreement +without either seeking competitive bids or providing an adequate single source justification. +Lorenz failed to comply with an internal accounting control that required contracts over $10,000 +in countries with a high risk of corruption, such as Angola, to be reviewed and approved by a +Tender Review Committee. + +13. By January 2010, nine months had passed since Halliburton had proposed to +Sonangol that it would use the local Angolan company to satisfy local content requirements. +Both Sonangol and the proposed local Angolan company believed that Halliburton was failing to +comply with local content requirements, thus risking the award of significant contracts scheduled +for mid-2010. At this moment of crisis, Lorenz asked a Halliburton senior executive to meet +with the Sonangol government official as soon as possible to renew Halliburton’s local content +commitment and the April 2009 proposal. On January 13, 2010, in the middle of an unrelated +trip through the Middle East, the Halliburton senior executive flew to Portugal to meet the +Sonangol government official at the vacation home of the Sonangol government official’s friend, +the owner of the local Angolan company. Both Lorenz and the friend were present. The +Halliburton senior executive explained to the Sonangol government official the delays associated +with a large company’s procurement processes and affirmed that Halliburton was negotiating a +deal with the local Angolan company to satisfy local content requirements. The Halliburton +senior executive also asked the Sonangol government official for his support for the international +oil company’s award of an upcoming contract to Halliburton, in light of progress Halliburton +was making to satisfy Halliburton’s local content requirements. + +14. In February 2010, Halliburton’s procurement personnel reviewed the bids for real +estate maintenance, travel and ground transportation services, and the preferred local Angolan +company was the least successful of the bidders. The local Angolan company did not submit a +bid for the travel portion but submitted bids for real estate maintenance and ground +transportation. The local Angolan company’s bid was 90% to 447% higher than the next highest +bid for the property maintenance and was 42% to 126% higher in ground transportation. As +noted by a Halliburton employee in a February 9, 2010 email evaluating the bids, the local +Angolan company “is a very expensive solution (non-competitive and not justified based on their +proposal) . . . .” Nonetheless – and notwithstanding the apparent availability of other Angolan +bidders to satisfy local content requirements -- Halliburton officials believed that they needed to +use the preferred local Angolan company as their local content because they had committed they +would do so. According to the February 9, 2010 email, Lorenz was “scrambling to find [a] +justification” to award the business to the local Angolan company. + +15. Lorenz and others unsuccessfully attempted to negotiate with the local Angolan +company for an acceptable price for the services based on the bids received from others. The +6 + +owner of the local Angolan company, however, insisted on an unexplained, non-negotiable +monthly “fixed cost” of no less than $250,000 above his costs. On February 22, 2010, the local +Angolan company refused to negotiate further. Desperate for a solution, and feeling intense +pressure to get the deal with the local Angolan company done, Lorenz and others pivoted from +the outsourced services contemplated under the bidding process to a new proposal where the +local Angolan company would lease commercial and residential real estate and then sublease the +properties to Halliburton at a substantial markup, and also provide real estate transaction +management consulting services. The preferred local Angolan company had minimal experience +in these areas and the services could have been provided more cheaply if done internally by +Halliburton personnel. Nonetheless, on February 23, 2010, Halliburton issued a letter of intent to +enter into contracts with the local Angolan company for real estate transaction management +consulting services and subleases for office and residential space. The local Angolan company +owner accepted the letter of intent and contacted the Sonangol official to inform him of the +agreement in principle. + +16. By again selecting a particular supplier – rather than determining the critical +services and then selecting the appropriate supplier – and doing so without competitive bidding +or substantiating the need for a single source, Lorenz violated Halliburton’s internal accounting +controls. Also, another Halliburton internal accounting control required its Real Estate Services +department to manage the process of subleasing real property and initiating contracts for +professional services related to the acquisition or disposition of property. Initially, no one from +Real Estate Services was consulted about the need for these services, let alone managed the +process. Ultimately, although employees from Halliburton’s Real Estate Services Department +assisted in drafting the contract, Lorenz and others outside of Real Estate Services managed and +executed the agreement. + +17. Near contemporaneously with the signing of the letter of intent, Lorenz and the +local Angolan company finally executed the Interim Consulting Agreement in February 2010. +That agreement remained backdated to September 2009 and Halliburton paid the local Angolan +company $405,000 for the period of September 2009 through May 2010 even though the local +Angolan company never provided the services enumerated in the agreement. + +18. In late March 2010, as part of review processes required by Halliburton’s internal +accounting controls in approving contracts over a certain value threshold high risk countries like +Angola, personnel from the Finance & Accounting department, both at the region and +headquarters, raised concerns about the proposed Real Estate Transaction Management +Agreement. Specifically, they questioned the use of single source procurement, the upfront +payment terms, the high costs, and the rationale for entering into subleases for properties that +would cost less if leased directly from the landlord. One Finance & Accounting reviewer at +headquarters noted that he could not think of any legitimate reason to pay the local Angolan +company over $13 million under the Real Estate Transaction Management Agreement and that it +would not have cost that much to run Halliburton’s entire real estate department in Angola. +These concerns were raised with and vetted within the Finance & Accounting supervisory chain, +and with Halliburton senior corporate executives. The senior executives understood that the +commercial terms were onerous but allowed the contract reviews to proceed because they +7 + +believed that by this time only this agreement with the local Angolan company would satisfy +Sonangol as to Halliburton’s local content commitments. + +19. On May 1, 2010, Lorenz signed the Real Estate Transaction Management +Agreement with the local Angolan company. Halliburton agreed to pay the local Angolan +company $275,000 per month for four years to purportedly (i) manage real estate transactions in +and around Luanda, Angola, (ii) develop a strategy for Halliburton’s staff housing, (iii) develop a +strategy for “off base” leasing of commercial space, (iv) streamline the leasing process, and (v) +produce quarterly reports relating to planning, costs and market conditions. Halliburton did not +receive any meaningful services under this agreement and the local Angolan company failed to +produce the required reports except for one unfinished report that was found in Lorenz’s house in +Angola in 2011 that appeared to be plagiarized wholly from internet sources. Halliburton +terminated payments to the local Angolan company in April 2011 after receiving an anonymous +email in December 2010 alleging possible misconduct surrounding the transactions with the local +Angolan company. + +20. According to Halliburton’s internal accounting controls, using a single source is +justified when “there is a significant advantage to the Company in soliciting a bid from only one +supplier, although more than one supplier may be capable of supplying the product or service.” +Halliburton’s internal accounting controls indicated that using a single source “typically occurs +when a supplier is clearly preferred for quality, technical, execution or other reasons.” In this +case, the supplier was not preferred for quality or technical reasons or its ability to execute. +Instead it was chosen to fulfill Halliburton’s local content commitment to Sonangol. Halliburton +internal accounting controls also mandated that when using a single source vendor without +competitive bidding, the underlying reasons “should be clearly identified and justified by +referencing an existing approved Single Source justification.” The purpose of this control is to +provide needed information to company auditors in their effort to test whether transactions were +undertaken for legitimate reasons and not due to improper considerations. + +21. Although possible justifications for selecting the local Angolan company may +have been discussed in some company emails, the documentation entered into Halliburton’s +accounting system in May 2010 provided no justification for choosing the local Angolan +company as a single source provider. The purported justifications merely described in summary +form the terms of the agreements. As a consequence, internal audit was kept in the dark about +the transactions and its late 2010 yearly review did not examine them. While internal audit did +not examine the agreements with the local Angolan company in its late 2010 yearly review in +Angola, it did note, from the transactions it did examine, that most of the filed single source +justifications contained “inadequate information on the SSJ [Single Source Justification] to +support why sole sourcing was necessary.” + +22. From April 2010 through April 2011, when Halliburton terminated payments to +the local Angolan company because of the allegations of misconduct, Halliburton paid the local +Angolan company $3,705,000 under the interim consulting agreement and the Real Estate +Transaction Management Agreement. Between May and December 2010, Sonangol approved +the award of seven lucrative subcontracts to Halliburton and Halliburton profited by +approximately $14 million. +8 + + +23. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent and cooperation afforded the Commission staff, including making +foreign witnesses available, compiling financial data and analysis relating to the transactions at +issue, and making substantive presentations on key topics at the staff's request. +LEGAL STANDARDS AND VIOLATIONS + +24. As a result of the conduct described above, Halliburton 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 dispositions of their assets. + +25. As a result of the conduct described above, Halliburton also violated +Section13(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. As a result of the prior settlement, Halliburton had clearly defined +internal accounting controls governing, among other things, the selection and approval of +vendors in high risk countries, commercial agents and single source suppliers. However, +Halliburton failed to maintain these controls. Indeed, as there was a business need, the company +failed to comply with controls that were supposed to prevent further violations of the FCPA. + +26. As a result of his conduct described above, Jeannot Lorenz caused Halliburton’s +violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + +27. As a result of his conduct described above, Jeannot Lorenz violated Section +13(b)(5) of the Exchange Act, which prohibits persons from knowingly circumventing or +knowingly failing to implement a system of internal accounting controls, or knowingly falsifying +any book, record or account, and Exchange Act Rule 13b2-1, which prohibits persons from +directly or indirectly falsifying or causing to be falsified any book, record, or account. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED that: +9 + + +A. Pursuant to Section 21C of the Exchange Act, Respondent Halliburton cease-and- +desist from committing or causing any violations and any future violations of Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. + +B. Pursuant to Section 21C of the Exchange Act, Respondent Jeannot Lorenz cease- +and-desist from committing or causing any violations and any future violations of Sections +13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder. + +C. Respondent Halliburton shall, within 14 days of the entry of this Order, disgorge +ill-gotten gains of $14,000,000 along with prejudgment interest of $1.2 million, and pay a civil +penalty of $14,000,000 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. + +D. Respondent Jeannot Lorenz shall pay a civil penalty of $75,000, to the Securities +and Exchange Commission for transfer to the general fund of the United States Treasury, subject +to Exchange Act Section 21F(g)(3). Payment shall be made in the following installments: +Lorenz shall pay (i) $20,000 within 14 days of the entry of this Order, and (ii) an additional +$55,000 within 364 days of the entry of this Order. If any payment is not made by the date the +payment is required by this Order, the entire outstanding balance of the civil penalty, plus any +additional interest accrued pursuant to SEC Rule of Practice 600 or pursuant to 31 U.S.C. § +3717, shall be due and payable immediately, without further application. + +E. For both Respondents, 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 Halliburton or Jeannot Lorenz as a Respondent in these proceedings, +as appropriate, and the file number of these proceedings; a copy of the cover letter +10 + +and check or money order must be sent to Ansu Banerjee, Assistant Regional +Director, Division of Enforcement, Securities and Exchange Commission, Los +Angeles Regional Office, 444 South Flower Street, Suite 900, Los Angeles, CA +90071. + + 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 Jeannot Lorenz 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 Jeannot Lorenz 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. + + G. Respondent Halliburton shall comply with the following undertakings: + +1. Retain an independent consultant (the “Independent Consultant”) not +unacceptable to the Staff within ninety (90) calendar days after the issuance of +this Order. Within sixty (60) 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 recommendations. + +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 +11 + +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 anti-corruption policies and procedures, including policies and +procedures related to retaining local content and the use of single source +justifications, for Respondent’s business operations in Africa (“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 in Africa and how such +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 to the business operations in Africa regarding the +Policies and Procedures described above. + +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, 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 thirty (30) 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 they fit within Respondent’s ethics and compliance function, the +12 + +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 as they pertain to its business +operations in Africa. 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 non-privileged 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 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 to review 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: Ansu N. Banerjee, Assistant Regional Director, +Division of Enforcement, Securities and Exchange Commission, 444 South +13 + +Flower Street, Suite 900, Los Angeles, California 90071. + +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, the Independent Consultant +shall have thirty (30) calendar 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. + +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 +Ansu N. Banerjee, 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. +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 Jeannot Lorenz, and further, any debt for disgorgement, prejudgment +interest, civil penalty or other amounts due by Respondent Jeannot Lorenz under this Order or + +14 + +any other judgment, order, consent order, decree or settlement agreement entered in connection +with this proceeding, is a debt for the violation by Respondent Jeannot Lorenz 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/2017/AAER-3888.txt b/raw/aaer/2017/AAER-3888.txt new file mode 100644 index 0000000000000000000000000000000000000000..a4e77e1ea93ad3c2aa1ebb5f0c1d5dc7d6b54ef8 --- /dev/null +++ b/raw/aaer/2017/AAER-3888.txt @@ -0,0 +1,1493 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81396 / August 15, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3888 / August 15, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18110 + + + + +In the Matter of + +KPMG LLP AND +JOHN RIORDAN, 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 KPMG LLP +(“KPMG”) and John Riordan, CPA (“Riordan” and collectively with KPMG, “Respondents”) +pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + + +1 Section 4C provides, in relevant part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess +the requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided +and abetted the violation of, any provision of the securities laws or the rules and regulations thereunder. +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing before +it . . . to any person who is found . . . to have engaged in unethical or improper professional conduct. + +2 + +II. +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (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 over 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: + +SUMMARY +1. This case involves improper professional conduct and securities law violations by +KPMG and Riordan relating to a review and audit of the financial statements of Miller Energy +Resources, Inc. (“Miller Energy”). During its fiscal 2010, Miller Energy acquired certain oil and +gas interests located in Alaska (the “Alaska Assets”) for an amount the company estimated at $4.5 +million and then subsequently reported those assets at an inflated value of $480 million in its fiscal +2010 financial statements. This asset valuation violated generally accepted accounting principles +(“GAAP”) and overstated the fair value of the assets by hundreds of millions of dollars. KPMG +was hired as the company’s auditor during fiscal 2011, the year following the acquisition of the +Alaska Assets, and issued an audit report containing an unqualified opinion on Miller Energy’s +fiscal 2011 financial statements. However, in conducting the audit and review of the financial +statements for fiscal 2011 and the third quarter of fiscal 2011 (“3Q2011”), respectively, +Respondents failed to comply with standards promulgated by the Public Company Accounting +Oversight Board (“PCAOB”), chiefly with respect to the procedures relating to the oil and gas +properties that contained the overstated asset values. + +2. As the successor auditor, PCAOB standards required KPMG, as part of its 2011 +audit, to analyze the impact of Miller Energy’s opening account balances, including the value of its +oil and gas properties, on the current-year financial statements. KPMG and Riordan failed to +obtain sufficient competent evidence regarding the impact of the opening balances on the current- +year financial statements, despite knowing that no proper fair value assessment had been +performed by management in the prior year. Although KPMG and Riordan did undertake some +audit procedures relating to the opening balances, these procedures failed to appropriately consider +the facts leading to Miller Energy’s acquisition of the Alaska Assets, including the multiple offers +received for those assets and the “abandonment” of the assets by the prior owner. In applying +these procedures, KPMG and Riordan also failed to sufficiently review certain forecasted costs +associated with the estimation of the fair value of the Alaska Assets, which were understated, and +to detect that certain fixed assets were double counted in the company’s valuation. + +3. KPMG and Riordan failed to properly assess the risks associated with accepting +Miller Energy as a client and to properly staff the audit. KPMG and Riordan also overlooked + +3 + +evidence that indicated a possible overvaluation of the Alaska Assets and failed to exercise the +requisite degree of due professional care and skepticism. And while KPMG management and +national office personnel became aware of the unusual and highly material prior-year transaction, +the firm did not take sufficient action to determine that an appropriate response was taken by the +engagement team regarding the risk of overvaluation of the Alaska Assets. + +RESPONDENTS +4. KPMG LLP is a Delaware limited liability partnership headquartered in New York +City. KPMG is registered with the PCAOB and is the U.S. member firm of KPMG International, a +Swiss cooperative, with over 90 offices in the U.S. KPMG was Miller Energy’s auditor from +February 2011 until approximately October 2015, when Miller Energy filed a voluntary +bankruptcy petition. + +5. John Riordan, age 52, is a certified public accountant (“CPA”) licensed to practice +in Georgia and Tennessee. Riordan joined KPMG’s New York City office in 1987, before +relocating to the Atlanta, Georgia office in 1992. He was admitted to the partnership in 2000. He +served as the KPMG engagement partner in charge of the 2011 audit of Miller Energy. Riordan is +a member of KPMG’s Technology, Media and Telecommunications practice, and, since 2013, he +has been the managing partner of KPMG’s Knoxville, Tennessee office, although he has remained +primarily based out of KPMG’s Atlanta office. + +OTHER RELEVANT ENTITIES +6. Miller Energy Resources, Inc. is a Tennessee corporation that, in 2011, was +headquartered in Knoxville, Tennessee. Miller Energy operated and developed oil and gas wells in +north and south central Alaska. It was founded in 1967 as a Tennessee-based oil and gas drilling +contractor. The company went public via a reverse merger in 1996. Between 2002 and 2009, +Miller Energy’s stock price regularly traded below one dollar per share, and the company reported +net losses in all years. It changed its name from Miller Petroleum, Inc. to Miller Energy +Resources, Inc. in April 2011. Until March 29, 2016, Miller Energy’s common stock was +registered pursuant to Exchange Act Section 12(b). On October 1, 2015, Miller Energy and its +subsidiaries filed a voluntary petition for reorganization under Chapter 11 of the Bankruptcy Code. +As part of Miller Energy’s bankruptcy plan, which became effective on March 29, 2016, all of the +company’s common and preferred shares were cancelled and extinguished. The company is now +wholly owned by its former creditors and doing business under another name. + +FACTS +Miller Energy Acquires and Overvalues the Alaska Assets +7. In the fall of 2009, Miller Energy – at the time, a thinly traded penny-stock +company with operations primarily in Tennessee – learned that certain oil and gas interests located +in Alaska (the “Alaska Assets”) were in the process of being legally “abandoned” as part of the +bankruptcy proceedings of a California-based energy company. The Alaska Assets consisted of +leases covering 602,000 acres of mostly unproven exploratory oil and gas prospects. In addition to +these prospects, the leases included five operative oil and gas wells located mainly on two fields, +two major facilities, and an offshore platform. + + +4 + +8. In late 2008, the former owner of the Alaska Assets began extensive marketing +efforts to sell those assets. These marketing efforts included hiring a leading financial advisory +firm, which approached roughly 40 market participants and made available to them a data room +containing materials about the value and operations of the assets. In mid-2009, after these +marketing efforts failed, the Alaska Assets were the subject of a bankruptcy court sponsored +auction, with the winning bidder agreeing to pay $8.1 million for the assets. A second entity, +which bid $7 million, was designated as the backup bidder. However, neither bidder closed on the +bids. + +9. Thereafter, the former owner sought, and obtained, an order as part of its +bankruptcy administration allowing it to abandon title to the Alaska Assets. In approving the +abandonment of the assets, the bankruptcy court concurred with the former owner’s assessment +that the Alaska Assets were of “no value or other benefit” to the former owner. A primary purpose +of the abandonment order was to relieve the former owner of virtually all financial obligations +relating to the Alaska Assets. + +10. Following Miller Energy’s expression of interest in acquiring the Alaska Assets, the +abandonment order was rescinded so that the assets could be sold. Miller Energy ultimately +obtained the Alaska Assets via a competitive auction by outbidding a subsidiary of an NYSE-listed +company, which at the time was the largest land drilling contractor in the world. Miller Energy’s +winning bid consisted of $2.25 million in cash plus the assumption of certain liabilities (reported at +$2.22 million). The transaction closed on December 10, 2009. + +11. Under the circumstances, applicable accounting principles required Miller Energy +to record the Alaska Assets at fair value, with any resulting gain flowing from a “bargain +purchase” to be recorded on the income statement. See Accounting Standards Codification +(“ASC”) 805, Business Combinations. “Fair value” is described in ASC 820, Fair Value +Measurement, as “the price that would be received to sell an asset or paid to transfer a liability in +an orderly transaction in the principal (or most advantageous) market at the measurement date +under current market conditions (that is, an exit price) regardless of whether that price is directly +observable or estimated using another valuation technique.” ASC 820-10-35-9A. As discussed +below, there were significant problems with Miller Energy’s estimate of “fair value.” + +12. In its first periodic filing with the Commission following the acquisition (i.e., the +3Q2010 Form 10-Q), Miller Energy disclosed that it had assigned a value to the assets of $480 +million, comprised principally of $368 million for oil and gas properties and $110 million for fixed +assets. It also recognized a one-time, after -tax bargain purchase gain of $277 million. Following +the acquisition, the Alaska Assets accounted for more than 95% of Miller Energy’s total reported +assets. + +13. Miller Energy, however, failed to conduct an appropriate analysis to calculate the +fair value of the Alaska Assets and overstated the value of the acquired assets by hundreds of +millions of dollars. For the recorded $368 million fair value of the oil and gas properties acquired, +Miller Energy improperly relied on a reserve report that was prepared by a third-party petroleum +engineer firm under the guidelines for supplemental oil and gas disclosures, but not for fair value + +5 + +purposes.3 The use of the reserve report was improper for the purpose of fair value, and the report +itself expressly disclaimed that any of the estimates set forth in the report were estimates of fair +value. + +14. Upon receiving the reserve report, Miller Energy merely recorded the sum of the +estimates for the proved, probable, and possible reserves – $368 million – as the fair value for the +acquired oil and gas properties without undertaking any additional analysis. The use of the +estimates from the reserve report for the purpose of fair value was improper because the report +failed to incorporate necessary assumptions, such as an appropriate discount rate and risk +adjustments for certain speculative reserve categories. In addition, the report contained understated +and unsubstantiated forecasted cost information, which was provided to the engineer firm by +Miller Energy. + +15. Miller Energy also erroneously double counted all or substantially all of the value +of the acquired fixed assets, such as facilities and pipelines ancillary to the oil and gas reserves, +which it valued at $110 million. To support this fixed asset value, Miller Energy relied on an +insurance report that purported to show replacement cost estimates from a third-party insurance +broker. However, the report did not contain any estimates prepared by the broker. Rather, Miller +Energy simply refashioned a pre-existing insurance report to make it appear that the broker had +independently calculated the $110 million replacement cost value. The value numbers in the report +were provided to the broker by Miller Energy and the former owners of the Alaska Assets. Aside +from the fact that it contained no third-party analysis of value, use of the report was improper for +other reasons. For example, by recording a separate value for the fixed assets in addition to the +reserves, Miller Energy double counted those fixed assets because they were necessary to produce +the oil and gas reserves and were thus included in the reserve report value. Recording incremental +value based on replacement cost was inappropriate for these particular assets because they had +little to no independent value absent the reserves to which they related. + +16. As a result of the flawed valuation, Miller Energy filed with the Commission +financial reports that materially misstated the value of its assets, as follows: Forms 10-Q for the +third quarter of fiscal year 2010 and for the first three quarters of fiscal years 2011 through 2015; +Forms 10-K for fiscal years ended 2010 through 2014; the Form S-1 filed on August 8, 2010; +Forms S-3 filed on September 6, 2012 and October 5, 2012; and prospectuses filed between +August 25, 2010 and August 21, 2014 pursuant to Rule 424. + +17. In August 2015, the Commission instituted administrative proceedings against +Miller Energy, two of its former officers, and the engagement partner for the independent audit +firm who audited the company’s fiscal 2010 financial statements. Miller Energy filed for + +3 ASC 932 (formerly SFAS 19, Financial Accounting and Reporting by Oil and Gas Producing Companies and +SFAS 69, Disclosures About Oil and Gas Producing Activities) establishes disclosure requirements for significant +oil and gas activities, including disclosure of the “standardized measure,” which is the future after-tax net cash flows +discounted at 10%. The FASB has noted that the standardized measure supplies investors with useful information, +however, they also noted their concern “that users of financial statements understand that it is neither fair market +value nor the present value of future cash flows. It is a rough surrogate for such measures, a tool to allow for a +reasonable comparison of mineral reserves and changes through the use of a standardized method that recognizes +qualitative, quantitative, geographic, and temporal characteristics.” Paragraph 83 of the Basis for Conclusions of +SFAS 69. + +6 + +bankruptcy shortly thereafter. Miller Energy submitted an offer to settle the administrative +proceedings that the Commission accepted on January 12, 2016. The remaining respondents in +that proceeding submitted offers of settlement that the Commission accepted on June 7, 2016. + +KPMG Named as Mille r Energy’s Auditor +18. On February 1, 2011, Miller Energy replaced its independent audit firm with +KPMG, which staffed the engagement with personnel principally from its Atlanta, Georgia and +Knoxville, Tennessee offices. + +19. The KPMG engagement team began with the interim review of the company’s +results for 3Q2011. The KPMG engagement team was led by Riordan and two senior managers, +one of whom resided in Houston, Texas, and was added to the team specifically for her oil and gas +experience, as Riordan and the other, Knoxville-based senior manager had no oil and gas industry +experience. + +20. KPMG issued audit reports containing unqualified opinions on Miller Energy’s +annual financial statements for fiscal years 2011 through 2014. Those audit reports were included +in Miller Energy’s Form 10-K filings that contained materially inflated asset values for the +company’s oil and gas properties. KPMG also provided review services related to Miller Energy’s +quarterly financial statements beginning in 3Q2011. During the 3Q2011 review and fiscal 2011 +audit, the value of the Alaska Assets recorded by Miller Energy was substantially the same as the +$480 million value initially reported by Miller Energy following the acquisition of those assets in +December 2009. + +KPMG’s Flawed Client Acceptance and Engagement Staffing +21. An accounting firm should establish policies and procedures for deciding whether +to accept or continue a client relationship and whether to perform a specific engagement for that +client. The PCAOB’s quality control standards (“QC”) also require, among other things, that audit +firms establish policies and procedures to provide reasonable assurance that each firm +appropriately considers the risks associated with providing professional services in the particular +circumstances. See QC 20.14-.15. In 2011, KPMG had not established adequate policies and +procedures for client acceptance and continuation. Having recently transitioned to a new system +for assessing and documenting prospective clients and engagements, KPMG had not established +adequate guidance and procedures relating to the use of the new system. + +22. Without adequate guidance and procedures in place, the KPMG engagement team +performed an inadequate assessment of the risks associated with the Miller Energy engagement. +Among other things, KPMG’s initial evaluation, which was completed by Riordan and approved +by KPMG management, failed to adequately consider Miller Energy’s bargain purchase, its recent +history as a penny-stock company, its lack of experienced executives and qualified accounting +staff, its existing material weaknesses in internal control over financial reporting, its long history of +reported financial losses, and its pressing need to obtain financing to operate the newly acquired +Alaska Assets. As a result, KPMG accepted Miller Energy as a client and incorrectly designated it +as a “low” risk client. Based on the information in the initial evaluation, KPMG and Riordan also +assigned the Miller Energy engagement an overall risk grade of “medium,” which was not + +7 + +reevaluated and changed to “high” until after KPMG issued its unqualified opinion on the +company’s fiscal 2011 financial statements. + +23. KPMG’s client acceptance procedures also failed to adequately address the audit +team’s lack of industry experience. Although a client acceptance evaluation form completed by +Riordan noted that the assigned engagement partner and senior manager had no prior experience +with oil and gas companies like Miller Energy, it stated that there were no concerns regarding the +overall skills and experience of the engagement team. Consequently, KPMG assigned to the +engagement team personnel who had insufficient expertise to appropriately address the risks +presented by Miller Energy. Riordan lacked the necessary experience to serve as the partner-in- +charge of the engagement, resulting in departures from professional standards. + +24. PCAOB quality control standards state that firms should establish policies and +procedures providing reasonable assurance that a practitioner-in-charge of an engagement +possesses the competencies necessary to fulfill his or her engagement responsibilities. See QC +40.06. Among other things, these policies and procedures should address whether practitioners-in- +charge possess an understanding of the industry in which the client operates. See QC 40.08. +KPMG did not have in place specific policies requiring an assessment of the engagement partner’s +competencies in the circumstances. In light of the high degree of risk associated with the Miller +Energy engagement and the unusual bargain purchase transaction in the prior year, KPMG should +not have assigned a partner-in-charge who had no experience auditing companies in the oil and gas +industry. Under these circumstances, the assignment of valuation specialists (whose scope and +objectives were defined by the engagement partner) and a senior manager, all of whom had +significant oil and gas experience, did not adequately mitigate KPMG’s failure to assign a partner- +in-charge with sufficient knowledge of the oil and gas industry. Many of the departures from +PCAOB auditing standards listed below occurred in part because Riordan lacked the industry- +specific knowledge to spot potential problems and meaningfully review the work of his assistants. + +KPMG and Riordan Failed to Obtain Sufficient Competent Evidence to Assess +the Impact of the Opening Balance of the Alaska Assets on Miller Energy’s Current Year +Financial Statements +25. As part of their audit procedures relating to Miller Energy’s fiscal 2011 financial +statements, KPMG and Riordan were required under AU § 315, Communications Between +Predecessor and Successor Auditors, to obtain sufficient competent evidential matter to afford a +reasonable basis for expressing an opinion on the financial statements the auditor was engaged to +audit, including evaluating the consistency of the application of accounting principles. This +includes obtaining audit evidence to analyze the impact of the opening balances on the current-year +financial statements and could include applying procedures to transactions in prior periods. AU § +315.12. An auditor’s review of its predecessor’s workpapers may affect the nature, timing, and +extent of procedures with respect to the opening balances. AU § 315.13. + +26. In regard to the fiscal 2011 audit and 3Q2011 review, KPMG and Riordan +determined that there had been no reportable disagreements between the prior auditors and Miller +Energy, and that the prior auditors did not resign or decline to stand for re-election. Nonetheless, +KPMG and Riordan concluded that the predecessor auditor did not document sufficient audit +procedures or evidence obtained relating to the valuation of the Alaska Assets. But the + +8 + +deficiencies in the predecessor auditor’s work identified by KPMG and Riordan were not +documented in KPMG’s own workpapers. Due to the lack of documented procedures by the +predecessor auditor, KPMG and Riordan performed additional audit and review procedures in an +attempt to obtain sufficient competent evidence regarding the impact of the opening balances on +the current period’s financial statements. See AU § 315.12. As discussed below, however, these +additional procedures were insufficient to properly assess the potential impact of the Alaska +Assets’ opening balances on the current-year financial statements. + +27. At the outset of the 3Q2011 review, Riordan reviewed the reserve report and sought +assistance from KPMG’s internal valuation specialists, Economic and Valuation Services (“EVS”), +in connection with the core engagement team’s review and audit procedures over the fair value of +the Alaska Assets.4 Specifically, KPMG and Riordan tasked EVS with performing certain limited +procedures relating to the Alaska Assets. As detailed below, the procedures performed by EVS +mainly consisted of (1) evaluating three assumptions in the reserve report and developing its own +oil and gas property valuation estimate using substitute inputs for those three assumptions and (2) +reviewing the replacement costs Miller Energy used to fair value certain fixed assets. Most of the +audit procedures relating to the fair value of the Alaska Assets occurred during, and were +performed concurrently with, the 3Q2011 review. Accordingly, the results of those procedures +were relied on in connection with both the third quarter review and the 2011 audit. + +28. As explained below, however, the additional procedures performed by the KPMG +engagement team, including the work done by EVS, failed to result in sufficient competent +evidence to support the value of the Alaska Assets. These failures included (i) not appropriately +assessing whether Miller Energy’s fair value estimate conformed with GAAP and (ii) insufficiently +examining the appropriateness of the assumptions on which Miller Energy’s valuation was based. + +KPMG and Riordan Failed Adequately to Assess Whether Miller Energy’s +Valuation of the Alaska Assets Conformed with GAAP +29. KPMG and Riordan failed to obtain sufficient competent audit evidence to provide +reasonable assurance that Miller Energy’s fair value measurements and disclosures relating to +the Alaska Assets were in conformity with GAAP. See AU § 328.03, Auditing Fair Value +Measurements and Disclosures. KPMG and Riordan also failed to obtain sufficient competent +evidential matter to provide reasonable assurance that management’s accounting estimates were +reasonable in the circumstances. See AU § 342.07, Auditing Accounting Estimates. + +30. ASC 820 defines fair value as the price that would be received to sell an asset or +paid to transfer a liability in an orderly transaction between market participants at the measurement +date. ASC 820 establishes a fair value hierarchy that distinguishes between observable inputs, i.e., +those inputs that reflect the assumptions market participants would use in pricing the asset or +liability based on market data obtained from sources independent of the reporting entity, and +unobservable inputs, i.e., inputs that reflect the reporting entity’s own assumptions about the +assumptions market participants would use in pricing the asset or liability developed based on the + +4 Because KPMG’s engagement team technically included the EVS staff, for clarity, the non-EVS members of the +engagement team, including Riordan, who were responsible for conducting the overall audit are hereafter referred to +as the “core engagement team.” + +9 + +best information available in the circumstances. Under ASC 820, the use of unobservable inputs +should be minimized in favor of observable inputs whenever possible. + +31. As part of its procedures to obtain sufficient competent evidence to assess the +impact of the opening balance of the Alaska Assets on the current period’s financial statements, +KPMG was required to review and understand how Miller Energy estimated the fair value that was +ultimately recorded in its financial statements. AU § 342, provides that, “[i]n evaluating +reasonableness, the auditor should obtain an understanding of how management developed the +estimate.” AU § 342.10; see also AU § 328.09 (“The auditor should obtain an understanding of +the entity’s process for determining fair value measurements . . . .”). Similarly, KPMG’s policies +required its engagement teams to “obtain an understanding” of “the requirements of the applicable +financial reporting framework relevant to accounting estimates” and “how management makes the +accounting estimates, and an understanding of the data on which they are based . . . .” + +32. KPMG and Riordan failed to obtain a sufficient understanding of the company’s +fair value measurement and to appropriately consider observable inputs relating to Miller Energy’s +acquisition of the Alaska Assets as part of their procedures relating to the impact of the opening +balances. Although the prior owner sold the Alaska Assets while in bankruptcy, there were several +facts suggesting that the sale price and history should have been considered in determining the fair +value of those assets. These facts included the extensive but ultimately unsuccessful marketing +efforts (which occurred during part of a roughly year-long period when the assets were made +available for sale), the subsequent and ultimately unsuccessful purchase offers for the assets (each +of which was for less than $10 million), the bankruptcy court-approved abandonment of the assets +(which relieved the prior owner of substantially all financial obligations for the assets), and Miller +Energy’s acquisition of the Alaska Assets in a competitive auction for a fraction of Miller Energy’s +recorded value. All of these facts were readily ascertainable from the publicly available +bankruptcy records of the prior owner of the Alaska Assets. + +33. If they had reviewed those records, KPMG and Riordan would have learned that +their understanding of the facts leading to the acquisition was inaccurate. KPMG and Riordan +wrongly believed that the low purchase price seemed reasonable because Miller Energy had +succeeded in negotiating the segregation of more valuable assets from less desirable ones and that, +during the auction, the bankruptcy court disqualified other bidders for colluding with each other, +making Miller Energy the only party bidding on the assets. In addition, a review of the bankruptcy +records also would have revealed evidence, such as the facts set forth in paragraph 32, contrary to +the company’s nearly half-billion-dollar asset valuation. + +34. KPMG and Riordan also failed to appropriately assess the unobservable inputs – +specifically, the assumptions underlying the reserve report and the insurance report – which Miller +Energy used in its estimation of the fair value of the Alaska Assets. KPMG and Riordan +recognized that the two reports the company used to support its fair value determination for the +Alaska Assets were not appropriate for ascertaining fair value. With respect to the reserve report, +Riordan knew at the time that using the assumptions in the reserve report for fair value purposes +was inappropriate. And, regarding the insurance report, Riordan further knew at the time that +KPMG did not consider the insurance broker an expert. He believed that the insurance report was +a starting point that EVS used when it came up with its own independent estimates of the value +based on their experience and understanding of the specific equipment. + +10 + + +35. Despite Riordan’s awareness that the insurance broker was not an expert, KPMG’s +workpapers refer to the insurance broker as “a third party valuation specialist” that “performed the +appraisal of the fixed assets.” Other workpapers also list the insurance broker among the +“specialists” whose work KPMG used as audit evidence and note that “EVS concluded that the +methodologies used and conclusions reached by [the insurance broker] were reasonable.” KPMG +and Riordan, however, had no information – other than the client’s representations – about the +insurance broker’s methodology. The insurance report Miller Energy used for the fixed assets +contained no description of any methodology, and KPMG never contacted the insurance broker to +ascertain its supposed methodology. + +36. Under these circumstances, where management used as fair value numbers from +reports that were known by KPMG and Riordan to have been prepared for other purposes, KPMG +and Riordan were unreasonable in applying certain limited procedures to Miller Energy’s fair value +estimate and then issuing an unqualified opinion on the company’s financial statements based on +those procedures. + +KPMG and Riordan Did Not Obtain Sufficient Competent Evidence Regarding the +Assumptions on Which Miller Energy’s Valuation of the Alaska Assets Was Based +37. In an effort to evaluate whether the valuation of the Alaska Assets was misstated +such that it could materially impact the fiscal 2011 financial statements, the core engagement team, +during their 3Q2011 review work, gave EVS the reserve report that was used in the company’s +prior-year valuation and requested assistance in testing Miller Energy’s recorded fair value for the +Alaska Assets. In doing so, the core engagement team asked EVS to formulate an estimated range +of values. According to PCAOB standards, when developing its own estimate, the auditor at a +minimum is required to understand the client’s assumptions and to determine whether the data on +which the fair value measurement is based is accurate, complete, and relevant. See AU § 328.40. +As set forth below, KPMG’s procedures failed to comply with professional standards. + +The Oil and Gas Reserves +38. As described in paragraph 13, supra, in fiscal 2010, Miller Energy improperly +recorded $368 million as the fair value of the oil and gas reserves. The $368 million value was +taken directly from a reserve report that was prepared by a third-party petroleum engineer firm +using the guidelines for supplemental oil and gas disclosures. The reserve report expressly stated +that it did not contain an opinion of fair value. Although this reserve report was created by a third- +party engineer firm, it incorporated assumptions provided by the company. + +39. EVS did not consider all of the significant assumptions Miller Energy used in the +reserve report. In the memo memorializing its work, EVS stated that an evaluation of oil and gas +properties using the income approach consists of twelve inputs, including, among other things, the +production forecast, future oil and gas prices, lease operating expenses, SG&A expenses, taxes, +capital expenditures, the discount rate, and risk weightings. A s part of its procedures, EVS +considered only three of the company’s assumptions for these inputs (the discount rate, risk +weightings, and future oil prices). In doing so, EVS found that each of the three assumptions was +erroneous and inappropriate for fair value purposes. Specifically, the reserve report used a 10% +discount rate that KPMG concluded was inappropriate under the circumstances for fair value. And + +11 + +the reserve report failed to apply any risk weighting to even the most speculative categories of +reserves, which was also improper for fair value purposes. Finally, the reserve report failed to +appropriately estimate future oil prices and instead used a flat price in all years of approximately +$61 per barrel. + +40. Under the circumstances, including that the reserve report was prepared using a +method that was not intended to estimate fair value, the conclusion that all three of the assumptions +under consideration were unreliable should have led KPMG and Riordan to request additional +support from management regarding the appropriateness of Miller Energy’s valuation, particularly +since their procedures left other significant assumptions unevaluated. Instead, at the core +engagement team’s request, EVS created an estimated range of possible fair values, using its own +assumptions for some of the inputs, to assess whether Miller Energy’s overall fair value number +was reasonable. + +41. EVS’s analysis did not result in sufficient competent evidential matter for the fair +value of the Alaska Assets. To test the reasonableness of the company’s fair value number, EVS +used a spreadsheet software-based discounted cash flow template, which was populated mostly +with the assumptions used in the non-fair value reserve report. EVS substituted its own +assumptions for Miller Energy’s discount rate and future oil prices assumptions in the reserve +report. EVS also risk weighted the reserves – a step the company’s reserve report omitted. Using +substitute assumptions for these three inputs (which included more appropriate forecasted oil prices +that were significantly higher than those used by Miller Energy), but keeping Miller Energy’s other +assumptions materially unchanged, EVS eventually estimated that a reasonable range of value for +the oil and gas reserves was between $331 million and $375 million. Although the results of this +analysis appeared to support Miller Energy’s fair value measurement, EVS’s substitute +assumptions were themselves flawed and insufficiently substantiated. + +42. KPMG and Riordan improperly accepted EVS’s substitute assumptions without +adequately reviewing the reasonableness of those assumptions. In some cases, the substitute +assumptions were not appropriate. For example, in lieu of the reserve report’s 10% discount rate, +EVS conducted multiple analyses using discount rates as low as 12% and as high as 17%. +Ultimately, just prior to the issuance of the 3Q2011 Form 10-Q, EVS changed its discount rate +range to 12% to 15% from 14% to 17%. The basis for the range used was not adequately reviewed +or documented by KPMG and Riordan. Had the discount rate not been lowered, keeping +everything else constant, EVS’s analysis would have indicated that the $368 million number was +overstated by as much as 15%. + +43. Additionally, KPMG and Riordan did not take appropriate steps to address specific +indications that the company’s valuation might be overstated due to Miller Energy’s use in the +reserve report of underestimated future operating and capital costs. On March 9, 2011, EVS +informed the core engagement team that portions of its own valuation estimate, which EVS was +using to test the reliability of the client’s valuation, appeared anomalously high on a per barrel +basis. EVS indicated that the high values it observed could have been the result of the forecasted +expenses Miller Energy used for the proved undeveloped (“PUD”), probable, and possible +reserves. EVS asked the core engagement team to review the forecasted expenses, as well as the +financial forecast used in the discounted cash flow to determine whether it was overly optimistic. +EVS reiterated its concerns to the core engagement team again on March 10, stating that the value + +12 + +numbers for “[t]he PUDs, probable and possible” reserves “are so high, it does not make sense . . . +.” On several occasions, EVS emphasized that it was relying on the core engagement team to +assess the reasonableness of the forecasted expenses. Nevertheless, insufficient procedures were +undertaken to assess the reliability of the forecast and estimated expenses used by Miller Energy to +value the Alaska Assets. + +44. There were, however, audit procedures that should have been done to assess the +reasonableness of the forecasted expenses. For example, KPMG and Riordan were required to test +the data used to develop the fair value measurement and evaluate whether the data on which the +fair value measurement was based, including the data used in the work of a specialist, was +accurate, complete, and relevant. See AU § 328.39. Had the engagement team performed +additional procedures on the cost estimates provided to the engineer firm, they could have +identified contrary evidence indicating that the forecasted costs were unreasonably low. For +instance, Miller Energy had in its possession historical expense data from the former owner. Had +the core engagement team obtained and reviewed the available historical expense data, KPMG and +Riordan could have discovered that the forecasted costs reflected in the reserve report were +substantially lower than the historical expense data. + +45. Likewise, had KPMG and Riordan compared the expense estimates used in the +valuation to corresponding estimates created approximately one year later for use in the fiscal 2011 +supplemental oil and gas disclosures, it would have been apparent that the capital expenditures for +some of the same wells had increased by roughly $100 million. KPMG and Riordan did not +adequately identify or inquire about the reasons for this substantial increase. Had the substantial +increase in costs been identified, KPMG and Riordan would have discovered that it resulted mainly +from increased drill cost estimates for a number of wells (from $4.6 million to over $12 million +each). Further inquiry likely would have led the core engagement team to discover that the higher +estimated capital costs used in the 2011 supplemental oil and gas disclosures were consistent with +historic data for the property and Miller Energy’s internal expense estimates dating back to 2009. + +46. KPMG and Riordan could have considered other identifiable indications that the +forecasted costs in the company’s valuation were understated. For example, Miller Energy’s 2011 +Form 10-K stated that in 2009 the company informed the State of Alaska that it would cost $31 +million to restart production in one of the Alaska Assets’ two principal fields – an estimate that it +internally increased in 2011 to $45 million. However, the original $31 million cost estimate was +nearly double the amount of restart costs ($16.8 million) in the reserve report used for the +valuation. + +47. In connection with other audit procedures, the engagement team had obtained a +2011 budget containing management’s forecast for the next several years. Had KPMG and +Riordan compared the forecasted costs in that budget to the forecasted costs in the February 2010 +reserve report that was used to fair value the Alaska Assets, they could have discovered that the +budget assumed significantly higher capital expenditures and significantly lower production +numbers than those set forth in the reserve report. + +48. The documentation of KPMG’s procedures on the valuation of the Alaska Assets +failed to accurately describe aspects of the company’s valuation and to clearly state EVS’s +findings. While KPMG personnel have acknowledged the unreasonableness of Miller Energy’s + +13 + +pricing, risk weighting, and discount rate assumptions, these conclusions are not clearly +documented in the only memo memorializing EVS’s procedures (the “EVS Memo”). Quite the +contrary, the EVS Memo implies that Miller Energy’s assumptions were reasonable and, on +several occasions, does not accurately reflect the facts KPMG uncovered. For example, the EVS +Memo contains a table purporting to compare the reserve adjustment factors used by EVS against +the reserve adjustment factors used by company management to fair value the oil and gas reserves. +Miller Energy, however, applied no reserve adjustment factors when calculating its $368 million +fair value estimate. During the 3Q2011 review, Miller Energy’s management informed KPMG +that, in other contexts, it used certain reserve adjustment factors, and the engagement team +incorporated these numbers into a draft of the EVS Memo. Although the engagement team +eventually discovered during the 3Q2011 review that management never risk weighted the +reserves, none of the engagement team members who reviewed the EVS Memo, including +Riordan, identified that the final EVS Memo continued to incorrectly state that management had +applied certain reserve adjustment factors in its fair value estimate. + +49. The only procedure documented in the workpapers, other than the work of EVS, +was performed in connection with Miller Energy’s 2011 supplemental oil and gas disclosures (see +note 3, supra). Near the end of the 2011 audit, the core engagement team made an inquiry to the +third-party petroleum engineer firm, which authored Miller Energy’s reserve reports at that time, +about the forecasted costs used by the company in its 2011 supplemental oil and gas disclosures. +In response to this inquiry, an employee of the engineer firm informed the core engagement team +that his firm had sufficient cost data to prepare the 2011 reserve report that was used as support for +the company’s supplemental disclosures that year. But the cost data used in the 2011 reserve +report was provided by Miller Energy to the engineer firm after the completion of the reserve +report used to value the assets. In February 2010, when it prepared the reserve report used for the +valuation of the Alaska Assets, the engineer firm was provided with virtually no data to support the +cost numbers. Furthermore, the cost estimates used in the later 2011 reserve report differed in +material respects from the cost estimates used in the earlier, February 2010 reserve report. In any +event, inquiry alone was not a sufficient method to test the data on which the fair value +measurement was based, especially since the core engagement team did not take any additional +steps to evaluate whether the data included in the February 2010 reserve report, which was used to +value the Alaska Assets’ oil and gas reserves, was accurate, complete, and relevant. + +The Fixed Assets +50. KPMG and Riordan failed to take reasonable steps to assess Miller Energy’s +recorded value of $110 million for certain fixed assets included in the Alaska acquisition. These +fixed assets were the same operating assets that were expected to generate the future cash flows +used to measure the value of the oil and gas reserves. In fact, the reserve report Miller Energy used +for the valuation recognized the interconnectedness of the properties, as it listed the facilities and +the offshore platform as assets used to generate the future cash flows. Because the fixed assets +were integral to the operations of the acquired properties and the generation of cash flows, their +values were already reflected in the reserve report’s cash flows. Under these circumstances, +including a separate value for the fixed assets, without any corresponding contributory asset charge +to the forecasted cash flows, resulted in improperly counting all or substantially all of the value of +the fixed assets twice. + + +14 + +51. KPMG and Riordan agreed with Miller Energy’s accounting treatment for the fixed +assets without performing sufficient procedures to obtain the necessary evidence to properly assess +the reasonableness of that accounting treatment. Although EVS was aware of potential double- +counting and made inquiries of the core engagement team about the relationship between the fixed +assets and the reserve report’s cash flows, the discussion and the resolution of this issue were not +documented in KPMG’s workpapers. + +52. There was also insufficient competent evidence to support the $110 million +valuation of the fixed assets. Despite workpapers that state the opposite, KPMG and Riordan knew +that the insurance broker was not a valuation specialist and that the insurance report was not +sufficient evidential matter to support the value of the fixed assets (see, supra, paragraph 34). + +53. To corroborate the $110 million number listed in the insurance report, Miller +Energy, at KPMG’s request, created a second estimate in 2011, without the assistance of any +valuation professionals. In preparing this analysis, Miller Energy adjusted its original estimates of +the replacement costs for the various fixed assets – increasing the values for some assets and +reducing the value of others – and made further adjustments to these replacement costs for +depreciation and for functional obsolescence. KPMG and Riordan accepted the new replacement +cost values from this analysis as reasonable without obtaining adequate corroboration, and they did +so even though the values were based on management’s own internal cost estimates and included +miles of additional pipelines (representing a 175% increase in pipeline mileage from the original +report). Based mostly on this additional analysis, EVS determined that the overall replacement +cost estimate in the insurance report was a “reasonable proxy” for fair value. + +54. In addition, KPMG’s analysis of the fixed asset valuation was flawed because of +the circumstances surrounding the assets themselves. Due to their remote and desolate location, a +willing buyer and seller would not have agreed on replacement cost as the price for these assets. +This was particularly true of the underground pipelines that connected various oil production +facilities, which – in order to value them separately – KPMG deemed as surplus assets that were +not needed to generate the cash flows in the reserve report. Using management’s new numbers, +EVS estimated that replacing the pipelines on the properties would cost up to $46 million (or +almost half the supposed value of the fixed assets). But it was highly unlikely that any market +participant would pay $46 million for pipelines that were assumed to be extraneous to the +production of oil and gas from the nearby fields. + +Lack of Planning, Supervision, Due Care, and Professional Skepticism +55. In connection with the procedures on the Alaska Assets, KPMG and Riordan failed +to exercise due care and to plan and reasonably supervise the work of the core engagement team +and EVS. + +56. Specifically, KPMG and Riordan failed to adequately plan the work relating to the +Alaska Assets, including the work to be performed by EVS and the core engagement team’s +review of EVS’s conclusions. By way of example, prior to EVS beginning its testwork, KPMG +and Riordan gave insufficient consideration to the nature and scope of the specialists’ work, as well +as the extent of the specialists’ involvement. This was contrary to KPMG policies requiring the +effective delineation of the responsibilities between the core engagement team and the KPMG +specialists. There was no agreement at the onset of the valuation testwork concerning who was + +15 + +specifically responsible for the significant assumptions in Miller Energy’s valuation. In addition, +on several important issues, such as the consideration of observable inputs and the accounting +treatment for the fixed assets, there was no agreement regarding the respective roles and +responsibilities of EVS and the core engagement team. + +57. Once the valuation testwork had begun, KPMG and Riordan failed to properly +supervise EVS and its work. For example, the core engagement team did not sufficiently evaluate +EVS’s substitute assumptions (see, supra , paragraph 42). + +58. KPMG and Riordan also failed to exercise due professional care in connection with +the procedures performed on the Alaska Assets. Due professional care requires an auditor to +exercise professional skepticism – i.e., an attitude that includes a questioning mind and critical +assessment of audit evidence. See AU § 230.07, Due Professional Care in the Performance of +Work. Due professional care also requires the auditor to consider the competency and sufficiency +of the evidence. See AU § 230.08. + +59. With respect to the fair value of the Alaska Assets, KPMG and Riordan failed +adequately to evaluate the estimates in the reserve report given the high valuation in light of the +nominal purchase price and the lack of oil and gas experience possessed by Miller Energy’s CEO +and CFO, as well as the material weakness identified by KPMG and Riordan in connection with +the inadequacy of the company’s accounting personnel. Miller Energy was run by a CEO with a +background in commercial real estate and with little to no previous industry, corporate or executive +experience. It also possessed a limited accounting staff led by a CFO with no prior industry +experience. In regard to the CFO, who was the person responsible for recording the Alaska +Assets’ valuation, KPMG’s workpapers state: He “does not appear to have adequate knowledge +and experience in the oil and gas industry to facilitate the completeness and accuracy of industry +specific accounting and required financial statement presentation and disclosure . . . .” Based on +Riordan’s recommendation, the CFO was replaced shortly after the issuance of KPMG’s audit +report on Miller Energy’s fiscal 2011 financial statements. + +60. KPMG and Riordan also failed to appropriately address the fact that management +based its fair value estimate on two reports that they knew were inappropriate for that purpose. +Under the circumstances, including EVS’s stated concerns about the reserve report’s forecast and +expenses, it should have been apparent to the core engagement team that additional procedures +were needed in order to obtain sufficient competent evidence for the valuation of the Alaska +Assets. + +61. KPMG and Riordan further failed to exercise due care and professional skepticism +following the discovery of the insurance report used to support the $110 million worth of fixed +assets. At first, EVS was tasked with assessing only whether the reserve report supported the $480 +million valuation. Using a pre-existing template, EVS created an estimate by using mostly the +company’s inputs from the reserve report and by substituting its own assumptions for the discount +rate, future oil prices, and reserve adjustment factors. EVS’s initial estimate, which assumed +significantly higher oil prices than Miller Energy, was approximately $200 million. However, due +to a flawed understanding of Miller Energy’s valuation, EVS removed from its analysis the reserve +adjustments – i.e., risk weightings – it had applied in that initial calculation, which caused the high- +end of its estimate to increase to over $500 million. + +16 + + +62. Approximately two weeks into EVS’s procedures and one week prior to the third +quarter filing deadline (and after Riordan had informed Miller Energy’s audit committee that +EVS’s work was almost complete and KPMG did not anticipate restatement of the valuation of the +Alaska Assets), KPMG, Riordan, and the rest of the engagement team discovered that management +had used an insurance report to value the fixed assets. At the time, again due in part to a flawed +understanding of management’s valuation, EVS’s value range based on the reserve report alone +appeared to suggest a value of $469 million to $531 million for the Alaska Assets, which roughly +approximated Miller Energy’s overall $480 million valuation. Thus, when the insurance report +surfaced, KPMG and Riordan became concerned that Miller Energy’s estimate may have been +understated due to the additional $110 million value reflected in the insurance report. + +63. As a result, Riordan sent EVS an email telling them that KPMG had already +informed the company’s audit committee that the firm did not anticipate restatement of the +valuation, which meant that the valuation of the Alaska Assets did not need to be included among +the financial restatement items that KPMG had identified and that the company had been working +“feverishly” to complete. Two days after Riordan’s email to EVS, KPMG and Riordan discovered +that the company’s valuation did not include any reserve adjustment factors. KPMG and Riordan +had received inconsistent representations from management regarding whether or not the values set +forth in the reserve report incorporated reserve adjustment factors. KPMG and Riordan failed to +adequately inquire about the reasons for Miller Energy having provided them with inconsistent +information. Instead, EVS reapplied risk weightings to its model. EVS then made several +additional changes to its valuation model, the rationale for which was not properly documented. +Due to these changes, EVS’s final estimated range appeared to support the company’s fair value +measurement for the Alaska Assets. + +64. KPMG and Riordan also failed to exercise due care and professional skepticism in +connection with the valuation of the fixed assets. During the week-long period between the +discovery of the insurance report and the 3Q2011 filing deadline, KPMG and Riordan did not +exercise appropriate due care and professional skepticism when they failed to perform sufficient +additional inquiries and other procedures relating to the fair value of the fixed assets and to detect +that Miller Energy double counted the value of the fixed assets (see, supra, paragraphs 50 to 54). +These departures from due care and professional skepticism also included failing to reasonably +investigate the lack of an engagement letter for the insurance report. The core engagement team +asked management for the engagement letter setting forth the terms of the insurance broker’s +supposed valuation work. In response, the core engagement team was told that no such letter could +be located. The core engagement team did not pursue the engagement letter further. Had they +done so, KPMG and the core engagement team could have learned that the insurance broker +undertook no valuation work for Miller Energy. + +65. KPMG and Riordan discounted, and did not sufficiently consider, information that +came to light shortly before KPMG issued its audit report on Miller Energy’s fiscal 2011 financial +statements. + +66. On July 28, 2011, TheStreetSweeper, a financial blog dedicated to “exposing +corporate fraud,” published a lengthy article that was extremely negative about Miller Energy and +challenged the recorded valuation of the Alaska Assets. The article provided Web-based links to + +17 + +numerous bankruptcy court records and other public sources for its assertions questioning the +valuation of the Alaska Assets. Riordan, the core engagement team, and a member of KPMG +management became aware of TheStreetSweeper article on the day it was published. + +67. KPMG and Riordan failed to take reasonable steps to assess the allegations set forth +in TheStreetSweeper article and to consider them in light of their review and audit procedures on +the Alaska Assets. + +68. In late July 2011, on the day after TheStreetSweeper article was published, Miller +Energy’s then-CEO caused the company to file with the Commission a Form 10-K that included +KPMG’s audit report containing an unqualified opinion on the company’s financial statements. +The filing, however, occurred prior to Miller Energy having obtained KPMG’s consent to file and +before KPMG had finished its audit. After an internal investigation by outside counsel +representing the audit committee, KPMG concurred with the audit committee’s assessment that the +premature and illegal filing had resulted from a miscommunication among company personnel. + +69. In August 2011, before KPMG issued its audit report, Miller Energy received a +subpoena from the Commission’s Division of Enforcement (the “Division”) seeking information +relating in part to the purchase and valuation of the Alaska Assets. Per KPMG policy, Riordan +discussed the formal investigation with regional KPMG management and with national office +personnel in the Department of Professional Practice (“DPP”) and in the general counsel’s office. +As part of this consultation, DPP became aware of the allegations in TheStreetSweeper article. +KPMG, including senior personnel in its national office, did not view the Division’s investigation +into the valuation of the Alaska Assets as requiring additional audit consideration largely because +Riordan represented that it had applied “certain audit procedures” to the Alaska valuation and +because it believed the staff’s investigation stemmed from TheStreetSweeper “hit job.” While +Riordan sought direction from KPMG’s national office, the national office failed to make sufficient +inquiries of the engagement team and to provide the engagement team with sufficient guidance in +light of the Division’s investigation and the information in TheStreetSweeper article. KPMG and +Riordan only made inquiries of certain company insiders and affiliates, including outside counsel +representing Miller Energy in the Division’s investigation, and never revisited its valuation +procedures. + +KPMG’s National Office Involvement in the Audit +70. KPMG management and national office personnel in DPP had considerable +involvement in certain aspects of the Miller Energy engagement, both at the start of the +engagement (with firm management’s appointment of Riordan and acceptance of the company as a +client) as well as during the summer of 2011 when multiple consultations substantially overlapped. +One of these consultations involved restatements of prior-year financial statements unrelated to the +Alaska Assets valuation. KPMG policies required DPP to expand its review beyond the possible +restatement items and to consider “all significant issues.” + +71. KPMG policies also provided that, “[o]nce an inquiry is initiated, DPP involvement +is not necessarily limited to the narrow, specific question and fact set. Depending on the +circumstances, area of consultation, and other factors, additional questions may be asked to fully +understand the inquiry and to ensure that the issue is appropriately framed and scoped.” According +to this policy, the DPP “deliberation process is designed to assist the engagement team and to + +18 + +improve the consultation process and our adherence to professional standards.” Contrary to these +policies, DPP’s inquiries were insufficient to elicit the information known to the engagement team, +including EVS’s concerns about the expenses and the fact that the company relied on two reports +that were not prepared in accordance with ASC 820. + +72. The memo memorializing the consultation with DPP on the restatement states that +the consultation “centered on” a materiality assessment regarding the identified errors, and it does +not mention any other significant matters . DPP’s decision not to inquire further about the +valuation of the Alaska Assets was unreasonable in light of the circumstances. In addition to the +restatement issue, DPP was simultaneously consulted about comment letters from the +Commission’s Division of Corporation Finance (portions of which involved the Alaska Assets +valuation), the prematurely filed Form 10-K and the resulting internal investigation, and the formal +investigation by the Division inquiring primarily about the valuation of the Alaska Assets. +Through these consultations, DPP became familiar with the company and the “transformational” +nature of the Alaska acquisition. It also became aware of the allegations made in the highly +negative online article by TheStreetSweeper. Its knowledge of the unusual “bargain purchase” for +the Alaska acquisition, as well as the Division’s formal investigation and the allegations in +TheStreetSweeper article, should have resulted in DPP making further inquiries about the +company’s fair value assessment of the Alaska Assets and KPMG’s procedures for that valuation. + +73. Had DPP made such inquiries, it could have discovered certain information that +cast significant doubt about the reliability of Miller Energy’s previously filed financial statements. +This information included that the KPMG auditors were aware of the deficiencies in the +predecessor auditor’s work concerning the portion of the audit relating to the Alaska Assets +valuation and that neither of the reports provided to KPMG satisfied the requirements for fair value +under ASC 820. Through further inquiry, DPP could also have identified that the use of a separate +insurance report to value the fixed assets raised the possibility that the value of the fixed assets had +been double-counted and that the forecasted expenses in the reserve report used for the valuation +were low. This information should have prompted KPMG to consider whether its procedures were +sufficient in the circumstances. + +VIOLATIONS +Rule 102(e) an d Section 4C of the Exchange Act +74. KPMG’s 2011 audit and 2011 third quarter review were deficient and not +performed in accordance with PCAOB standards.5 Section 4C(b) of the Exchange Act and Rule +102(e)(1)(iv) define improper professional conduct with respect to persons licensed to practice as +accountants as (1) a single instance of highly unreasonable conduct in circumstances for which +heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct that indicate a +lack of competence to practice before the Commission. + +75. As a result of the conduct described above, KPMG and Riordan engaged in +improper professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. Section 4C(a)(2) of the Exchange Act + +5 References to auditing standards in this Order are to PCAOB standards in effect at the time the audit and review +work was performed. + +19 + +and Rule 102(e)(1)(ii) provide, in pertinent part, that the Commission may censure or deny, +temporarily or permanently, the privilege of appearing or practicing before the Commission to any +person who is found by the Commission to have engaged in improper professional conduct. + +76. As set forth above, KPMG and Riordan should have known that Miller Energy’s +financial statements were not in accordance with GAAP. They knew that the two reports the +company relied on to substantiate the fair value of the Alaska Assets were not fair value estimates +that were appropriate for financial reporting purposes. They should have known that the inclusion +of the numbers in the insurance report double counted as much as $110 million worth of the fixed +assets. Moreover, throughout the 3Q2011 review and fiscal 2011 audit, KPMG and Riordan were +aware of the company’s inadequate accounting staff, ineffectual internal controls, and +management’s possible incentive to overstate the value of the Alaska Assets. During the review +and audit, they should have been aware of the understated forecasted costs in the reserve report. +Yet KPMG and Riordan failed to take reasonable steps to determine that the company’s valuation +for its Alaska acquisition was properly recorded pursuant to applicable GAAP. + +Failure to Properly Plan the Audit (AU §§ 311 and 312) +77. In planning the audit, PCAOB standards state that an auditor should consider the +nature, extent and timing of work to be performed in planning the audit and should prepare a +written audit program which sets forth in reasonable detail the audit procedures necessary to +accomplish the audit objectives. AU § 311.05. Auditors must also consider audit risk and +materiality in planning the audit and designing audit procedures. AU § 312.12. In doing so, they +should plan the audit so that audit risk will be limited to a low level appropriate for expressing an +opinion on the financial statements. AU § 312.13. Auditors are also required to consider +identified significant risks of material misstatement of the financial statements in: (1) determining +the nature, timing or extent of procedures; (2) assigning staff; or (3) requiring appropriate levels of +supervision. AU § 312.17. + +78. As a result of the conduct described above, KPMG and Riordan failed to adequately +plan the audit of Miller Energy’s fiscal 2011 financial statements in accordance with professional +standards. + +Failure to Exercise Due Professional Care +and Professional Skepticism (AU §§ 23 0, 316 and 722) +79. 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 are +required to 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. In exercising professional skepticism, an auditor should not be satisfied +with less than persuasive evidence because of a belief that management is honest. AU §§ 230.09 +and 316.13. Further, auditors should: (1) perform an ongoing questioning of whether the +information and evidence obtained suggests that a material misstatement due to fraud has occurred; +and (2) conduct the engagement with a mindset that recognizes that a material misstatement due to +fraud could be present, regardless of past experience with the entity and the auditors’ belief about + +20 + +management’s honesty and integrity. AU § 316.13. Auditors should also exercise due +professional care and professional skepticism in the course of reviews of interim financial +information. AU § 722.01 (noting that the three general standards discussed in AU § 150 apply to +interim reviews); see also AU § 150.02. + +80. As a result of the conduct described above, KPMG and Riordan failed to exercise +due professional care and an attitude of professional skepticism in its 3Q2011 review and 2011 +audit of Miller Energy. + +Failure to Properly Test Fair Value Measurements and Disclosures +and Using the Work of a Specialist (AU §§ 328 , 342 and 336 ) +81. AU § 328 requires auditors to obtain sufficient competent audit evidence to provide +reasonable assurance that fair value measurements and disclosures are in conformity with GAAP. +AU § 328.03. The standard provides that “[t]he auditor should test the data used to develop the fair +value measurements and disclosures and evaluate whether the fair value measurements have been +properly determined from such data and management’s assumptions.” This includes “whether the +data on which the fair value measurements are based, including the data used in the work of a +specialist, is accurate, complete and relevant . . . .” AU § 328.39. In addition, “[t]he auditor should +evaluate the sufficiency and competence of the audit evidence obtained from auditing fair value +measurements and disclosures as well as the consistency of that evidence with other audit evidence +obtained and evaluated during the audit.” AU § 328.47; see also AU § 342.07 (the auditor’s +objective is, inter alia, to obtain sufficient competent evidential matter to provide reasonable +assurance the accounting estimates are presented in conformity with applicable accounting +principles). If a valuation model is used, the auditor reviews the model and evaluates whether the +assumptions used are reasonable. AU § 328.40. + +82. In addition, AU § 336 provides guidance to auditors when they seek to use the work +of a specialist as evidential matter to support financial statement assertions. Among other items, +the standard requires the auditor to evaluate the professional qualifications of the specialist to +determine that he or she possesses the necessary skill and knowledge in the type of work under +consideration. See AU § 336.08. It also provides that the auditor should obtain an understanding +of the nature, scope, and objectives of the work performed by the specialist, including the +appropriateness of using the specialist’s work for the intended purpose. See AU § 336.09. In +addition, AU § 336.12 states that an auditor should evaluate the appropriateness and +reasonableness of the specialist’s methods and assumptions by: (a) obtaining an understanding of +those methods and assumptions; (b) making appropriate tests of data provided to the specialist; and +(c) evaluating whether the specialist’s findings support the related assertions in the financial +statements. + +83. As a result of the conduct described above, KPMG and Riordan failed to comply +with these professional standards in connection with testing Miller Energy’s fair value assertions +for the Alaska Assets. KPMG and Riordan departed from AU § 328 by, among other things, +failing to sufficiently evaluate the reasonableness of management’s assumptions and by failing to +test the reliability of the information used in the preparation of the reports used for valuing the +properties. KPMG and Riordan also departed from AU § 336 by, among other things, failing to +appropriately test the data provided to the specialists. + +21 + + +Failure to Obtain Sufficient Competent Evidential Matter (AU §§ 315 and 326) +84. Under AU § 315.12, “[t]he successor auditor must obtain sufficient competent +evidential matter to afford a reasonable basis for expressing an opinion on the financial statements +he or she has been engaged to audit.” Obtaining audit evidence to analyze the impact of the +opening balances on the current-year financial statements may include applying appropriate +auditing procedures to account balances at the beginning of the period under audit and to +transactions in prior periods. Id. “Evidential matter” includes the underlying accounting data and +all corroborating information available to the auditor. AU § 326.15. To be “competent,” evidence +must be both valid and relevant. AU § 326.21. For it to be “sufficient,” the evidence must be +“persuasive.” AU § 326.22. In evaluating evidential matter, the auditor must consider whether the +specific audit objectives have been achieved. AU § 326.25. In doing so, he or she makes an +“unbiased” evaluation and considers “relevant evidential matter regardless of whether it appears to +corroborate or to contradict the assertions in the financial statements.” Id. If there is substantial +doubt, the auditor must refrain from forming an opinion until additional evidential matter can be +obtained to remove such doubt, or the auditor must express a qualified opinion or a disclaimer of +opinion. Id. + +85. As a result of the conduct described above, KPMG and Riordan failed to obtain +sufficient competent evidence supporting the assertions in Miller Energy’s fiscal 2011 financial +statements concerning the fair value of the acquired Alaska Assets. + +Failure to Supervise the Engagement Team Properly (AU § 311) +86. PCAOB standards note that audit “assistants,” including firm personnel other than +the auditor with final responsibility for the audit, are to be “properly supervised.” AU §§ 311.01. +Those standards further require that assistants be informed of their responsibilities and the +objectives of procedures assigned to them, and that the work of assistants be reviewed to determine +whether that work was adequately performed. AU §§ 311.12 and 311.13. + +87. As a result of the conduct described above, KPMG and Riordan failed to properly +supervise the engagement team in connection with its 2011 Miller Energy engagement. + +Failure to Prepare Required Documentation (AS 3) +88. PCAOB standards mandate that an auditor’s documentation contain sufficient +information to enable an experienced auditor, having no previous connection to the engagement to: +(1) understand the nature, timing, extent and results of the procedures performed, evidence +obtained and conclusions reached; and (2) determine who performed the work and the date such +work was completed as well as the person who reviewed the work and the date of such review. AS +3.1, 3.6. Auditors are also required to document significant findings and issues, including the +actions taken to address them and the basis for the conclusions reached. AS 3.12. + +89. As a result of the conduct described above, KPMG and Riordan failed to prepare +and retain required audit documentation in sufficient detail to provide a clear understanding of its +purpose, source, and conclusions reached in connection with its 2011 Miller Energy engagement. + + + +22 + +Failure to Issue an Accurate Audit Report (AU § 508) +90. Under AU § 508, an auditor may only express an unqualified opinion on historical +financial statements when the auditor has formed such an opinion on the basis of an audit +performed in accordance with PCAOB standards. AU § 508.07. Based upon the departures from +PCAOB auditing standards discussed above, KPMG should not have issued an audit report +containing an unqualified opinion on Miller Energy’s fiscal year 2011 financial statements. + +Failure to Perform Adequate Personnel Management (QC 20 and 40) +91. 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 QC 20.13 and QC 40.02. + +92. 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 +an engagement possess an understanding of the industries in which their clients operate. See QC +40.08. When the client’s business involves unique and complex accounting, as in the case of the +oil and gas industry, the need for the engagement partner to understand the client’s industry is even +more important.6 + +93. As a result of the conduct described above, KPMG failed to meet the standard that +required the partner-in-charge to be competent and have the degree of technical training and +proficiency required in the circumstances. + +Failure Related to Adequate Competency and Proficiency +(AU §§ 210 and 161, QC 20) +94. PCAOB standards require that the audit be performed by “a person or persons +having adequate technical training and proficiency as an auditor.” AU § 210.01. 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. + +95. As a result of the conduct described above, KPMG failed to meet the standard that +required competency and proficiency in staffing the fiscal 2011 Miller Energy audit. + + + + +6 The American Institute of Certified Public Accountants (“AICPA”), for example, has observed that the “[f]inanci al +accounting by entities with oil and gas producing activities is unique in many areas and consequently presents +challenges for the auditor when determining whether the financial statements are presented in accordance with an +applicable financial reporting framework.” AICPA Auditing & Accounting Guide, Entities with Oil and Gas +Producing Activities, at 8.03. + +23 + +FINDINGS +96. As a result of the conduct described above, the Commission finds that Respondents +engaged in improper professional conduct within the meaning of Sections 4C(a)(2) and 4C(b)(2) of +the Exchange Act and Rules 102(e)(1)(ii) and 102(e)(1)(iv)(B) of the Commission’s Rules of +Practice. Respondents’ conduct during the 2011 audit and 3Q2011 review of Miller Energy +involved repeated instances of unreasonable conduct, each resulting in violations of PCAOB +standards and indicating a lack of competence, and also satisfies the standard of highly +unreasonable conduct resulting in violations of PCAOB standards in circumstances in which +heightened scrutiny was warranted. + +RESPONDENTS CAUSED VIOLATIONS OF SECTION 13(a) OF THE EXCHANGE ACT +AND RULES 13a-1 AND 13a-13 THEREUNDER +97. Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder require +that every issuer of a security registered pursuant to Section 12 of the Exchange Act file with the +Commission annual and quarterly reports (i.e., Forms 10-K and 10-Q) as the Commission may +require. The obligation to file such reports embodies the requirement that they be true and correct. + +98. As a result of the conduct described above, KPMG and Riordan caused Miller +Energy’s violations of Section 13(a) of the Exchange Act, and Rules 13a-1and 13a-13 thereunder, +which require that every issuer of a security registered pursuant to Exchange Act Section 12 file +with the Commission, among other things, annual and quarterly reports as the Commission may +require. + +REMEDIAL EFFORTS +99. In determining to accept its Offer, the Commission considered the remedial acts +undertaken by KPMG. + +UNDERTAKINGS + KPMG has undertaken to complete the following actions: + +100. KPMG’s Review. Within 120 days after the entry of this Order, KPMG shall +perform and complete a review and evaluation (“KPMG’s Review”) of the sufficiency and +adequacy of KPMG’s quality controls, including its policies and procedures for audits and interim +reviews regarding the following (hereinafter referred to as “KPMG’s Policies and Procedures”): +a) client acceptance and continuance practices, including client designation, +retention, risk identification, and assessment of identified risk areas of such +clients; +b) auditing fair value measurements and disclosures (as set forth in AS 2502) of non- +financial assets, including, but not limited to: +(i) considering the relevance, reliability, and sufficiency of the factors and +data used in forming the assumptions underlying estimates; + +24 + +(ii) evaluating the results of procedures performed, including whether the +evidence obtained supports or contradicts the estimates included in the +financial statements; and +(iii) considering and documenting estimates giving rise to significant risk and +based on projected financial information; +c) appropriate use of specialists employed or engaged by KPMG to perform risk +assessments, plan or perform audit procedures, or evaluate audit results (as set +forth in AS 2101 and AS 1201 or AS 1210, as applicable), including, but not +limited to: +(i) the coordination of relative responsibilities between auditors and +specialists; and +(ii) effective supervision by engagement partners and managers of the +employed specialists’ work, including the evaluation of whether: (1) the +work was performed and documented; (2) the objectives of the procedures +were achieved; and (3) the results of the work support the conclusions +reached (as set forth in AS 1201); +d) appropriate use of specialists engaged or employed by management (as set forth +in AS 1210); +e) consultations with local, regional or national office technical oversight +professionals; +f) audit documentation of risk assessment procedures and responses, significant +findings and resulting actions, work paper sign-off, and the work of specialists; +and +g) obtaining reasonable assurance (as set forth in QC 20 and QC 40) 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 circumstances; and +(ii) work is assigned to personnel having the degree of technical training and +proficiency required in the circumstances. +KPMG’s Review shall assess the forgoing areas to determine whether KPMG’s Policies and +Procedures relating to the subparts of this paragraph are adequate and sufficient to provide +reasonable assurance of compliance with all relevant Commission regulations and PCAOB +standards and rules. + +101. KPMG Report. Within 60 days of completing KPMG’s Review, KPMG shall +deliver to the Commission staff a detailed written report (“KPMG Report”) summarizing its review +and changes to KPMG’s Policies and Procedures relating to the subparts of paragraph 100, if any, +to provide reasonable assurance of compliance with all relevant Commission regulations and +PCAOB standards and rules. With respect to KPMG’s Policies and Procedures, the KPMG Report +shall identify the undertaking, provide written evidence of compliance in the form of a narrative, +and be supported by exhibits sufficient to demonstrate compliance. The KPMG Report shall also +contain a section consistent with paragraph 106, which requires KPMG to conduct an assessment + +25 + +regarding the adequacy of certain aspects of its training program. The Commission staff may +make reasonable requests for further evidence of compliance, and KPMG agrees to provide such +evidence. +102. Independent Consultant’s Review. KPMG has undertaken to retain, within 180 +days after the entry of this Order, an independent consultant (“Independent Consultant”), not +unacceptable to the Commission staff. KPMG 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 KPMG. +KPMG shall deliver to the Independent Consultant the KPMG Report at the same time as KPMG +provides such report to the Commission staff as specified in paragraph 101 above. KPMG shall +require that the Independent Consultant perform a review (the “IC Review”) of KPMG’s Policies +and Procedures to determine whether such policies and procedures are adequate and sufficient to +provide reasonable assurance of compliance with all relevant Commission regulations and +PCAOB standards and rules. KPMG shall cooperate fully with the Independent Consultant and +shall provide reasonable access to firm personnel, information, and records as the Independent +Consultant may reasonably request for the IC Review (including training materials pertaining to +the undertaking in paragraph 106), subject to KPMG’s right to withhold from disclosure any +information or records protected by any applicable protection or privilege such as the attorney- +client privilege or the attorney work product doctrine. +103. Independent Consultant’s Report. After the IC Review is completed, but no later +than 90 days after receiving the KPMG Report, the Independent Consultant shall issue a detailed +written report (the “IC Report”) to KPMG: (a) summarizing the IC Review; (b) making +recommendations, where appropriate, reasonably designed to ensure that KPMG’s Policies relating +to the topics enumerated in paragraph 100 are adequate and sufficient to provide reasonable +assurance of compliance with all relevant Commission regulations and PCAOB standards and +rules; and (c) describing its review of KPMG’s training as required under paragraph 106. KPMG +shall require the Independent Consultant to provide a copy of the IC Report to the Commission +staff and the PCAOB staff when the IC Report is issued. +104. KPMG shall adopt, as soon as practicable, all recommendations of the Independent +Consultant in the IC Report. Provided, however, that within thirty days of issuance of the IC +Report, KPMG may advise the Independent Consultant in writing of any recommendation that it +considers to be unnecessary, outside the scope of this Order, unduly burdensome, or impractical. +KPMG 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. KPMG and the Independent Consultant shall +engage in good-faith negotiations in an effort to reach agreement on any recommendations +objected to by KPMG. In the event that the Independent Consultant and KPMG are unable to +agree on an alternative proposal within 60 days, KPMG shall abide by the determinations of the +Independent Consultant. +105. Certification by Vice Chair. Within 60 days of issuance of the IC Report, but not +sooner than 30 days after a copy of the IC Report is provided to the Commission staff, KPMG’s +Vice Chair must certify to the Commission staff in writing that (i) KPMG has adopted and has +implemented or will implement all recommendations of the Independent Consultant, if any; and + +26 + +(ii) the Independent Consultant agrees with KPMG’s adoption and implementation of the +recommendations. To the extent that KPMG has not implemented all recommendations of the +Independent Consultant within 60 days of issuance of the IC Report, KPMG’s Vice Chair must +certify to the Commission staff in writing, 30 days after their implementation, that (i) KPMG has +adopted and has implemented all recommendations of the Independent Consultant; and (ii) the +Independent Consultant agrees that the recommendations have been adequately adopted and +implemented by KPMG. The certifications by KPMG’s Vice Chair 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 KPMG agrees to provide such evidence. +106. Training. As part of KPMG’s Review, KPMG shall examine and assess whether it +has adequate and sufficient training programs in place to provide reasonable assurance that KPMG +auditors have adequate technical training and proficiency (as set forth in AS 1010) in relation to (i) +valuations, auditing estimates, including fair value measurements (collectively, “Valuation +Training”); (ii) use of engaged or employed specialists and using the work of management’s +specialists (collectively, “Specialist Training”); and (iii) fraud risks and fraud detection training +(collectively, “Fraud Training”). In a separate section of the KPMG Report, KPMG shall set forth +the results of the examination and assessment required under this paragraph, including a +description of the specific training. As to each training course, the KPMG Report shall, at a +minimum, include a description of the course (including training content, intended audience, +delivery method (e.g., in-person, webinars, remote-place viewing)), the qualifications of the +preparers and providers of the training, the length of training as well as the recipients of such +training, the training objective, a discussion of how the training techniques and methods used +achieve the stated training objective, and a brief discussion of why the chosen attributes (e.g., +content, delivery method, level of interaction on the part of participants) of the course are sufficient +in the circumstances. The KPMG Report should also include a description of any training courses +added or modified as a result of the assessment conducted under this paragraph. The Independent +Consultant shall review the KPMG Report and state in the IC Report whether it concurs with the +results of KPMG’s assessment under this paragraph. The Independent Consultant, as and if +necessary, shall make additional recommendations regarding the training relating to the topics +enumerated in paragraph 100. Notwithstanding anything else in this paragraph, KPMG will ensure +that, during the period beginning May 1, 2017 and ending 15 months after the entry of this Order, +all audit personnel are provided with (i) a minimum of 4 hours of Valuation Training, (ii) a +minimum of 4 hours of Specialist Training, and (iii) a minimum of 4 hours of Fraud Training. +107. To ensure the independence of the Independent Consultant, KPMG: (1) shall not +have the authority to terminate the Independent Consultant or substitute another independent +compliance consultant for the initial Independent Consultant, without the prior written approval of +the Commission staff; and (2) shall compensate the Independent Consultant and persons engaged +to assist the Independent Consultant for services rendered pursuant to this Order at their reasonable +and customary rates. +108. KPMG shall require the Independent Consultant to enter into an agreement that +provides that, for the period of engagement and for a period of two years from completion of the +engagement, the Independent Consultant shall not enter into any employment, consultant, attorney- +client, auditing or other professional relationship with KPMG, or any of its present or former + +27 + +affiliates, directors, officers, employees, or agents acting in their capacity as such. The agreement +shall also provide that the Independent Consultant will require that any firm with which he/she is +affiliated or of which he/she is a member, and any person engaged to assist the Independent +Consultant in performance of his/her duties under this Order shall not, without prior written +consent of the Division, enter into any employment, consultant, attorney-client, auditing or other +professional relationship with KPMG, 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. +109. KPMG shall not be in, and shall not have an attorney-client relationship with the +Independent Consultant and shall not seek to invoke the attorney-client privilege or any other +doctrine or privilege to prevent the Independent Consultant from transmitting any information, +reports, or documents to Commission staff. +110. KPMG shall inform its audit professionals of the terms of the Order within ten +business days after entry of the Order. +111. By no later than 15 months after the entry of this Order, KPMG’s Vice Chair shall +certify, in writing, compliance with the undertakings set forth in paragraph 106 and 110. 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 KPMG agrees to +provide such evidence. +112. Annual Certification. With respect to the calendar years 2018 and 2019, KPMG’s +Vice Chair shall certify that KPMG has assessed whether KPMG’s Policies and Procedures +relating to topics set forth in the subparts of paragraph 100 are adequate and sufficient to provide +reasonable assurance of compliance with all relevant Commission regulations and PCAOB +standards and rules by, among other things, testing the firm’s implementation of KPMG’s Policies +and Procedures during the twelve (12) months preceding the certification (“Annual Certification”). +The Annual Certification shall describe the nature and scope of KPMG’s testing. The Annual +Certification shall represent that the Vice Chair has reviewed and evaluated the firm’s assessment +and testing process and that, based on belief and after reasonable inquiry, the Vice Chair believes +that KPMG’s Policies and Procedures relating to topics set forth in the subparts of paragraph 100 +are adequate and sufficient to provide reasonable assurance of compliance with all relevant +Commission regulations and PCAOB standards and rules. If the Vice Chair cannot represent that +KPMG’s Policies and Procedures are adequate and sufficient, then the Vice Chair shall describe in +reasonable detail the reasons for the inability to so certify. The Vice Chair shall provide the +Annual Certifications to the Commission’s staff within 60 days of the end of the annual period. +KPMG shall preserve and retain all documentation regarding the Vice Chair’s Annual Certification +for seven (7) years and will make it available to the staffs of the Commission or the PCAOB upon +request. +113. All reports and certifications mentioned in these undertakings shall be submitted to +Aaron Lipson, Associate Regional Director, and William M. Uptegrove, Senior Counsel, Division +of Enforcement, Securities and Exchange Commission, 950 East Paces Ferry Rd., N.E., Suite 900, + +28 + +Atlanta, GA 30326, or such other person as the Commission staff may request, with a copy to the +Office of Chief Counsel of the Enforcement Division. +114. For good cause shown, the Commission staff may extend any of the procedural +dates relating to the undertakings. Deadlines for procedural dates shall be counted in calendar +days, except that if the last day falls on a weekend or federal holiday, the next business day shall be +considered to be the last day. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Pursuant to Section 21C of the Exchange Act, KPMG shall cease and desist from +committing or causing any violations and any future violations of Section 13(a) of the Exchange +Act and Rules 13a-1 and 13a-13promulgated thereunder. + + B. KPMG is censured. + + C. Riordan shall cease and desist from committing or causing any violations and +any future violations of Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +promulgated thereunder. + + D. Riordan is denied the privilege of appearing or practicing before the +Commission as an accountant. + + E. After two years from the date of this Order, Riordan 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 Riordan’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 + +29 + +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. Riordan, 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. Riordan, 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 the respondent will not receive +appropriate supervision; +c. Riordan 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. Riordan acknowledges his responsibility, as long as Riordan 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 Riordan 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 Riordan’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. KPMG shall comply with the undertakings enumerated in paragraphs 100 +through 114 above. + +H. KPMG shall, within 14 days of the entry of this Order, pay disgorgement of +$4,675,680, which represents audit and audit related fees paid to KPMG by Miller Energy over the +course of their auditor-client relationship, and prejudgment interest of $558,319, to the +Commission. The Commission will hold funds paid pursuant to this paragraph in an account at the +United States Treasury pending a decision whether the Commission, in its discretion, will seek to +distribute funds or, transfer them to the general fund of the United States Treasury, subject to +Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to +Commission Rule of Practice 600. + + +30 + + I. Respondents each shall, within 14 days of the entry of this Order, pay civil money +penalties indicated below: +1. $1,000,000 for KPMG; and + +2. $25,000 for Riordan + +to the Commission. The Commission may distribute civil money penalties collected in this +proceeding if, in its discretion, the Commission orders the establishment of a Fair Fund pursuant to +15 U.S.C. § 7246, Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended. The +Commission will hold funds paid pursuant to this paragraph in an account at the United States +Treasury pending a decision whether the Commission, in its discretion, will seek to distribute funds +or, subject to Exchange Act Section 21F(g)(3), transfer them to the general fund of the United +States Treasury. If timely payments are not made, additional interest shall accrue pursuant to 31 +U.S.C. §3717. + +J. Payments ordered in paragraphs H and I 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 Commission 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 +KPMG or Riordan 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 Aaron Lipson, Associate +Regional Director, Securities and Exchange Commission, Atlanta Regional Office, 950 East Paces +Ferry Road, N.E., Suite 900, Atlanta, GA 30326. + +K. Regardless of whether the Commission in its discretion orders the creation of a Fair +Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all purposes, +including all tax purposes. To preserve the deterrent effect of the civil penalty, Respondents agree +that in any Related Investor Action, they shall not argue that they are entitled to, nor shall they +benefit by, offset or reduction of any award of compensatory damages by the amount of any part of +Respondents’ payment of a civil penalty in this action (“Penalty Offset”). If the court in any + +31 + +Related Investor Action grants such a Penalty Offset, Respondents agree that they shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in this +action and pay the amount of the Penalty Offset to the Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against 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 +Riordan, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Riordan 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 +Riordan 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/2017/AAER-3892.txt b/raw/aaer/2017/AAER-3892.txt new file mode 100644 index 0000000000000000000000000000000000000000..f62007341ed64d35195e6f8be76df8d179c9683d --- /dev/null +++ b/raw/aaer/2017/AAER-3892.txt @@ -0,0 +1,549 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81542 / September 7, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3892 / September 7, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-17651 + + + + + +In the Matter of + +ADRIAN D. BEAMISH, CPA, + +Respondent. + + +CORRECTED ORDER PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate to enter +this Order Pursuant to Section 4C of the Securities Exchange Act of 19341 (“Exchange Act”) and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, Making Findings, and Imposing +Remedial Sanctions as to Adrian D. Beamish, CPA (“Respondent” or “Beamish”).2 + +1 Section 4C provides, in relevant part, that: “The Commission may censure any person, or deny, +temporarily or permanently, to any person the privilege of appearing or practicing before the +Commission in any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have engaged in unethical +or improper professional conduct; or (3) to have willfully violated, or willfully aided and abetted +the violation of, any provision of the securities laws or the rules and regulations thereunder.” +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: “The Commission may . . . deny, temporarily +or permanently, the privilege of appearing or practicing before it . . . to any person who is found +. . . to have engaged in unethical or improper professional conduct.” +2 +II. +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 the +Respondent and the subject matter of these proceedings, which are admitted, Respondent +consents to the entry of this Order Pursuant to Section 4C of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, Making Findings, and Imposing +Remedial Sanctions (“Order”), as set forth below. +III. +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: +A. Summary +1. Respondent Adrian D. Beamish repeatedly engaged in improper professional +conduct during PricewaterhouseCoopers LLP’s audits of Burrill Life Sciences Capital Fund III, +LP, a $283 million San Francisco-based venture capital fund. PricewaterhouseCoopers LLP, was +first engaged to conduct the audits of the venture capital fund’s year-end 2006 financial +statements. As detailed below, Beamish, as the engagement partner, failed to comply with the +relevant professional standards in connection with his audits of the fund’s 2009, 2010, 2011, and +2012 year-end financial statements. +2. In the audit of the venture capital fund’s year-end 2009 financial statements, +Beamish became aware that the fund’s founder, G. Steven Burrill, had arranged for the fund to +pay millions of dollars to the fund’s management company that Burrill owned and controlled. +From 2009 through 2011, the management company characterized the payments as advances on +future management fees that it would earn through the provision of future management services +as the fund’s manager. The payments were made many months—and even years—before the +fees were to be earned. In each of these three years, Beamish failed to inquire whether the +management company had the authority to take the unusual payments, nor did he scrutinize the +rationale for the payments, which Burrill needed to pay his own personal expenses and to fund +his other businesses. Significantly, in conducting the year-end 2012 audit, Beamish learned that +the advanced management fee payments that had been paid greatly exceeded any potential future +management fee obligations the fund might owe. +3. Despite an advanced management fee balance rapidly growing over several years +and not decreasing, and Beamish’s own audit team’s suggested financial disclosure language +being rejected by management, Beamish improperly signed audit reports with unqualified +opinions for the fund’s year-end 2009, 2010, 2011, and 2012 financial statements, in violation of +Generally Accepted Auditing Standards (“GAAS”). In addition, the fund’s financial statements, + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in any other proceeding. +3 +for those same years, did not comply with Generally Accepted Accounting Principles (“GAAP”). +Further, Beamish relied upon unreasonable bases as the supposed means for repayment of the +advanced management fee balance. + +B. Respondent +4. Adrian D. Beamish, CPA, age 46, is a resident of Los Altos, California. Beamish +has been licensed as a Certified Public Accountant in California since November 2004, and has +been a Chartered Accountant in England and Wales since 1995. Beamish was hired by +PricewaterhouseCoopers’ U.K. firm in 1995, and in 1998, he moved to PricewaterhouseCoopers’ +U.S.A. firm in San Jose, California, where he became an audit partner in 2006. Beamish +conducts audits of both public and private entities for PricewaterhouseCoopers, and he +specializes in the pharmaceutical life sciences and venture capital industries. +C. Related Persons and Entities +5. G. Steven Burrill, age 71, resides in San Francisco, California, and Eagle River, +Wisconsin. From 1977 to 1993, Burrill was a partner at a large audit firm and focused on the +biotechnology industry. Burrill began raising venture capital funds when he left the audit firm in +1993. In addition to venture capital funds, Burrill owned and controlled a number of affiliated +businesses, including an investment adviser, a merchant banking firm, and a media company. On +March 16, 2016, after the audits at issue here, Burrill, a CPA, was suspended from appearing or +practicing before the Commission as an accountant and was barred from association with any +broker, dealer, investment adviser, municipal securities dealer, municipal advisor, transfer agent, or +nationally recognized statistical rating organization and prohibited from serving or acting as an +employee, officer, director, member of an advisory board, investment adviser or depositor of, or +principal underwriter for, a registered investment company or affiliated person of such investment +adviser, depositor, or principal underwriter. +6. Burrill Capital Management, LLC (“BCM”) is a Delaware limited liability +company and filed reports as an exempt reporting adviser with the Commission from April 2012 +to January 2015, when it withdrew its registration. Burrill Capital Management is wholly owned +by Burrill and had its principal place of business in San Francisco, California. Now defunct, +BCM acted as the adviser to several venture capital funds operated by Burrill. Burrill also used +BCM as the operating entity through which he directed resources to his affiliated businesses. As +of its last filing in March 2014, BCM reported $358.6 million in total assets under management. +7. Burrill Life Sciences Capital Fund III, LP (“Fund III” or the “Fund”) is a +Delaware limited partnership formed by Burrill in 2006. The Fund received $283 million in +venture capital funds to invest in life sciences companies. The Fund retained BCM as its +investment adviser. The Fund is a private entity subject to AICPA auditing standards, and its +investors were all accredited as defined under Regulation D, 17 CFR § 230.501. +8. Burrill Life Sciences Capital Fund III Partners, LP (“General Partner”), a +Delaware limited partnership, was the General Partner of Fund III during the relevant time +period. The General Partner’s Investment Committee included Burrill and four others. The +4 +General Partner was entitled to receive fees for managing the Fund, but also could designate an +affiliate to receive the fees. +9. Burrill Capital, LLC (“Management Company”) is a Delaware limited liability +company owned and controlled entirely by Burrill. As described further below, in its 2012 +financial statements, the Fund stated that the Management Company was responsible for +repaying the balance of the management fees that had been advanced to the General Partner. +10. PricewaterhouseCoopers LLP (“PricewaterhouseCoopers” or “PwC”) +provides audit, assurance, tax, transaction, and advisory services throughout the United States, +and throughout the world via their members firms. Auditors from its San Jose, California office +conducted the audits of Fund III for fiscal years 2006-2012. +D. Formation of Fund and Retention of PricewaterhouseCoopers as Auditors +11. Burrill formed Fund III in 2006 to invest in life sciences companies. Established +with a projected 10-year lifespan, Fund III was originally scheduled to expire in February 2016. +Fund III is structured as a limited partnership. Investors in Fund III, which include public +companies, pension funds, and institutional investors, are limited partners in the Fund. During +the relevant period, Burrill Life Sciences Capital Fund III Partners, LP served as the Fund’s +General Partner. Five individuals, including Burrill, were members of the General Partner and +their control of the General Partner was set forth in its partnership agreement. +12. The rights and responsibilities of the General Partner and the limited partners of +Fund III are governed by a limited partnership agreement (“LPA”). The LPA delineates, among +other things, the manner and amount of the General Partner’s fees for managing the Fund. +According to the LPA, the General Partner or its designee is entitled to two percent of committed +capital for six years, payable on the first day of each fiscal quarter for management services to be +rendered during that quarter. After the initial six years, the General Partner or its designee is +entitled to two percent of the cost basis of the investments, plus reserves. As enumerated in the +LPA, the General Partner would bear all normal expenses incurred in connection with the +management of the fund, including salaries, travel, and rent, from the management fee. The LPA +did not authorize the General Partner to take management fees more than one quarter in advance, +and prohibited non-arm’s length transactions between Fund III and the General Partner or its +members without explicit approval of an advisory committee of limited partners. +13. The Fund’s offering materials state that a major financial accounting firm would +issue a report on the financial statements annually. In addition, the LPA similarly provided that +the Fund would issue financial statements in accordance with GAAP, and would be audited +annually by a public accountant of recognized national standing. +14. Beginning in 2006, the Fund issued annual financial statements and retained +PricewaterhouseCoopers to serve as its auditor to conduct annual audits on the Fund. Beamish +served as the PwC audit partner responsible for the audit team’s compliance with the appropriate +professional standards. As the engagement partner, Beamish had final authority over the +planning, execution, and supervision of the audits and was responsible for audit reports issued by +PwC on the Fund’s financial statements. +5 +15. For the year-end 2009 through year-end 2012 audits, Beamish authorized +PricewaterhouseCoopers to issue audit reports with unqualified opinions stating that the Fund’s +financial statements were presented fairly, in all material respects, in accordance with GAAP and +that the audits were conducted in accordance with GAAS. In reality, however, the Fund’s +financial statements failed to comply with GAAP and the audits failed to comply with GAAS. +E. Burrill Took “Advanced Management Fees” to Fund Other Businesses +16. In late 2007, Burrill and his affiliated businesses began to face cash flow +shortages. Burrill Capital Management, the adviser to Fund III and the entity through which +Burrill operated and funded his affiliated businesses, maintained records showing that the +expenses of the Burrill affiliates far exceeded the revenue that the businesses were generating. +Even though he did not solely control the Fund’s General Partner, Burrill unilaterally directed +BCM’s controller to take $400,000 from Fund III to make up for the cash shortfall in BCM. +Burrill justified the withdrawal as an “advance on management fees” that the General Partner +expected to earn in the first quarter of 2008. The advance was recorded as a “prepaid expense” +on the books of Fund III. +17. By mid-2008, Burrill, alone directing the General Partner, had begun to take +routine and significant advances on management fees. Whenever BCM or Burrill’s affiliated +entities faced a cash shortfall, Burrill arranged to cover the shortfall by taking money from +Fund III and recording it as a prepaid expense to BCM on the Fund’s books. Advanced +management fees from Fund III became a consistent cash source for the affiliates and for Burrill +personally. Burrill used the money to pay for, among other things, salaries of employees of the +related entities and his personal expenses. These advanced management fees appeared in the +Fund’s financial statements as “prepaid expenses” or “receivables,” as described below. +F. During the Year-End 2009, 2010, and 2011 Audits, Beamish Failed +to Scrutinize the Advanced Fees Appropriately +18. The amount of the advanced management fees taken by the General Partner was +disclosed to the PricewaterhouseCoopers audit team. Through the audits, Beamish became aware +that the balance of the advanced management fees increased by millions of dollars every year +from 2009 through 2011: +• By the end of 2009, the advanced management fee balance totaled $4,927,374, +representing almost one year of advanced management fees. +• By the end of 2010, the advanced management fee balance had grown to +$9,259,317, or just under two years of advanced management fees. +• By the end of 2011, the advanced management fee balance had grown to +$13,374,569, or nearly three full years of advanced management fees. +19. These balances were significant, far surpassing PwC’s internally-established +threshold for materiality and were recognized by the PwC audit team, and by Beamish +particularly, as unusual in the industry. According to the relevant GAAS standards that relate to +6 +the consideration of the possibility of fraud, if an auditor becomes aware of significant and +unusual transactions, the auditor should gain an understanding of “the business rationale of such +transactions and whether that rationale (or lack thereof) suggests that such transactions may have +been entered into to engage in fraudulent financial reporting or to conceal the misappropriation +of assets.” AU § 316.66.4 Furthermore, in assessing the risk of material misstatement, the auditor +should consider factors including whether there is a risk that “involves significant non-routine +transactions that are outside the normal course of business for the entity, or that otherwise appear +to be unusual.” AU § 314.111. +20. Despite the significant and unusual nature of the payment of the advanced +management fees, Beamish and the PwC audit team took no steps to try to understand the +business rationale for the payments. And even though the balance of the advanced fees grew +steadily during 2009, 2010, and 2011, Beamish did not inquire into the rationale for the +advances, nor did Beamish inquire as to why the amount grew. +21. Had Beamish or his audit team made appropriate inquiries as required by +professional standards, they would have likely discovered that the fees advanced to the General +Partner had been used for the business operations of affiliated Burrill entities, such as Burrill +Securities LLC, and to pay for Burrill’s own personal expenses. Further, Beamish did not take +adequate steps to determine whether Burrill and the affiliated entities were authorized to receive +such payments, as well as whether they had the ability to repay the amounts. +22. Generally Accepted Auditing Standards require auditors to exercise “due +professional care” throughout an audit. AU § 230. Due professional care requires an auditor to +exercise professional skepticism, “an attitude that includes a questioning mind and a critical +assessment of audit evidence.” AU § 230.07. “Since evidence is gathered and evaluated +throughout the audit, professional skepticism should be exercised throughout the audit process.” +AU § 230.08. The auditor “should not be satisfied with less than persuasive evidence because of +a belief that management is honest.” AU § 230.09; see also AU § 316.13. This is particularly +true with respect to related party transactions. Audit procedures for related party transactions +“should extend beyond inquiry of management,” and an auditor should apply the procedures he +or she considers necessary to obtain an “understanding of the business purpose of the +transaction.” AU § 334.09. +23. Beamish failed to exercise the professional care required by GAAS in the audits +of the Fund’s 2009, 2010, and 2011 financial statements. Beamish took insufficient steps to +obtain audit evidence that the payments were properly approved and authorized, even as the +balance continued to grow year to year. During the audit of the Fund’s year-end 2011 financial +statements, Beamish’s audit team calculated the total future management fees due to the General +Partner for the remaining life of Fund III. The audit team estimated there was approximately +$10.2 million left in future management fees to be earned by the General Partner over the +remainder of the contractual life of Fund III, beyond the nearly $13.4 million that had already +been advanced. The audit team concluded that the General Partner could “earn down” the + +4 “AU” and “AU-C” refer to Statements on Auditing Standards issued by the American Institute +of Certified Public Accountants. +7 +balance, through the provision of management services by the scheduled termination of the Fund +in 2016. +24. The auditors’ calculation of the amount of future fees available to the General +Partner during the 2011 audit, however, was incorrect by a significant margin. If Beamish’s audit +team had correctly calculated the future management fees to be earned, using a conservative +calculation, they would have realized there was, at most, $3.2 million in future fees to be +earned—not the $10.2 million that they had calculated. After the approximately $3.2 million was +paid, Fund III would have no contractual obligation to pay additional management fees to the +General Partner or its designee for the remaining contractual term of the Fund. While Beamish +was not aware of this calculation error at the time, had he exercised the appropriate professional +skepticism required of him as an auditor, especially in light of the ever increasing advanced +management fee balance, he should have questioned and sought evidence for the premise that the +advanced management fee balance would likely be recovered simply through the provision of +future management services by the General Partner. +25. From his audit, moreover, Beamish learned that the Fund described the advanced +management fee balance as a “receivable,” which in this instance represented an undocumented +loan, to the General Partner in the year-end 2009, 2010, and 2011 financial statements. Generally +Accepted Auditing Standards require special scrutiny of interest-free loans between related +parties and loans with “no scheduled terms for when or how the funds will be repaid.” AU +§ 334.03. When confronted with such an undocumented loan, an auditor should apply the +procedures he or she considers necessary to “[d]etermine whether the transaction has been +approved by those charged with governance.” AU § 334.09. Nonetheless, Beamish, and the PwC +auditors working at his direction, took no steps to determine whether such a loan to the General +Partner was permitted by the LPA. Nor did Beamish inquire whether the General Partner’s +governing documents permitted Burrill to take the advanced fees without the consent of the +General Partner. +G. The Fund’s Year-End 2009, 2010, and 2011 Financial Statements +Failed to Disclose Fees Accurately +26. Generally Accepted Auditing Standards concerning related party transactions +require that an “auditor should view related party transactions within the framework of existing +[accounting] pronouncements, placing primary emphasis on the adequacy of disclosure.” AU +§ 334.02 (emphasis added). Furthermore, an auditor should apply procedures to obtain +satisfaction about the related party transactions and the effect on financial statements. AU +§ 334.09. For each “material related party transaction . . . common ownership or management +control relationship . . . the auditor should consider whether he has obtained sufficient +appropriate audit evidence to understand the relationship of the parties and . . . the effects of the +transaction on the financial statements.” AU § 334.11. Disclosures of related party transactions +must include (1) the nature of the relationships involved; (2) a description of the transactions and +8 +other such information deemed necessary to an understanding of the effects of the transactions +on the financial statements; and (3) the terms and manner of settlement. ASC 850-10-50-1.5 +27. The Fund III year-end 2009, 2010, and 2011 financial statements inconsistently +and inaccurately disclosed the nature of the advanced management fees. In none of the three +year-end financial statements did the Fund adequately disclose that management fees were being +advanced: +• The balance sheet in the Fund’s year-end 2009 audited financial statements +included the amount of advanced management fees as an undefined part of a larger +“prepaid expense” paid by the Fund. The balance sheets in the 2010 and 2011 +financial statements similarly included the amount of advanced management fees as +an undefined part of a larger amount of “prepaid expenses and other receivables,” +but did not separately show a related party receivable on the balance sheet as +required by GAAP (and in particular, ASC 850-10-50-2). The balance sheets did +not further describe the nature of the “prepaid expenses” or “receivables,” and made +no explicit reference to the payment of advanced management fees. +• The Related Party footnotes to the year-end 2009, 2010, and 2011 audited financial +statements described the amount of the advanced management fees only as a +“receivable from the General Partner.” The footnotes did not further describe the +transaction nor the terms and manner of settlement of the so-called “receivable,” as +required by GAAP. ASC 850-10-50-1. +• The Management Fee footnotes to the year-end 2009, 2010, and 2011 audited +financial statements merely described the amount the General Partner was legally +entitled to receive over the course of the calendar year in accordance with the LPA. +The footnotes did not disclose that the Fund had actually paid advanced +management fees, and contained no references to the amounts described as “prepaid +expenses” and “receivables” on the balance sheets or a cross-reference to the +Related Party footnotes. As a result, the footnotes further created a misleading +picture of the Fund’s financial statements for each period. +28. The Fund’s audited financial statements materially misstated the nature of the +related party payments. Beamish failed to obtain sufficient appropriate audit evidence to +determine whether GAAP compliant disclosure of the payments made was adequate, as required +by GAAS, when he authorized PricewaterhouseCoopers to issue audit reports with unqualified +opinions on the Fund’s year-end 2009, 2010, and 2011 financial statements. +H. Beamish Issued a Clean Opinion on the Fund’s Year-End 2012 Financial Statements +29. By the first quarter of 2012, the General Partner was paid more in management +fees from Fund III than the General Partner was contractually entitled to earn over the entire 10- + +5 “ASC” refers to the Accounting Standards Codification issued by the Financial Accounting +Standards Board. +9 +year life of the Fund. At the end of 2012, the balance of the advanced management fees totaled +$17,922,059. Beamish was aware of the balance of advanced management fees in connection +with the audit of the Fund’s 2012 financial statements. Under Beamish’s supervision, the PwC +audit team calculated that the fund overpaid in excess of approximately $7 million in +management fees. +30. Aware that millions of dollars in excess management fees had been taken from +the Fund, the audit team proposed to BCM management that the Fund provide the following +additional disclosure in its year-end 2012 financial statements: “Prepaid expenses and other +receivables at December 31, 2012 include $17.9 million due from the General Partner. This +amount exceeds the expected future management fee expenses for the remaining contractual life +of the fund.” (Emphasis added.) BCM management rejected the second sentence of Beamish’s +proposal regarding the excessive amount and suggested alternative language regarding its +repayment. In response, Beamish agreed that the additional disclosure contained in his proposed +second sentence need not be included in the Fund’s financial statements. +31. Shortly thereafter, BCM management told Beamish that Burrill had executed an +unsecured promissory note for the full amount of the advanced management fee balance. The +BCM controller provided PwC with the promissory note, which was dated December 31, 2012. +After receiving the note, Beamish’s audit team suggested a revision to the proposed Related +Party footnote for the Fund’s year-end 2012 financial statements to describe the terms of the +note, the manner of settlement, and the interest rate. The auditors provided the suggestion to +BCM management. Three days later, the BCM controller told Beamish that Burrill “strongly +feels he does not want the footnote as currently worded to be included in the financials” and that +the note had been “withdrawn.” The reference to the promissory note was removed from the +year-end 2012 audited financial statements. +32. In April 2013, the Fund issued its year-end 2012 financial statements with an +audit report with an unqualified audit opinion from PricewaterhouseCoopers. The audited +financial statements materially misstated the nature of the related party payments. Beamish failed +to obtain sufficient appropriate audit evidence to determine whether GAAP compliant disclosure +of the payments was made, as required by GAAS, when he authorized PwC to issue its audit +report with an unqualified opinion. The balance sheet identified the advanced management fees +as part of a larger amount of “prepaid expenses and other receivables from related party” owed to +the Fund, but did not separately show a related party receivable on the balance sheet as required +by GAAP (and in particular, ASC 850-10-50-2). +33. In the Related Party footnote to the year-end 2012 financial statements, the Fund +described the advanced management fees only as a “receivable” owed by the Management +Company, Burrill Capital, LLC—not the General Partner, as had been disclosed in the year -end +2009, 2010, and 2011 financial statements. The footnote did not further describe the transaction +nor the terms of the “receivable,” as required by GAAP (and in particular, ASC 850-10-50-1). +34. The footnote further stated that the Management Company “intends to pay” the +receivable “from future distributions to the General Partner” and from “Management Company +funds.” Beamish and his audit team, however, failed to obtain sufficient audit evidence of the +receivable’s collectability, as required by GAAS. An auditor “should design and perform audit +10 +procedures that are appropriate in the circumstances for the purpose of obtaining sufficient +appropriate audit evidence.” AU-C § 500.06. Furthermore, an auditor should “obtain sufficient +appropriate audit evidence about whether related party relationships and transitions have been +appropriately identified, accounted for, and disclosed in the financial statements.” AU-C +§ 550.09. +35. With respect to the collectability of the receivable “from future distributions to the +General Partner,” Beamish looked only to the Fund’s capital account for the General Partner, +which was valued at $15.3 million as of December 31, 2012. As set forth in the LPA, the General +Partner’s right to use the capital account was conditioned on the performance of its management +duties (including, among other things, not breaching its fiduciary duties nor engaging in willful +or reckless misconduct or fraud). Significantly, the LPA provided that if the General Partner +failed to make its required capital contributions to the Fund, its right to the capital account could +be substantially impaired. As Beamish and the PwC audit team were aware, the General Partner +had not made its required capital contributions from 2009 through 2012 and was instead adding +the amount of the contributions to the advanced management fee balance each year. By relying +only on the value of the General Partner’s capital account, and failing to consider that the +General Partner did not make its required capital contributions, Beamish failed to obtain +sufficient appropriate audit evidence about the collectability of the receivable. +36. Furthermore, Beamish relied on Burrill’s and management’s written +representations about the General Partner’s intent to pay the receivable through its future +distributions without determining whether they had authority to bind the entity. Beamish did not +inquire whether the General Partner’s governing documents permitted Burrill to commit the +future distributions of the General Partner. Nor did Beamish obtain evidence of the financial +condition of the General Partner to determine whether the General Partner was encumbered by +other financial obligations. Thus, Beamish’s failure to scrutinize the representations made by +Burrill regarding the intent to pay the receivable “from future distributions to the General +Partner” demonstrated a significant lack of professional skepticism by Beamish under the +circumstances. Additionally, when faced with inconsistent audit evidence, “the auditor should +determine what modifications or additions to audit procedures are necessary to resolve the +matter… ” AU-C § 500.10. In this situation, Beamish failed to identify the contradictory audit +evidence and thus did not consider additional audit procedures to test the collectability of the +receivable. +37. Nor did Beamish take sufficient steps to verify whether the Management +Company had the funds to repay the receivable. While Beamish did not audit the Management +Company, had he requested the Management Company’s balance sheet, he would have +discovered that the Management Company had less than $1,600 in cash on hand as of December +31, 2012, and that its remaining assets were illiquid and arose out of related party transactions +with other Burrill entities. Generally Accepted Auditing Standards state that written +representations “complement other auditing procedures and do not provide sufficient appropriate +audit evidence on their own about any of the matters with which they deal.” AU-C 580.04. +Additionally, “if written representations are inconsistent with other audit evidence, the auditor +should perform audit procedures to attempt to resolve the matter.” AU-C 580.23. Instead, in +violation of the professional standards required by GAAS, Beamish relied on management’s +written representations about the sources and means of repayment. +11 +38. As in the year-end 2009-2011 audited financial statements, the Management Fee +footnote to the Fund’s year-end 2012 financial statements merely described the amount the +General Partner was legally entitled to receive over the course of the calendar year in accordance +with the LPA. The footnote did not disclose that the Fund had actually paid advanced +management fees, and contained no references to the amounts described as “prepaid expenses” +and “receivables” on the balance sheet and in the Related Party footnote. +39. With respect to the year-end 2012 audit specifically, Beamish was responsible for +obtaining audit evidence that “significant related party transactions outside the entity’s normal +course of business . . . have been appropriately authorized and approved.” AU-C § 550.24. This +he did not do. While Beamish and his audit team obtained management’s representations that the +Fund had complied with all contractual agreements and that management intended to repay the +receivable (i.e., the undocumented loan), they took no steps to determine whether the LPA +permitted the payment of management fees in excess of what the General Partner would be +entitled to earn, or loans to related parties without approval of an advisory committee of limited +partners. +40. Beamish failed to maintain professional skepticism with respect to the audit of the +Fund’s year-end 2012 financial statements, as required by GAAS (and in particular, AU-C +§ 200.08). Beamish did not take adequate steps to understand the business rationale for taking +advanced management fees, even after BCM management resisted his proposed additional +disclosure and “withdrew” the promissory note, contrary to GAAS (and in particular, AU-C +§ 240.32 and AU-C §§ 315.28-29). By failing to make adequate inquiry into these matters, and +instead relying on the representations of BCM management, Beamish fell short of the +professional standards required by GAAS. +I. PricewaterhouseCoopers Resigned as Auditor of the Fund +41. From the beginning of 2013 through the issuance of the Fund’s year-end 2012 +audited financial statements on April 4, 2013, Burrill, alone directing the General Partner, took +an additional $3.2 million in advanced management fees. After the audit opinion was issued, +Burrill took another $1.15 million in advanced management fees through July 2013. +42. In late August 2013, the Fund’s investment committee became aware that +virtually all the committed capital in Fund III had been spent. Emergency meetings of the +investment committee were convened. Over the following weeks, the other members of the +General Partner were informed that the Fund paid approximately $18 million in advanced +management fees. The amounts taken exceeded the amount to which the General Partner was +entitled to receive over the contractual life of the Fund by millions of dollars. +43. In late October 2013, three members of the General Partner sent a letter to the +advisory committee of the limited partners informing them of Burrill’s misappropriation. In +response, the advisory committee of the limited partners removed the General Partner, including +Burrill, from managing the Fund. +44. On November 6, 2013, BCM management provided Beamish with several letters +between BCM management and various limited partners regarding the misappropriation. +12 +45. Prior to learning of the limited partners’ allegations of misappropriation, PwC was +contemplating resigning as auditor of the Fund for economic reasons. On or about November 11, +2013, PricewaterhouseCoopers resigned as the auditor of the Fund. +46. In 2014, the limited partners agreed to recycle distribution payments back into +Fund III, in lieu of receiving individual distribution pay-outs. They used the recycled money to +meet the Fund’s financial commitments to its portfolio companies and to stabilize the Fund. +J. Violations +47. As a result of the conduct described above, Respondent engaged in improper +professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +48. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) provide, in part, that the +Commission may censure or deny, temporarily or permanently, the privilege of appearing or +practicing before the Commission to any person who is found by the Commission to have +engaged in “improper professional conduct.” In relevant part, Section 4C(b)(2) and +Rule 102(e)(1)(iv)(B) define “improper professional conduct” as one of two types of negligent +conduct: (1) a single instance of highly unreasonable conduct in circumstances for which +heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct that indicate +a lack of competence. +49. As discussed above, Respondent’s failures to conform to applicable professional +standards found in GAAS, in connection with the audits of the year-end 2009, 2010, 2011, and +2012 Fund III financial statements, constitute repeated instances of unreasonable conduct. In +addition, Respondent’s failures to conform to the applicable professional standards found in +GAAS, in connection with the Fund’s year-end 2012 financial statements, constitutes an instance +of highly unreasonable conduct under circumstances that warranted heightened scrutiny, which is +required under Rule 102(e)(1)(ii) in instances where significant and unusual transactions take +place, such as taking millions of dollars in advanced fees beyond the life of Fund. +K. Findings +50. 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’s Offer. +Accordingly, it is hereby ORDERED, effective immediately, that: +A. Respondent Beamish is denied the privilege of appearing or practicing before the +Commission as an accountant. +13 +B. After one year from the date of this order, Respondent Beamish 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 Respondent Beamish’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) Respondent Beamish, 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 Beamish, 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 Beamish’s or the +firm’s quality control system that would indicate that the respondent will not +receive appropriate supervision; + (c) Respondent Beamish 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 Beamish 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. +C. The Commission will consider an application by Respondent Beamish to resume +appearing or practicing before the Commission provided that his state CPA license is current and +14 +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 Beamish’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/2017/AAER-3896.txt b/raw/aaer/2017/AAER-3896.txt new file mode 100644 index 0000000000000000000000000000000000000000..bea351ed0d8233f19dec65b836b875df82a07851 --- /dev/null +++ b/raw/aaer/2017/AAER-3896.txt @@ -0,0 +1,204 @@ + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81619 / September 14, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3896 / September 14, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18181 + +In the Matter of + +THOMAS C. TEKULVE, JR., +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 +Thomas C. Tekulve, Jr., CPA (“Respondent” or “Tekulve”) 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. Tekulve, age 65, is and has been a certified public accountant licensed to +practice in the State of Oregon. He served as Chief Financial Officer of Basin Water, Inc., from +September 2004 to May 2008, and Vice President of Business Development from June 2008, until +he resigned effective October 8, 2008. + + 2. Basin Water, Inc. was a Delaware corporation with its principal place of +business in Rancho Cucamonga, California. Basin was engaged in the business of designing, +manufacturing and servicing ground water treatment systems. Basin became a reporting company +on May 11, 2006. During the relevant time period, its stock was registered with the Commission +pursuant to Section 12 of the Exchange Act, and its stock traded on the Nasdaq National Market +until July 31, 2006, and thereafter on the Nasdaq Global Market. On February 10, 2009, Basin +filed a restatement with the Commission on Form 10-K/A, concluding that it had improperly +recognized revenue on the six transactions at issue in the Commission’s civil action described +below, as well as on several other transactions. On July 16, 2009, Basin filed a bankruptcy petition +under Chapter 11 of the Bankruptcy Code. On August 5, 2009, the Nasdaq delisted Basin’s stock +effective August 17, 2009. On August 29, 2009, it sold substantially all of its assets to a subsidiary +of London-based Amplio Group. On September 21, 2011 the Commission revoked Basin’s +registration under Section 12(g). + + 3. On June 24, 2011, the Commission filed a complaint in the Central District +of California against Tekulve in SEC v. Peter L. Jensen and Thomas C. Tekulve (Civil Action No. +11-05316 R). On September 13, 2017, the court entered an order permanently enjoining Tekulve, +by consent, from future violations of Section 17(a) of the Securities Act of 1933 [15 U.S.C. § +77q(a)]; Section 10(b) of the Exchange Act of 1934 (the “Exchange Act”) [15 U.S.C. § 78j(b)] and +Rule 10b-5 thereunder [17 C.F.R. § 240.10b-5]; Section 13(a) of the Exchange Act [15 U.S.C. § +78t(a)], and Rules 12b-20, 13a-1 and 13a-13 thereunder [17 C.F.R. §§ 240.12b-20, 240.13a-1 and +240.13a-13]; Section 13(b)(5) of the Exchange Act [15 U.S.C. §78m(b)(5)] and Rule 13b2-1 +thereunder [17 C.F.R. §240.13b2-1]; Rule 13b2-2 [17 C.F.R. §240.13b-2]; Rule 13a-14 [17 C.F.R. +§ 240.13a-14]; and Section 304(a) of the Sarbanes-Oxley Act of 2002 (“SOX”) [15 U.S.C. § + 3 +7243(a)]. The court also imposed a one (1) year officer and director bar on Tekulve, pursuant to +Section 21(d)(2) of the Exchange Act [15 U.S.C. 78h(d)(2)], ordered him to pay a $130,000 civil +money penalty, and ordered him to reimburse BWI Liquidating Trust $1,200.00 under Section +304(a) of SOX. + + 4. The Commission’s complaint alleged, among other things, that Tekulve, +together with Peter L. Jensen, Basin Water’s Chairman of the Board and Chief Executive Officer, +overstated Basin Water’s financial results for each of its quarters beginning with its initial quarter +as a public company (the first quarter of fiscal year 2006 ended March 31, 2006) through its fiscal +year ended December 31, 2007. The complaint alleges that Jensen and Tekulve materially +overstated and caused Basin Water to materially overstate its revenues, gross profits, and system +sales by improperly recognizing and reporting revenue from the company’s purported sales of +water treatment systems in six discrete transactions. The purported revenue failed to meet +Generally Accepted Accounting Principles (“GAAP”) for recognizing revenue. In particular, the +complaint alleged that certain sales did not occur in the quarter for which revenue was recognized; +other sales were contingent on the customer’s acceptance of the treatment system or the resale of +the system to an ultimate end-user; several sales were recorded even though the company never +delivered the treatment system; and on all the sales collectability was not reasonably assured. As a +result, Jensen and Tekulve caused Basin Water to overstate its annual revenues in 2006 by 13% +and its revenues in 2007 by 74%, as well as caused Basin Water to overstate revenues for multiple +quarterly periods from 10% to 68%, and from 56% to 161% for 2006 and 2007 interim periods +respectively. On August 11, 2008, the company announced it was restating its financial results for +these periods, including the six transactions alleged in the complaint, which restatement was issued +on February 10, 2009. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Tekulve’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent is suspended from appearing or practicing before the Commission as an +accountant. + + B. After one year 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 (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 Respondent’s work in his +practice before the Commission as an accountant will be reviewed either by the independent + 4 +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) 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 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. + + + + + + + + + + + + + + 5 +C. 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 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/2017/AAER-3899.txt b/raw/aaer/2017/AAER-3899.txt new file mode 100644 index 0000000000000000000000000000000000000000..10e6235c1184da63f10130fc8c4ec8b7443ef650 --- /dev/null +++ b/raw/aaer/2017/AAER-3899.txt @@ -0,0 +1,906 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81678 / September 21, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3899 / September 21, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18197 + + +In the Matter of + + +PARITZ & COMPANY, P.A., +LESTER S. ALBERT, CPA, +and BRIAN A. SEROTTA, +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 Rules +102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of Practice2 against Paritz & + +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. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + + +2 + +Company, P.A. (“Paritz”), Lester S. Albert, CPA (“Albert”), and Brian A. Serotta, CPA +(“Serotta,” and collectively, “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V as to +Respondent Albert, 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: + +Summary + +1. This proceeding involves the Respondents’ audit and review failures related to the +valuation of two private companies held by INVENT Ventures, Inc. (“INVENT”), a public +business development company. The Commission found that, from 2010 through the first +quarter of 2014, INVENT materially overstated the value of its interests in two of the companies +it owned – LottoPals, Inc. (“LottoPals”) and Clowd, Inc. (“Clowd”) – in periodic reports filed +with the Commission. These valuations were unreasonable as they were based on limited, +private sales of the companies’ securities, and did not properly consider other relevant factors in + + 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 Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +determining whether the valuations reflected the prices INVENT could obtain for its interests in +these companies in current market transactions with market participants. + +2. Paritz audited INVENT’s financial statements for the years ended 2010-2013, and +reviewed INVENT’s interim financial information. The engagement partner on all of the audits +and reviews was Albert, and the engagement quality reviewer was Serotta. The Respondents +failed to comply with the standards of the Public Company Accounting Oversight Board +(“PCAOB”) in their audits and reviews of INVENT’s financial statements. Paritz’ procedures +related to INVENT’s fair value measurements and disclosures for LottoPals and Clowd were +deficient, and Paritz and Albert failed to obtain sufficient appropriate audit evidence in +performing the INVENT audit. Serotta did not provide adequate engagement quality reviews of +Paritz’ audits. All three Respondents failed to exercise due professional care. Paritz failed to +staff the INVENT audits with staff possessing adequate competence and experience to perform +the audits, Albert failed to properly evaluate management’s valuation of LottoPals and Clowd, +and Serotta did not exercise professional skepticism in connection with his engagement quality +reviews. Finally, Paritz and Albert failed to prepare certain audit documentation required by +PCAOB standards. + +Respondents + +3. Paritz & Company, P.A. is a Hackensack, New Jersey based certified public +accounting firm licensed in New Jersey since November 1, 1981. Paritz primarily provides +accounting, tax, and auditing services to individuals, private, and public entities and has been +registered with the PCAOB since November 13, 2003. Paritz has never been subject to any +disciplinary or regulatory proceedings. + +4. Lester S. Albert, age 60, resides in Pine Brook, New Jersey. Albert has been a +certified public accountant licensed in New Jersey since March 1, 1984 and has been auditing +publicly traded companies since 1996. During the relevant period, Albert was a partner at Paritz. +Albert has never been subject to any disciplinary or regulatory proceedings. + +5. Brian A. Serotta, age 69, resides in Syosset, New York. Serotta has been a +certified public accountant licensed in New York since August 12, 1971. During the relevant +period, Serotta was a partner at Paritz. Serotta has never been subject to any disciplinary or +regulatory proceedings. + +Other Relevant Entities + +6. INVENT Ventures, Inc. (“INVENT”) was an internally managed, non- +diversified closed-end investment company that elected to be regulated as a business + +4 + +development company (“BDC”)4 under the Investment Company Act of 1940 (“Investment +Company Act”) on April 12, 2010 until it filed a notice of withdrawal on July 24, 2015. Among +other names, INVENT was previously named Los Angeles Syndicate of Technology, Inc. +INVENT is incorporated in Nevada and is headquartered in Santa Monica, California. +INVENT’s common stock was registered with the Commission pursuant to Section 12(g) of the +Exchange Act until April 18, 2017, when it filed a Form 15 terminating its duty to file reports with +the Commission. At all relevant times, INVENT’s stock traded on the OTCQB market under the +symbol “IDEA,” but now trades on OTC Link. On January 14, 2016, in INVENT Ventures, Inc., +Exchange Act Rel. No. 76916 (Jan. 14, 2016) (“INVENT Order”), the Commission instituted +settled administrative and cease-and-desist proceedings against INVENT and its president for +material misrepresentations in connection with the valuation of portfolio companies, without either +respondent admitting or denying the allegations contained in the INVENT Order except as to +jurisdiction. + +7. LottoPals, Inc. (“LottoPals”), a private company, was incorporated in Nevada on +June 1, 2010. In July 2010, INVENT purchased all six million shares of LottoPals for $6,000. + +8. Clowd, Inc. (“Clowd”), a private company, was incorporated in Delaware on +August 20, 2008. In September 2010, INVENT purchased all Clowd shares for approximately +$65,000 of INVENT stock. + +Background + +9. From 2010 through the first quarter of 2014, INVENT reported the value of its +interests in two companies, LottoPals and Clowd, in periodic reports filed with the Commission. +According to the INVENT Order, INVENT improperly valued LottoPals and Clowd by basing +its valuations on limited, private sales of the companies’ securities, and not properly considering +or accounting for other factors relevant to valuation. + +10. In the case of LottoPals, although INVENT purchased all outstanding LottoPals +shares in July 2010 for $6,000, it valued LottoPals at $3 million as of December 31, 2010. In +reaching this valuation, INVENT purportedly relied on limited sales of LottoPals shares to five +individuals for $0.50 per share in the months after INVENT’s purchase of LottoPals. While +these sales comprised only 2% of LottoPals’ then outstanding stock, INVENT applied the share +price to all of LottoPals’ outstanding stock yielding the $3 million valuation. INVENT’s +valuation of LottoPals increased INVENT’s reported net asset value 105%. + +4 A BDC is a closed-end investment company authorized by Congress for the purpose of making capital +more readily available to certain types of companies. Under the Investment Company Act, a closed-end investment +company meeting certain eligibility criteria may elect to be regulated as a BDC by filing a notification with the +Commission on Form N-54A. A company filing such a notification is regulated under Sections 55 through 65 of the +Investment Company Act. These sections set forth rules governing the investments BDCs may make, transactions +BDCs may enter into, the governance of BDCs, and various other rules governing BDCs. + +5 + + +11. In the case of Clowd, although INVENT purchased all outstanding Clowd shares +in September 2010 for approximately $65,000 of INVENT stock, it valued Clowd at $3 million +as of March 31, 2011. In reaching this valuation, INVENT purportedly relied on sales of Clowd +shares to five individuals for $0.50 per share in the months after INVENT’s purchase of Clowd. +While these limited sales of Clowd shares comprised less than 0.5% of the amount of shares +INVENT understood were Clowd’s authorized shares, INVENT similarly applied the share price +to all of Clowd’s outstanding stock yielding the $3 million valuation. INVENT’s valuation of +Clowd increased INVENT’s reported net asset value by an additional 34% beyond the 105% +increase in net asset value resulting from the $3 million valuation of LottoPals. + +12. INVENT maintained its $3 million valuation for LottoPals in quarterly and annual +reports filed with the Commission for three years, adjusting it downward to $81,912 in its first +quarter Form 10-Q for 2014. Clowd’s $3 million valuation was maintained in INVENT’s +quarterly and annual reports until it was adjusted downward to $1,486,375 starting in its second +quarter Form 10-Q for 2012; to $743,187 in the 2013 Form 10-K; and to $99,742 in the second +quarter Form 10-Q for 2014. The valuations for LottoPals comprised between 26% and 51% of +INVENT’s net asset value during the relevant period. The valuations for Clowd comprised +between 8% and 26% of INVENT’s net asset value during the relevant period. According to the +INVENT Order, these valuations resulted in INVENT’s net asset value during the relevant +periods being materially misstated in periodic filings. +13. For fiscal years 2010 to 2013, Paritz was engaged as INVENT’s auditor. During +this time, Albert was the engagement partner and Serotta was the engagement quality reviewer +for each of INVENT’s audits and reviews even though neither of them had sufficient relevant +experience with the auditing work that was needed to audit INVENT’s financial statements +considering the company was a business development company that held start-up technology +companies. Between 2011 and 2014, Paritz issued audit reports containing unqualified opinions +stating that INVENT’s financial statements were presented fairly, in all material respects, in +conformity with generally accepted accounting principles (“GAAP”) and that its audits were +conducted in accordance with the standards of the PCAOB (“PCAOB Standards”). +Respondents’ Improper Professional Conduct + +14. Contrary to the representations in the audit reports, Paritz’ audits were not +conducted in accordance with PCAOB Standards. The Respondents deviated from PCAOB +Standards in significant ways that resulted in the issuance of audit reports that contained +unqualified opinions that were not supported by sufficient appropriate audit evidence. + +6 + +Failures Auditing Fair Value Measurements and Disclosures (AU § 328) +15. AU § 328.09 states that the auditor should obtain an understanding of the entity’s +process for determining fair value measurements and disclosures and of the relevant controls +sufficient to develop an effective audit approach.5 AU § 328.12 provides that when obtaining an +understanding of the entity’s process for determining fair value measurements and disclosures, +the auditor considers, for example, the significant management assumptions used in determining +fair value; the documentation supporting management’s assumptions; the process used to +develop and apply management assumptions; and the extent to which the entity engages or +employs specialists in determining fair value measurements and disclosures. The auditor uses +both the understanding of management’s process for determining fair value measurements and +his or her assessment of the risk of material misstatement to determine the nature, timing, and +extent of the audit procedures. AU § 328.25. AU § 328.23 provides, “[b]ased on the auditor’s +assessment of the risk of material misstatement, the auditor should test the entity’s fair value +measurements and disclosures.” Substantive tests of the fair value measurements may involve +(a) testing management’s significant assumptions, the valuation model, and the underlying data, +(b) developing independent fair value estimates for corroborative purposes, or (c) reviewing +subsequent events and transactions. When an auditor test’s management’s significant +assumptions, the valuation model, and the underlying data, as Paritz set out to do in this instance, +an auditor evaluates whether “(a) management’s assumptions are reasonable and reflect, or are +not inconsistent with, market information . . . (b) the fair value measurement was determined +using an appropriate model . . . [and] (c) management used relevant information that was +reasonably available at the time.” AU § 328.26. +16. Paritz and Albert failed to comply with these requirements for their audits of +INVENT’s 2010 through 2013 financial statements. In connection with the 2010 audit, Albert +identified a risk of material misstatement regarding INVENT’s LottoPals valuation, but did not +design and perform appropriate audit procedures to address this risk. Specifically, Albert +reviewed management’s valuation model, and questioned why it would be appropriate to use +stock transactions representing only 2% of the company’s shares as the basis for the company’s +value. In response, INVENT provided Albert with a third-party valuation report supporting its +valuation. On April 12, 2011, several days after the date of Paritz’ audit report on INVENT’s +financial statements, Albert e-mailed INVENT’s management and wrote, “[f]or many different +reasons, we do not place much stock in the 3rd party valuations and believe that from a technical +valuation standpoint, these are at best, weak.” He went on to point out that “Lotto Pals [sic] is +owned almost 98% by [INVENT] with the remaining 2% held by outside investors. It is not +reasonable to treat the value of the entire 100% based on 2% without weighting the results.” +Albert later testified that the third-party valuation report was only one of many inputs he used +regarding the LottoPals valuation. Despite identifying the risk of using stock sales representing +only 2% of the company’s shares as the basis for a significant increase in LottoPals’ valuation, +Albert did not prepare an audit program or document procedures for testing management’s + +5 Citations to “AU” and “AS” are citations to PCAOB Standards in effect at the time of the relevant conduct. + +7 + +valuation model. Instead, he simply confirmed that applying a $0.50 per share valuation to +100% of the company’s shares did, in fact, result in a $3 million valuation. There is no evidence +supporting how Albert became comfortable with the fact that INVENT valued LottoPals at $3 +million five months after purchasing it for $6,000. Nevertheless, Albert authorized the inclusion +of Paritz’ audit report that included an unqualified opinion in INVENT’s Form 10-K filed April +15, 2011. +17. A similar situation occurred during the 2011 INVENT audit. INVENT valued +Clowd at $3 million six months after purchasing it for approximately $65,000 of INVENT stock. +This valuation was based on limited stock sales to five friends and acquaintances of INVENT’s +management. In connection with the 2011 audit, Paritz and Albert failed to comply with AU § +328. Specifically, the significant increase in the Clowd valuation posed similar risks of material +misstatement that existed with LottoPals, but there is no evidence that Albert evaluated the +significant assumptions used as a basis for the valuation. During the 2011 INVENT audit, while +Albert documented management’s assumptions, he failed to evaluate the significant assumptions +and the appropriateness of management’s fair value model. Albert’s auditing procedures for +LottoPals’ and Clowd’s fair values were limited to testing the stock transactions at issue by +confirming the transactions in the stock ledgers, and reviewing stock subscription agreements +and operating expenses. +18. Albert’s failures to appropriately evaluate the valuation methodology employed +for LottoPals continued in the 2011 through 2013 INVENT audits. While he began including +investment memoranda in the work papers regarding LottoPals and Clowd, the memoranda did +not describe how he tested fair value measurements and disclosures on an annual basis in order +to comply with AU § 328. Albert continued to use LottoPals’ limited stock sales during 2010 as +the evidence for the 2011 through 2013 valuations despite the fact that he had questioned the +2010 valuations provided by management.6 In 2013, he raised concerns with INVENT +management regarding the age of the 2010 stock sales and INVENT management told him that +an additional stock sale similar to the ones in 2010 had been made, and that an underwriter had +tentatively agreed to offer LottoPals shares to investors at $0.50/share. However, in the 2013 +investment memoranda regarding LottoPals, there is no evidence that Albert reviewed or +analyzed the purported additional stock sale or the terms of the proposed offering, and in fact, no +offering ever took place. In addition, Albert’s work papers do not reflect that he considered +evidence other than the initial 2011 Clowd stock sales for the fair value of the company, despite +the fact that INVENT management, starting in 2012, no longer used those sales as the only input +in the valuation analysis. Specifically, during 2012, instead of only using limited stock sales as +the basis for Clowd’s valuation, INVENT management chose to value Clowd based largely on +comparable companies in the area. This resulted in an approximately 50% reduction in Clowd’s +value in 2012, but there is no evidence that Albert tested or evaluated the change in inputs or the +reduction in value. + +6 Moreover, even if it were appropriate to rely on such sales as evidence for the valuation in 2010, those sales +would have become less relevant as evidence as time progressed. + +8 + +Failure to Obtain Sufficient Competent Evidential Matter (AU § 326) + +19. For audits of fiscal years beginning before December 15, 2010, an auditor is +required to obtain sufficient competent evidential matter “through inspection, observation, +inquiries and confirmations to afford a reasonable basis for an opinion regarding the financial +statements under audit.” AU § 326.01. In connection with INVENT’s 2010 audit, Paritz and +Albert did not obtain sufficient competent evidential matter to afford a reasonable basis for the +unqualified opinion Paritz issued. Specifically, there is little evidence that audit work was +performed on the valuation of LottoPals, which comprised over 35% of INVENT’s total assets as +of December 31, 2010. Accordingly, Paritz and Albert failed to obtain sufficient reliable +evidence concerning the nature of the LottoPals transactions. +Failure to Obtain Sufficient Appropriate Audit Evidence (AS No. 15) + +20. For audits of fiscal years beginning on or after December 15, 2010, AS No. 15.4 +provides that the “auditor must plan and perform audit procedures to obtain sufficient +appropriate audit evidence to provide a reasonable basis for his or her opinion.” Audit +procedures for obtaining audit evidence include inspection, observation, inquiry, confirmation, +recalculation, reperformance, and analytical procedures. AS No. 15.13-21. In connection with +INVENT’s 2011 through 2013 audits, Paritz and Albert did not obtain sufficient appropriate +audit evidence to afford a reasonable basis for the unqualified opinions Paritz issued. While the +work papers included memorialization of INVENT’s valuation methodology and the Paritz audit +procedures performed, the work papers do not reflect that sufficient appropriate audit evidence +was obtained related to INVENT’s valuations of LottoPals or Clowd, and does not indicate that +any consideration was given to LottoPals’ or Clowd’s business development. The 2011 work +papers documented management’s valuation methodology, but did not include the auditor’s +evaluation of the reasonableness of the significant assumptions and appropriateness of +management’s fair value model. The work papers for the 2012 and 2013 audits simply carried +forward the same information from prior years without new updates or evaluations. The audit +procedures performed during this time were limited to the same initial calculations that had been +done to recalculate that applying the transaction share price in limited stock sales to 100% of the +companies’ outstanding shares resulted in the valuations provided by management. In addition, +for the 2012 audit, although Clowd’s valuation was reduced from $3 million to approximately +$1.4 million, there is no evidence that Albert performed audit procedures that would provide a +reasonable basis for Paritz’ unqualified opinion. Specifically, in 2012, INVENT management +looked at other comparable companies in the area to value Clowd instead of only using Clowd’s +limited stock sales, resulting in the significant reduction in value. Although INVENT provided +this information to Albert, his 2012 investment memo did not reflect the write-down or the +change in inputs, and instead discussed Clowd’s stock sales as the basis of its valuation. +Clowd’s valuation was further reduced by 50% in 2013, but again, there was no discussion, +evaluation, or documentation about this additional write-down. + + + +9 + +Failure to Adequately Prepare Required Audit Documentation (AS No. 3) + +21. AS No. 3.2 provides that “[a]udit documentation is the written record of the basis +for the auditor’s conclusions that provides the support for the auditor’s representations, whether +those representations are contained in the auditor’s report or otherwise.” Additionally, AS No. +3.6 provides that: +The auditor must document the procedures performed, evidence +obtained, and conclusions reached with respect to relevant +financial statement assertions. Audit documentation must clearly +demonstrate that the work was in fact performed. This +documentation requirement applies to the work of all those who +participate in the engagement as well as to the work of specialists +the auditor uses as evidential matter in evaluating relevant +financial statement assert ions. Audit documentation must contain +sufficient information to enable an experienced auditor, having no +previous connection with the engagement (a) to understand the +nature, timing, extent, and results of the procedures performed, +evidence obtained, and conclusions reached, and (b) to determine +who performed the work and the date such work was completed as +well as the person who reviewed the wor k and the date of such +review. + +22. Paritz and Albert failed to comply with AS No. 3 for their 2010-2013 audits of +INVENT’s financial statements because they failed to document the procedures performed in +sufficient detail to provide a clear understanding of the evidence obtained and conclusions +reached with respect to relevant financial statement assertions. For example, the standardized +Risk Assessment Summary Forms included no detail linking the identified risks of misstatement +to the auditor’s responses to those risks. In addition, documentation for fraud risk brainstorming +discussions and fraud inquiries with management did not exist for the 2010, 2011 and 2013 +INVENT audits. +23. In addition, the work papers for the 2010-2013 INVENT audits did not include +sufficient information to enable an experienced auditor having no previous connection with the +engagement to understand the nature, timing, extent, and results of the procedures performed, +evidence obtained, and conclusions reached; or to determine who performed and reviewed the +work and the relevant dates of review. While Albert prepared memoranda that were separate +from the checklists documenting information regarding LottoPals and Clowd, the documentation +in the aggregate was extremely limited, did not explain what evidence was obtained or how he +reached his conclusions, and in some cases, contained significant factual errors. For example, in +Albert’s 2012 investment memo, the business description of Clowd was incorrect, and the +valuation methodology described was simply carried forward from the last year despite the fact +that INVENT had written down the fair value of Clowd using additional inputs. Specifically, +instead of only using limited stock sales as the basis for Clowd’s valuation, INVENT also looked + +10 + +at other comparable companies in the area to value Clowd, resulting in an approximately 50% +reduction in Clowd’s valuation. Albert’s 2012 investment memo did not reflect any of this +information. +24. AS No. 3.18 provides that the office of the firm issuing the auditor’s report is +responsible for ensuring that all audit documentation sufficient to meet the requirements of AS +No. 3.4-13 is prepared and retained. Paritz failed to comply with AS No. 3 because the INVENT +work papers lack sufficient documentation in key areas such as fraud risk assessments and +discussions, and fair value measurements. Additionally, AS No. 3.15 provides 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 (i.e., documentation completion date). Paritz failed to +assemble and retain a complete and final set of INVENT’s 2010 and 2011 audit work papers. In +particular, Paritz produced to the Commission staff different versions of certain key audit work +papers, and Albert and Serotta could not adequately identify the final versions or explain the +discrepancies. +Failures in Conducting Reviews of +Interim Financial Information (AU § 722) + +25. Under AU § 722, procedures for conducting a review of interim financial +information generally are limited to analytical procedures, inquiries, and other procedures that +address significant accounting and disclosure matters relating to the interim financial information +to be reported. AU § 722.07. The accountant performs these procedures to obtain a basis for +communicating whether he or she is aware of any material modifications that should be made to +the interim financial information for it to conform with GAAP. The specific inquiries made and +the analytical and other procedures performed should be tailored to the engagement based on the +accountant’s knowledge of the entity’s business and its internal control. AU § 722.15. AU § +722.51 provides that auditors “should prepare documentation in connection with a review of +interim financial information.” The standard stipulates that 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 § 722.52. +26. The work papers prepared in connection with Paritz and Albert’s reviews of +INVENT’s first quarter 2011 and second quarter 2012 financial statements do not evidence that +any inquiry was performed or that any documentation was prepared regarding the material +changes in Clowd’s valuation that occurred during these periods. During the first quarter of +2011, INVENT valued Clowd at $3 million six months after purchasing it for approximately +$65,000 of INVENT stock. Yet, the work papers do not include evidence of any inquiries or +other procedures performed regarding the significant difference between the initial purchase +price and the 2011 valuation. Similarly, there is no evidence that Albert performed any + +11 + +analytical procedures in connection with the approximately 50% decrease in Clowd’s valuation +during the second quarter of 2012. +Failure to Provide Adequate Engagement Quality Review (AS No. 7) + +27. AS No. 7 stipulates that an engagement quality reviewer should evaluate the +significant judgments made by the engagement team and the related conclusions reached in +forming the overall conclusion on the engagement and in preparing the engagement report. AS +7.02. To evaluate such judgments and conclusions, the engagement quality reviewer should, to +the extent necessary to satisfy the requirements, hold discussions with the engagement partner +and other members of the engagement team and review documentation. AS No. 7.9. The +engagement quality reviewer, among other things, should evaluate the significant judgments that +relate to engagement planning, including the consideration of the auditing firm’s recent +engagement experience with the company and risks identified in connection with the firm’s +client acceptance and retention process, the consideration of the company’s business, recent +significant activities, and related financial reporting issues and risks, and the judgments made +about materiality and the effect of those judgments on the engagement strategy. AS No. 7.10. In +an audit, the engagement quality reviewer should evaluate whether the engagement +documentation reviewed when performing the procedures required indicates that the engagement +team responded appropriately to significant risks and supports the conclusions reached by the +engagement team with respect to the matters reviewed. AS No. 7.11. In an engagement to +review interim financial information, the engagement quality reviewer should evaluate the +significant judgments made by the engagement team and the related conclusions reached in +forming the overall conclusion on the engagement. To evaluate such judgments and conclusions, +the engagement quality reviewer should, to the extent necessary to satisfy requirements: (1) hold +discussions with the engagement partner and other members of the engagement team, and (2) +review documentation. AS No. 7.14-16. +28. Serotta failed to comply with AS No. 7 in connection with the 2010-2013 audits +of INVENT’s financial statements and interim reviews of INVENT’s first quarter 2011 and +second quarter 2012 financial statements. In addition, there is no documentary evidence that +Serotta evaluated the significant judgments the engagement team made related to the risks +identified in connection with the firm’s client acceptance and retention process for the 2010 and +2011 audits. There is no documentary evidence that Serotta evaluated the engagement team’s +assessment of, and responses to, significant risks during the 2010, 2011 and 2013 audits. Other +than participating in an engagement team discussion related to the 2012 audit, there is little +documentary evidence of any communications between Serotta and the audit team. There is no +documentary evidence that Serotta reviewed the engagement team’s risk assessment form, which +linked the engagement team’s assessment of significant risks to their responses to such risks. +There is no documentary evidence that Serotta reviewed any work papers relating to the +valuation of LottoPals and Clowd, which he was required to evaluate because it involved +significant judgments made by the engagement team. During the 2010 audit, Serotta signed the +firm’s Supervision, Review, and Approval form on April 6, 2011 at a time when Albert still had +significant concerns regarding the LottoPals valuation, although he never signed the engagement + +12 + +completion document. Finally, there is no documentary evidence that Serotta reviewed the work +papers associated with the interim reviews of INVENT’s first quarter 2011 and second quarter +2012 financial statements. As a result, Serotta failed to comply with AS No. 7. +Failure to Exercise Due Professional Care and Professional Skepticism (AU § 230) + +29. PCAOB Standards require auditors to exercise due professional care in the +planning and performance of an audit and the preparation of the report. AU § 230.01. +Specifically, this standard “imposes a responsibility upon each professional within an +independent auditor’s organization to observe the standards of field work and reporting.” AU § +230.02. Further, due professional care requires the auditor to exercise professional skepticism, +which is an attitude that includes a questioning mind and a critical assessment of the audit +evidence. AU § 230.07. Under this standard, the auditor is also required “to consider the +competency and sufficiency of the evidence” in gathering and objectively evaluating audit +evidence. AU § 230.08. The auditor should not be satisfied with less than persuasive evidence +because of a belief that management is honest. AU § 230.09. +30. Paritz and Albert failed to exercise due professional care in several ways between +2010 and 2013. For example, during the 2010 audit, despite having significant concerns +regarding LottoPals’ valuation, Paritz and Albert signed off on the audit with no explanation of +how the competency and sufficiency of the evidence was considered as being supportive of the +valuation reported in INVENT’s financial statements. Going forward, Paritz and Albert did not +evaluate the appropriateness of using stale stock transactions as the basis for the LottoPals and +Clowd valuations, assess the appropriateness or amount of Clowd’s write-downs in 2012 and +2013, or consider the business development of the portfolio companies. Paritz and Albert also +prepared and reviewed audit documentation that lacked sufficient audit evidence, and authorized +the issuance of audit reports despite insufficient audit evidence supporting the fair value of +LottoPals and Clowd. +31. Serotta failed to exercise due professional care in connection with the 2010-2013 +audits of INVENT’s financial statements. There is no evidence that he exercised professional +skepticism by questioning the significant changes in the values of LottoPals or Clowd, or that he +reviewed any specific documents regarding the valuations even though they related to significant +judgments made by the engagement team. +Failure to Maintain Adequate System of Quality Control +(QC §§ 20, 40) + +32. QC § 20.03 provides that a “firm has a responsibility to ensure that its personnel +comply with the professional standards applicable to its accounting and auditing practice.”7 A + +7 Citations to “QC” are citations to Statements on Quality Control Standards in effect at the time of the +relevant conduct for PCAOB audits and review of financial statements. + +13 + +firm is required to maintain policies and procedures that provide the firm with reasonable +assurance that “(a) [t]hose hired possess the appropriate characteristics to enable them to perform +competently; (b) [w]ork is assigned to personnel having the degree of technical training and +proficiency required in the circumstances; (c) [p]ersonnel participate in general and industry- +specific continuing professional education and other professional development activities that +enable them to fulfill responsibilities assigned, and satisfy applicable continuing professional +education requirements of the AICPA and regulatory agencies; [and] (d) [p]ersonnel selected for +advancement have the qualifications necessary for fulfillment of the responsibilities they will be +called on to assume.” QC § 20.13; QC § 40.02. Policies and procedures should 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 also provide reasonable +assurance that the firm (a) undertakes only those engagements that the firm can reasonably +expect to be completed with professional competence; and (b) appropriately considers the risks +associated with providing professional services in the particular circumstances. QC § 20.14-.15; +QC § 20.17 provides that policies 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. +33. Paritz failed to maintain an adequate system of quality control to provide +reasonable assurance that its personnel complied with professional standards. Specifically, +Paritz accepted INVENT as a client when the firm lacked sufficient competence and experience +to audit INVENT’s financial statements considering the company was a business development +company that held start-up technology companies. Albert lacked the technical skills and +competence to audit INVENT, and Paritz did not ensure that the audit was assigned to personnel +having the proficiency required under the circumstances. Paritz’ inadequate system of quality +control is also evidenced by the fact that the INVENT audits and reviews were not conducted in +accordance with PCAOB Standards. +Violations + +34. As a result of the conduct described above, Respondents engaged in “improper +professional conduct” within the meaning of Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. In relevant part, Rule 102(e)(1)(iv)(B) of +the Commission’s Rules of Practice defines “improper professional conduct” as one of two types +of negligent conduct: (1) a single instance of highly unreasonable conduct in circumstances for +which heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct that +indicate a lack of competence. +35. 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. 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. 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 + +14 + +[S]tandards when it had not. As a result of the conduct described above, Paritz willfully +violated, and Albert willfully aided and abetted and caused Paritz’ violations of Rule 2-02(b)(1) +of Regulation S-X by issuing an audit report stating that it had conducted its audit in accordance +with PCAOB Standards when it had not. +36. As a result of the conduct described above, Paritz willfully violated and Albert +willfully aided and abetted and caused violations of provisions of the federal securities laws and +rules and regulations thereunder within the meaning of Section 4C(a)(3) of the Exchange Act and +Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. +Findings + +37. Based on the foregoing, the Commission finds that Respondents engaged in +improper professional conduct within the meaning of Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +38. Based on the foregoing, the Commission finds that Paritz willfully violated, and +Albert willfully aided and abetted and caused Paritz’ violations of Rule 2-02(b)(1) of Regulation +S-X within the meaning of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice. +Undertakings + +39. Review of Written Policies and Procedures. Paritz shall, within sixty (60) days +after the entry of this Order, evaluate its existing audit and interim review written policies and +procedures and shall make such revisions as may be necessary in order to adopt, implement, and +enforce written policies and procedures to provide reasonable assurance that Paritz’ audits and +reviews are conducted in compliance with (a) the relevant Commission regulations and (b) +professional standards relevant to appearing and practicing before the Commission. Paritz shall +review and revise as necessary its written policies and procedures in the following areas: (i) +auditing fair value measurements and disclosures; (ii) obtaining sufficient appropriate audit +evidence; (iii) adequately preparing required audit documentation; (iv) conducting reviews of +interim financial information; (v) providing adequate engagement quality review; (vi) exercising +due professional care and professional skepticism; and (vii) maintaining an adequate system of +quality control. +40. Retention of an Independent Consultant. Paritz shall retain, within sixty (60) +days after entry of this Order, an independent consultant (“Independent Consultant”), not +unacceptable to the Commission staff. Paritz will require the Independent Consultant to review +and evaluate the audit and interim review policies and procedures of Paritz including but not +limited to those set forth in paragraph 39 above. Paritz will require that the Independent +Consultant’s review and evaluation assess the foregoing areas to determine whether Paritz’ +policies and procedures are adequate and sufficient to provide reasonable assurance of +compliance with (a) the relevant Commission regulations and (b) professional standards relevant + +15 + +to appearing and practicing before the Commission. Paritz 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. Paritz will provide the Commission staff a copy of the engagement +letter detailing the scope of the Independent Consultant’s responsibilities. +41. Within ninety (90) days of being retained, Paritz will require the Independent +Consultant to issue a report (“Report”) to Paritz: (a) summarizing the Independent Consultant’s +review and evaluation; and (b) making recommendations, where appropriate, reasonably +designed to ensure that audits and reviews conducted by Paritz comply with Commission +regulations and relevant professional standards. At Paritz’ direction, the Independent Consultant +shall provide a copy of the Report to the Commission staff when the Report is issued. +42. Paritz shall adopt, as soon as practicable, all recommendations of the Independent +Consultant in the Report. Provided, however, that within thirty (30) days of issuance of the +Report, Paritz may advise the Independent Consultant in writing of any recommendation that it +considers to be unnecessary, outside the scope of this Order, unduly burdensome, or impractical. +Paritz 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. Paritz and the Independent Consultant shall +engage in good-faith negotiations in an effort to reach agreement on any recommendations +objected to by Paritz. In the event that the Independent Consultant and Paritz are unable to agree +on an alternative proposal within thirty (30) days, Paritz shall abide by the determinations of the +Independent Consultant. +43. To ensure the independence of the Independent Consultant, Paritz: (1) shall not +have the authority to terminate the Independent Consultant or substitute another independent +compliance consultant for the initial Independent Consultant, without the prior written approval +of the Commission staff; and (2) shall compensate the Independent Consultant and persons +engaged to assist the Independent Consultant for services rendered pursuant to this Order at their +reasonable and customary rates. +44. Paritz shall require the Independent Consultant to enter into an agreement that +provides that for the period of engagement and for a period of two years from completion of the +engagement, the Independent Consultant shall not enter into any employment, consultant, +attorney-client, auditing or other professional relationship with Paritz, or any of its present or +former affiliates, directors, officers, employees, or agents acting in their capacity. The +agreement will also provide that the Independent Consultant will require that any firm with +which he/she is affiliated or of which he/she is a member, and any person engaged to assist the +Independent Consultant in performance of his/her duties under this Order shall not, without prior +written consent of the Commission’s Los Angeles Regional Office, enter into any employment, +consultant, attorney-client, auditing or other professional relationship with Paritz, 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. + +16 + +45. Certification of Compliance. Paritz 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 Paritz agrees to provide such evidence. The certification and +supporting material shall be submitted to Sara D. Kalin, Esq., Assistant Regional Director, Los +Angeles Regional Office, 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 Respondents’ Offers. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondents Albert and Paritz shall cease and desist from committing or causing +any violations of and any future violations of Rule 2-02(b)(1) of Regulation S-X. + +B. Respondent Paritz is censured. + +C. Respondent Paritz shall comply with the undertakings set forth in paragraphs 39 +through 45, above. + +D. Respondents Albert and Serotta are denied the privilege of appearing or practicing +before the Commission as accountants. + +E. After two (2) years from the date of this Order, Respondent Albert 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 Respondent Albert’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 + + +17 + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934. Such +an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + +(a) Respondent Albert, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + +(b) Respondent Albert, 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 Respondent Albert’s +or the firm’s quality control system that would indicate that Respondent +Albert will not receive appropriate supervision; +(c) Respondent Albert has resolved all disciplinary issues with the PCAOB, +and has complied with all terms and conditions of any sanctions imposed +by the PCAOB (other than reinstatement by the Commission); and + +(d) Respondent Albert 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. + +F. The Commission will consider an application by Respondent Albert 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 Albert’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. + +18 + +G. After one (1) year from the date of this Order, Respondent Serotta 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 Respondent Serotta’s work +in his practice before the Commission as an accountant will be reviewed +either by the independent audit committee of the public company for +which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934. Such +an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + +(a) Respondent Serotta, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + +(b) Respondent Serotta, 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 Respondent Serotta’s +or the firm’s quality control system that would indicate that Respondent +Serotta will not receive appropriate supervision; +(c) Respondent Serotta 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 + + +19 + +(d) Respondent Serotta 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. + +H. The Commission will consider an application by Respondent Serotta 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 Serotta’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. +I. Respondent Albert shall, within 20 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. + +J. Respondent Paritz shall, within 20 days of the entry of this Order, pay a civil +money penalty in the amount of $60,000 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +K. Respondent Paritz shall, within 20 days of the entry of this Order, pay +disgorgement of $64,476 and prejudgment interest of $7,573 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. + +L. 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 + + +20 + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying the +Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to C. Dabney O’Riordan, Co-Chief, Asset +Management Unit, Division of Enforcement, Securities and Exchange Commission, 444 S. +Flower Street, 9th Floor, Los Angeles, California 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, 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 any Respondent by or on behalf of one +or more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + + +21 + +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 Albert, and further, any debt for disgorgement, prejudgment interest, +civil penalty or other amounts due by Respondent Albert 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 Albert 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/2017/AAER-3900.txt b/raw/aaer/2017/AAER-3900.txt new file mode 100644 index 0000000000000000000000000000000000000000..40a5af6bb147075a6976f4aeab3475fdefa634a6 --- /dev/null +++ b/raw/aaer/2017/AAER-3900.txt @@ -0,0 +1,79 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81740 / September 27, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3900 / September 27, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18225 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +Robert K. Stewart, 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 Robert K. Stewart (“Stewart”) 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. Stewart is a certified public accountant in New York. + +2. On May 9, 2016, a judgment of conviction was entered against Stewart in United +States v. Stewart, et al., 15-cr-287 (LTS), in the United States District Court for the Southern +District of New York, finding him guilty of one count of conspiracy to commit securities fraud +and fraud in connection with a tender offer. + +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, the Court sentenced Stewart to four years of +probation, including 12 months of home detention, and imposed a criminal forfeiture order of +$150,000. + +III. + +In view of the foregoing, the Commission finds that Stewart 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 Stewart 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/2017/AAER-3902.txt b/raw/aaer/2017/AAER-3902.txt new file mode 100644 index 0000000000000000000000000000000000000000..835d75a3494d7c08ae563673c5825de8a9d967f6 --- /dev/null +++ b/raw/aaer/2017/AAER-3902.txt @@ -0,0 +1,165 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 81911 / October 19, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3902 / October 19, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18259 + + + + +In the Matter of + +MAYANK GUPTA, CPA, + +Respondent. + + + + +ORDER INSTITUTING +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Rule 102(e)(3)(i) of the Commission’s Rules of Practice against Mayank Gupta (“Respondent”). 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 paragraphs 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. Gupta, age 34 and a resident of Sunnyvale, California, was an assurance manager at +PricewaterhouseCoopers, LLP. (“PWC”), from 2012 to November, 2016. He is licensed as a +certified public accountant in the State of California. + +2. QLogic Corporation (“QLogic”), was a California limited liability company +headquartered in Aliso Viejo, California. At all relevant times, QLogic’s common stock was +registered with the Commission under Section 12(b) of the Securities Exchange Act of 1934 +(“Exchange Act”) and traded on The NASDAQ Global Select Market. + +3. On September 12, 2017, the Commission filed a complaint against Gupta in SEC v. +Mayank Gupta, et. al. (Case No. 5:17-cv-05274) in the United States District Court for the Northern +District of California. On October 11, 2017, the court entered a consent final judgment against +Gupta permanently enjoining him from future violations of Sections 10(b) and 14(e) of the +Exchange Act and Rules 10b-5 and 14e-3 thereunder, and ordering him to pay a civil penalty of +$23,785.40. + +4. The complaint alleges that Gupta engaged in insider trading by tipping his cousin-in- +law, Pushpendra Agrawal (“Agrawal”), material nonpublic information in advance of a June 15, +2016 announcement that Cavium, Inc. (“Cavium”) would acquire QLogic through a tender offer. +The complaint alleges that Gupta worked at PWC including providing auditing services for Cavium. +The complaint further alleges that by the morning of June 15, 2016, in the course of his employment +at PWC, Gupta became privy to material non-public information about Cavium’s acquisition of +QLogic. Allegedly, on the morning of June 15, 2016, Gupta tipped Agrawal that Cavium was +acquiring QLogic and that QLogic was therefore a “sure thing.” According to the complaint, +Agrawal purchased 250 QLogic call options based on Gupta’s tip. The complaint alleges that +Agrawal made a profit of $23,785.40 as a result of the price increase in QLogic stock after the +tender offer was announced. + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Gupta’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Gupta 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 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 Respondent’s work +in his practice before the Commission as an accountant will be reviewed either by the independent +audit committee of the public company for which he works or in some other acceptable manner, as +long as he practices before the Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission as a member of +an audit committee, as that term is defined in Section 3(a)(58) of the Securities Exchange Act of +1934. Such an application will be considered on a facts and circumstances basis with respect to +such membership, and the applicant’s burden of demonstrating good cause for reinstatement will +be particularly high given the role of the audit committee in financial and accounting matters; +and/or: + +3. an independent accountant. Such an application must satisfy the +Commission that: + +(a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + +(b) Respondent, or the registered public 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 + 4 +reinstatement by the Commission); and + +(d) Respondent acknowledges his responsibility, as long as he appears +or practices before the Commission as an independent accountant, to comply with all requirements +of the Commission and the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control standards. + + C. 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 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/2017/AAER-3907.txt b/raw/aaer/2017/AAER-3907.txt new file mode 100644 index 0000000000000000000000000000000000000000..75f0106d3ae091cbdb898c78c48ccefc6e9678de --- /dev/null +++ b/raw/aaer/2017/AAER-3907.txt @@ -0,0 +1,302 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82110 / November 17, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3907 / November 17, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-18285 + + + +In the Matter of + +MICHAEL C. SABATINO, +CPA, + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE ACT +OF 1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Michael C. +Sabatino, CPA (“Respondent” or “Sabatino”) 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)(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: +Summary +1. Michael C. Sabatino, is the former Senior Vice President and Chief Accounting +Officer of MDC Partners Inc. (“MDCA”), a publicly-traded marketing company. From 2009 +through 2014, Sabatino’s conduct contributed to the improper receipt by Miles S. Nadal, MDCA’s +then Chairman and Chief Executive Officer, of millions of dollars in undisclosed compensation in +the form of a wide range of perquisites, personal expense reimbursements and other items of value. +As a result of his misconduct, Sabatino violated Exchange Act Rule 13b2-1, and caused MDCA to +violate Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, +13a-1, 14a-3 and 14a-9 thereunder. +Respondent, and Relevant Entity and Individual +2. Respondent Michael C. Sabatino, age 53, is a resident of New York. He was the +Senior Vice President and Chief Accounting Officer of MDCA from 2005 until he resigned in + +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 + +July 2015. Sabatino has been licensed as a certified public accountant in the State of New York +since 1988. +3. MDC Partners Inc. is a Canadian corporation headquartered in New York, New +York, engaged in the advertising, marketing and communications businesses. The company’s +common stock is registered under Section 12(b) of the Exchange Act and trades on the +NASDAQ National Market under the ticker symbol “MDCA.” +4. Miles S. Nadal was the Chairman of the Board, Chief Executive Officer and +President of MDCA from 1986 until 2015. +Facts +5. Pursuant to MDCA’s policies and procedures, Sabatino’s responsibilities as Chief +Accounting Officer included the review and approval of Nadal’s requests for expense +reimbursements. +6. From 2009 through 2014, MDCA paid to Nadal $11.285 million worth of +perquisites, personal expense reimbursements and other items of value, without disclosing such +items as compensation in its definitive proxy statements. Sabatino approved nearly all of these +payments to Nadal. Items for which Nadal received reimbursement with approval from Sabatino +include, but are not limited to, private aircraft usage, cosmetic surgery, yacht-and-sports-car-related +expenses, jewelry, cash for tips and gratuities, medical expenses for Nadal, family members and +others, charitable donations in Nadal’s name, pet care, vacation and personal travel expenses, club +memberships, and certain expenses for which supporting documentation or information was +incomplete. +7. MDCA’s definitive proxy statements for 2009 through 2014 disclosed +approximately $3.87 million worth of perquisites and personal benefits provided to Nadal. The +proxy statements disclosed an annual $500,000 perquisite allowance; interest benefits received on +interest free loans in 2009, 2010, 2011 and 2012; disability, medical, life insurance benefits in +2009 and 2010; and legal fees and the use of company aircraft and apartment in 2014. +8. Each year, Sabatino reviewed and assisted with the preparation of MDCA’s +definitive proxy statements, including the executive compensation sections. However, MDCA’s +definitive proxy statements for 2009 through 2014 failed to disclose an annual average of +approximately $1.88 million worth of additional perquisites and personal benefits provided to +Nadal, thereby understating the perquisites and personal benefits portion of Nadal’s compensation +by an average of almost 300% each year. +9. MDCA incorporated its definitive proxy statements into its annual reports by +reference. Sabatino reviewed and signed these annual reports. +10. From 2009 through 2014, MDCA incorrectly recorded payments for the benefit of, +and reimbursements to, Nadal as business expenses, and not compensation, based in part of +Sabatino’s approval of Nadal’s expense reimbursement requests. As a result, MDCA’s books, +4 + +records, and accounts did not, in reasonable detail, accurately and fairly reflect its disposition of +assets. +11. In addition, MDCA failed to devise and maintain internal accounting controls +relating to payments for the benefit of, and reimbursements to, Nadal that were sufficient to +provide reasonable assurances that transactions were recorded as necessary to maintain the +accountability of assets. These failures included, for instance, MDCA’s practice of reimbursing +several thousands of dollars a month to Nadal for cash payments of “tips and gratuities,” with +Sabatino’s approval, based solely on a line item in Nadal’s monthly expense submissions. By way +of further example, MDCA paid, with Sabatino’s approval, more than $1.5 million for the benefit +of Nadal outside of its monthly expense reimbursement process. +12. After receipt of a subpoena from the Commission staff, MDCA launched an +internal investigation, which continued after additional staff inquiries. Sabatino cooperated with +the internal and Commission investigations. After the internal investigation was launched, Nadal +paid back $11.285 million worth of perquisites, personal expense reimbursements and other items +of value that he improperly received from 2009 through 2014. Nadal resigned from MDCA in July +2015. +Violations +13. Section 14(a) of the Exchange Act makes it unlawful to solicit any proxy in respect +of any security (other than an exempted security) registered pursuant to Section 12 of the Exchange +in contravention of such rules and regulations as the Commission may prescribe. Rule 14a-3 +prohibits the solicitation of proxies without furnishing proxy statements containing the information +specified in Schedule 14A, including executive compensation disclosures pursuant to Item 402 of +Regulation S-K. 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, Sabatino caused MDCA to violate Section 14(a) of the Exchange Act and Rules 14a-3 and +14a-9 thereunder. +14. Section 13(a) of the Exchange Act and Rule 13a-1thereunder require every issuer of +a security registered pursuant to Section 12 of the Exchange Act to file with the Commission, +among other things, annual reports as the Commission may require. As a result of the +incorporation of deficient proxy statements by reference in its annual reports, MDCA violated +Section 13(a) of the Exchange Act and Rule 13a-1 thereunder. As a result of the conduct described +above, Sabatino caused these violations. +15. As a result of the conduct described above, Sabatino caused MDCA to violate Rule +12b-20 under the Exchange Act, which requires that, in addition to the information expressly +required to be included in a statement or report filed with the Commission, there shall be added +such further material information, if any, as may be necessary to make the required statements, in +light of the circumstances under which they are made, not misleading. +5 + +16. As a result of the conduct described above, Sabatino caused MDCA to violate +Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep +books, records and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. +17. As a result of the conduct described above, Sabatino caused MDCA to violate +Section 13(b)(2)(B) of the Exchange Act, which requires reporting companies to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that, +among other things, transactions are recorded as necessary to maintain accountability for assets. +18. As a result of the conduct described above, Sabatino willfully4 violated Rule 13b2- +1, which prohibits any person from, directly or indirectly, falsifying or causing to be falsified, any +book, record, or account subject to Section 13(b)(2)(A) of the Exchange Act. +Findings +19. Based on the foregoing, the Commission finds that Sabatino engaged in conduct +within the meaning of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Sabatino’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Sabatino shall cease and desist from committing or causing any violations and any +future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and +Rules 12b-20, 13a-1, 13b2-1, 14a-3 and 14a-9 thereunder. + B. Sabatino is denied the privilege of appearing or practicing before the Commission +as an accountant. + C. After one year from the date of this order, Sabatino 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: + +4 This use of the word “willfully” does not reflect a finding that Sabatino acted +deliberately, with intent to violate the law or with knowledge that he was doing so. 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)). +6 + + 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 Sabatino’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) Sabatino, 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) Sabatino, 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’s or the firm’s quality control system that would indicate that +Sabatino will not receive appropriate supervision; + (c) Sabatino 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) Sabatino 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 Sabatino 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 Sabatino’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 +7 + +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + E. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $70,000 to the Securities and Exchange Commis sion 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 Michael C. +Sabatino, CPA as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Brendan P. McGlynn, Assistant +Regional Director, Philadelphia Regional Office, Division of Enforcement, Securities and +Exchange Commission, 1617 JFK Blvd., Suite 520, Philadelphia, PA 19103. + +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 +8 + +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/2017/AAER-3910.txt b/raw/aaer/2017/AAER-3910.txt new file mode 100644 index 0000000000000000000000000000000000000000..5da41af4a471bfe9ab133a55a8565f985eac02f0 --- /dev/null +++ b/raw/aaer/2017/AAER-3910.txt @@ -0,0 +1,69 @@ + 1 +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10441 / November 30, 2017 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82179 / November 30, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3910 / November 30, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18290 + +In the Matter of +THADDEUS BEREDAY, +Respondent. + +ORDER OF SUSPENSION PURSUANT TO +RULE 102(e)(2) OF THE COMMISSION’S +RULES OF PRACTICE + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate to issue an +order of forthwith suspension of Thaddeus Bereday (“Bereday”) 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. Bereday, age 52, previously held a license as an attorney in Ohio. He served as +senior vice president and general counsel of WellCare Health Plans, Inc. (“WellCare”) from 2002 +until his resignation in January 2008. + +2. On November 22, 2017, a judgment of conviction was entered against Bereday in +United States v. Farha, et al., Crim. No. 8:11cr-00115-JSM-MAP (MDFL), finding him guilty of + +1 Rule 102(e)(2) provides in pertinent part: Any attorney who has been suspended or +disbarred by a court of the United States or of any State; . . . or any person who has been +convicted of a felony or a misdemeanor involving moral turpitude shall be forthwith suspended +from appearing or practicing before the Commission.” See 17 C.F.R. 201.102(e)(2). + 2 +one count of making a false statement relating to health care matters in violation of 18 U.S.C. § +1035. + +3. As a result of the conviction, on November 22, 2017, Bereday was sentenced to six +months imprisonment in a federal penitentiary, three years of supervised release, and a $50,000 fine. + +III. + + In view of the foregoing, the Commission finds that Bereday 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 Thaddeus Bereday 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/2017/AAER-3911.txt b/raw/aaer/2017/AAER-3911.txt new file mode 100644 index 0000000000000000000000000000000000000000..f93f0501792051854558cec2465ff717f871c3c1 --- /dev/null +++ b/raw/aaer/2017/AAER-3911.txt @@ -0,0 +1,2015 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82206 / December 4, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3911 / December 4, 2017 + +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 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 +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 Practice2 and + +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 + +against Georgia Chung, CPA (“Chung”) and Tommy Shek, CPA (“Shek”) pursuant to Section +4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. (A&C, +Wahl, Deutchman, Chung, and Shek are collectively referred to as “Respondents.”) + +II. + + After an investigation the Division of Enforcement alleges that: + +SUMMARY + +1. These proceedings involve serial violations of the federal securities laws and/or +improper professional conduct by public accounting firm Anton & Chia, LLP (“A&C”) and several +of its current and former partners and a manager. Respondents’ conduct relates to the audit and/or +interim review engagements for three separate microcap company clients: Accelera Innovations, +Inc. (“Accelera”), Premier Holding Corporation (“Premier”), and CannaVEST Corp. +(“CannaVEST”) (together, the “Reporting Companies”). In performing the audits and interim +reviews of the Reporting Companies’ financial statements, Respondents egregiously deviated from +multiple standards of the Public Company Accounting Oversight Board (“PCAOB”) and ignored +numerous red flags that indicated the Reporting Companies’ financial statements and public filings +contained material misstatements. + +2. In the Accelera matter, Accelera inflated its financial position and results by +treating another company’s revenues, assets, and liabilities as its own. Accelera’s public filings +for year-end 2013 through year-end 2015 included revenue from an entirely separate company – +a putative subsidiary that Accelera did not own or control. As a result of this improper +consolidation, Accelera’s financial statements overstated its revenue by 69% to 90% during the +relevant period. Yet A&C audited Accelera’s financials and opined that they fairly represented +Accelera’s financial condition and results and complied with generally accepted accounting +principles. + +3. In Premier’s 2013 year-end audit, A&C and Wahl, the engagement partner, accepted +Premier management’s grossly inflated and wholly unsupported valuation of the company’s largest +tangible asset: an unsecured promissory note (“Note”) issued in January 2013 by a new company +that had essentially taken over a business that had generated a $756,000 loss for Premier for 2012, +and which had defaulted on its first payment obligation under the Note. A&C and Wahl also +improperly accepted management’s accounting for the company’s largest intangible asset – +goodwill reportedly derived from Premier’s acquisition of a controlling interest in a private +company. Although the stake in the private company had been acquired over a year earlier, +management still allocated the entire purported value of the asset to goodwill, because the valuation +of the identifiable assets and liabilities acquired had not been completed. In addition, management +failed to adequately assess that goodwill for impairment. Together, the Note and the goodwill +associated with the controlling interest in the private company represented 75% of the company’s +reported assets on December 31, 2013. The receipt of the Note had also purportedly generated +almost a million dollars in income. In performing their audits, A&C and Wahl failed to adhere to +multiple auditing standards, by failing to, among other things, obtain sufficient appropriate audit +evidence and failing to exercise due care and professional skepticism. In addition, A&C and +3 + +Wahl ignored red flags indicating that the Note was part of a round-trip exchange between +related parties of essentially worthless assets for stock. + +4. A&C, Wahl, and Deutchman disregarded red flags and violated professional +standards in the audits of Accelera from 2013 to 2015, and so did A&C and Wahl in the audit of +Premier in 2013. The process was fundamentally flawed. They then issued or approved reports on +the financial statements of Accelera and Premier, claiming that A&C had conducted the audits in +accordance with the standards of the PCAOB. The reports, in turn, opined that the financial +statements fairly presented the financial positions and results of Accelera and Premier, respectively, +and followed Generally Accepted Accounting Principles (“GAAP”). A&C, Wahl, and Deutchman +knew, or were reckless in not knowing, that the statements in A&C’s reports for Accelera and +Premier were false and misleading. + +5. In the CannaVEST matter, CannaVEST’s assets were materially overstated on its +2013 first and second quarter balance sheets filed in its Forms 10-Q. The overstatements related to +CannaVEST’s acquisition of PhytoSphere Systems, LLC (“PhytoSphere”) on January 29, 2013 for +a purported purchase price of $35 million. CannaVEST knew it was paying substantially less than +$35 million to acquire PhytoSphere because it was mainly paying with CannaVEST stock that had +little value. CannaVEST, however, recorded $35 million in assets on its balance sheet related to the +acquisition. A&C did not identify the overstatements during the first and second quarter interim +reviews because, among other things, A&C failed to make adequate inquiries of management +regarding the fair value of the consideration that CannaVEST paid for PhytoSphere, i.e., the fair +value of CannaVEST’s stock as of January 29, 2013. In the third quarter of 2013, CannaVEST +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. During the third quarter interim review, however, A&C failed to consider whether a +restatement of CannaVEST’s first and second quarter balance sheets was necessary. In April 2014, +CannaVEST restated all three quarters to reflect $8 million in assets related to the PhytoSphere +acquisition on CannaVEST’s balance sheet. During CannaVEST’s interim reviews, A&C, Wahl +(the first through third quarter engagement partner), Chung (the first quarter EQR), and Shek (the +first through third quarter audit manager) engaged in improper professional conduct by failing to +adhere to PCAOB standards and ignoring a number of red flags that indicated that CannaVEST’s +financial information contained material misstatements. + +6. As described below, in connection with A&C’s audits and interim reviews of +Accelera’s FY 2013 through FY 2015 financial statements: + +a. A&C willfully violated Exchange Act Section 10(b) and Rule 10b-5(b) +thereunder, and Deutchman willfully aided and abetted A&C’s violation +of Exchange Act Section 10(b) and Rule 10b-5(b) thereunder; + +b. A&C, Wahl, and Deutchman willfully aided and abetted and were a cause +of Accelera’s violation of Section 13(a) of the Exchange Act, and Rules +13a-1 and 13a-13 thereunder; + +4 + +c. A&C willfully violated Rule 2-02(b) of Regulation S-X, and Wahl and +Deutchman willfully aided and abetted and were a cause of A&C’s +violation of Rule 2-02(b) of Regulation S-X; and + +d. A&C, Wahl, and Deutchman willfully violated or willfully aided and +abetted violations of the federal securities laws or the rules and regulations +thereunder for the purposes of Section 4C(a)(3) of the Exchange Act and +Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, and 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. + +7. As described below, in connection with A&C’s audit of Premier’s FY 2013 financial +statements: + +a. A&C and Wahl willfully violated Exchange Act Section 10(b) and Rule +10b-5(b) thereunder; + +b. Wahl willfully aided and abetted A&C’s violations of Exchange Act +Section 10(b) and Rule 10b-5(b) thereunder; + +c. A&C and Wahl willfully aided and abetted and were a cause of Premier’s +violation of Section 13(a) of the Exchange Act, and Rule 13a-1 +thereunder; + +d. A&C willfully violated Rule 2-02(b) of Regulation S-X, and Wahl +willfully aided and abetted and was a cause of A&C’s violation of Rule 2- +02(b) of Regulation S-X; and + +e. A&C and Wahl willfully violated or willfully aided and abetted violations +of the federal securities laws or the rules and regulations thereunder for the +purposes of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) +of the Commission’s Rules of Practice, and 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. + +8. As described below, in connection with CannaVEST’s 2013 interim reviews, +A&C, Wahl, Chung, and 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. + + +5 + +RESPONDENTS + +9. 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 +currently co-owned by Chung and her husband, Wahl. As relevant here, A&C performed +Accelera’s 2013 through 2015 year-end audits and 2014 through 2015 interim reviews, Premier’s +2013 year-end audit, and CannaVEST’s 2013 interim reviews. + +10. 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. As relevant here, Wahl served as the +engagement partner for Accelera’s 2013 and 2014 year-end audits and for the five interim +reviews from the first quarter of 2014 through the second quarter of 2015, Premier’s 2013 year- +end audit, and CannaVEST’s 2013 interim reviews. + +11. 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. + +12. Michael Deutchman, CPA, age 70, of Playa Del Rey, California, was an A&C +audit partner from August 2014 until August 2016, when he resigned from the firm. He was the +EQR for Accelera’s 2014 year-end audit and the interim reviews for the third quarter of 2014 and +the first and second quarters of 2015. In 2008, Deutchman was censured by the Commission +under Section 4C(a) of the Exchange Act and 102(e) of the Commission’s Rules of Practice for +issuing an audit report for a public company while not registered with the PCAOB. Exchange +Act Rel. No. 58240 (July 29, 2008). In January 2015, the PCAOB barred Deutchman from +associating with a registered public accounting firm and ordered him to pay a civil penalty, for +concealing document deficiencies from PCAOB inspectors. See Final Decision, Kabani & Co., +No. 105-2012-002, slip op. at 19 (PCAOB Jan. 22, 2015). Those sanctions were stayed pending +an appeal, and the Commission upheld the PCAOB’s decision on March 10, 2017. 2017 SEC +LEXIS 758, Exchange Act Rel. No. 80201 (Mar. 10, 2017).3 + +13. 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. From January 2013 to July 2014, Shek was an A&C audit manager. 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.4 + +3 Kabani has appealed the Commission’s decision, and the Commission agreed to stay +Deutchman’s civil penalty, but not his bar, pending that appeal. See 2017 SEC LEXIS +1095, Exchange Act Rel. No. 80403 (April 7, 2017). + +4 On December 4, 2017, the Commission instituted an Order Instituting Public +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of + +6 + +OTHER RELEVANT PERSONS AND ENTITIES + +Accelera-Related Entities + +14. Accelera Innovations, Inc. is a Delaware corporation with its principal place of +business in Frankfort, Illinois. It was formerly known as Accelerated Acquisition IV, Inc. and +was incorporated in April 2008 as a shell company. The company claims to be “a healthcare +service company which is focused on acquiring companies primarily in the post-acute care +patient services and information technology services industries.” Its common stock has been +quoted on OTC Link, operated by OTC Markets Group, Inc. and formerly known as the Pink +Sheets (“OTC Link”) under ticker ACNV since January 2014. Accelera 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. Accelera’s fiscal year ends on December 31.5 + +15. Behavioral Health Care Associates, Ltd. (“BHCA”) is a health care provider +based in Schaumberg, Illinois specializing in psychiatry and substance abuse treatment. 100% of +its stock is owned by its founder, director, and sole owner. In or around October of 2012, the +owner placed BHCA for sale. Accelera entered into an agreement to acquire BHCA, but never +closed the deal. + +Premier-Related Entities + +16. Premier Holding Corporation is a Nevada corporation with its principal place of +business in Tustin, California. At all relevant times, Premier was a self-described provider of a +large array of energy services through its subsidiary companies. Premier’s common stock is and +was at all relevant times registered with the Commission pursuant to Section 12(g) of the +Exchange Act and quoted on the OTC Link, under ticker PRHL. Premier 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. Premier’s fiscal year ends on December 31. +Throughout the relevant period, Premier raised funds through purportedly private sales of stock. + +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 against Richard Koch, CPA, an A&C audit partner, related to his conduct in an +audit for Premier and two interim reviews for CannaVEST (Exchange Act Rel. No. 34- +82207) and also against Rahuldev Gandhi, CPA, a former A&C audit partner, concerning +his conduct in an audit for Accelera (Exchange Act Rel. No. 34-82208). + +5 On September 29, 2017, the Commission filed a civil injunctive action against Accelera, +its Chairman, and a related company in the United States District Court for the Northern +District of Illinois. (Case No. 17-cv-7052). On the same day, the Commission also filed +a civil injunctive action in that district against Accelera’s CFO, and later filed a motion +for entry of judgment based on a bifurcated settlement. (Case No. 17-cv-7057). + +7 + +For most of the relevant period, Premier was run, at least nominally, by Kevin Donovan and, +from October 2012 on, by Randall Letcavage.6 + +17. WePower Ecolutions, Inc. was a wholly-owned subsidiary of Premier formed in +November 2011 for the purpose of “offer[ing] renewable energy production and energy +efficiency products and services .” In January 2013, Premier effectively sold the business and the +name. On February 26, 2013, WePower Ecolutions’ name was changed to Energy Efficient +Experts. + +18. WePower Eco Corp. (“New Eco”), a Delaware corporation located in Aliso Viejo, +California, effectively acquired WePower Ecolutions in January 2013. + +19. The Power Company USA, LLC (“TPC”) was a privately-owned deregulated +power broker that brokered power to both residential and commercial users in the twelve states that +allowed the distribution of deregulated power. Since February 28, 2013, TPC has been 80% +owned by Premier. + +CannaVEST-Related Persons and Entities + +20. 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). + +21. 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 2013.7 + + + + + + +6 On December 4, 2017, the Commission filed a civil injunctive action against Premier, +Letcavage, and another individual in the United States District Court for the Southern +District of New York. + +7 On June 15, 2017, the Commission filed a civil injunctive action against CannaVEST and +Mona in the United States District Court for Nevada (Case No. 2:17-CV-01681-APG- +PAL). +8 + +FACTS + +2013-2015 ACCELERA AUDITS AND REVIEWS + +Background + +22. Accelera’s public filings were supposed to reflect Accelera’s financial condition +and results, but in reality, they included the revenues, assets, and liabilities of an entirely separate +company. Accelera inflated its financial position and results in its public filings by including the +revenues, assets, and liabilities of a company that it did not own or control. By including the +financial results of another company, Accelera painted a rosier picture of its finances than was +accurate, misleading the investing public about its true financial condition and results. + +23. A&C did not stand in the way of Accelera’s fraud. Instead, A&C facilitated it. + +24. A&C audited Accelera’s year-end financial statements for 2013, 2014, and 2015. +Accelera’s Forms 10-K for each of those years included audit reports containing unqualified +opinions from A&C. In addition, A&C performed the quarterly reviews of Accelera’s financial +statements throughout 2014 and 2015. + +25. A&C opined that Accelera’s financial statements fairly presented its financial +condition and results, and conformed with generally accepted accounting principles. + +26. A&C’s reports in Accelera’s 10-Ks provided: “In our opinion, the consolidated +financial statements referred to above present fairly, in all material respects, the consolidated +financial position of Accelera Innovations, Inc. as of [date], and the consolidated results of their +operations and their cash flows for each of the years then ended, in conformity with accounting +principles generally accepted in the United States of America.” A&C also represented that it had +“conducted our audits in accordance with the standards of the Public Company Accounting +Oversight Board (United States).” + +27. For the quarterly reviews, the Engagement Summary Memos stated that A&C +“review[ed] the financial statements of the Company” and performed “procedures to ensure that +there are no material misstatements in the financial statements.” + +28. In reality, most of Accelera’s purported revenues did not belong to Accelera at all. + +29. Two individuals at A&C, Wahl and Deutchman, facilitated Accelera’s fraud. +They knew, or were reckless in not knowing, that Accelera never acquired the purported +subsidiary. They knew, or were reckless in not knowing, that most of Accelera’s purported +revenues came from a company that Accelera did not own or control. + +30. Wahl was the engagement partner for the 2013 and 2014 audits of Accelera’s +financial statements and for the five interim reviews from the first quarter of 2014 through the +second quarter of 2015. Wahl testified that he was “heavily involved” in the 2013 audit “from +start to finish.” The 2014 audit was one of approximately 75 different engagements that Wahl +9 + +worked on during the 2014 audit season. Deutchman was the EQR for Accelera’s 2014 audit +and for the interim reviews for the third quarter of 2014 and the first and second quarters of +2015. + +31. A&C’s audit and interim reviews played a significant role in Accelera’s +misrepresentations. Without audited financial statements, Accelera could have not have filed its +10-Ks. Without quarterly reviews, Accelera could not have filed its 10-Qs. A&C’s misconduct +enabled Accelera to file false financial statements and provide misinformation to the market +about its true financial condition and results. + +32. During the relevant time frame (April 2014 through August 2016), Accelera stock +was publicly traded through OTC Link. Accelera also issued approximately 8.8 million shares of +its common stock and sold at least 92,000 shares of common stock through an affiliated entity. + +Improper Consolidation of BHCA into Accelera’s Financial Statements + +33. Beginning with the year-end financial statements for 2013, Accelera consolidated +into its publicly-filed financial statements the financial condition and results of a purported +subsidiary, Behavioral Health Care Associates (“BHCA”). Accelera treated BHCA’s revenues, +assets, and liabilities as if they belonged to Accelera. Accelera continued to consolidate BHCA’s +financials with Accelera’s financial statements through the Form 10-K for the year ending +December 31, 2015, which was filed in August 2016. + +34. By consolidating BHCA, Accelera filed materially misstated consolidated +financial statements, including statements of operations, balance sheets, statements of cash flow, +and statements of changes in stockholders’ deficit. Accelera inflated its revenues, assets, and +liabilities, and included inaccurate related footnote disclosures. + +35. Consolidating BHCA’s financials with Accelera’s financials had a material +impact on Accelera’s financial statements. Accelera substantially overstated its true financial +results. + +36. Before the Stock Purchase Agreement with BHCA in November 2013 (explained +below), Accelera was a shell company with little or no assets and revenues. In its Form 10-Q for +the quarter before the Stock Purchase Agreement, Accelera reported $0 of revenues and $50 of +assets. + +37. In 2013 – 2015, the vast majority of Accelera’s reported revenue was, in reality, +the revenue of BHCA. BHCA’s revenue comprised approximately 90% of Accelera’s purported +revenue in 2013 and 2014, and 69% in 2015. + +38. Accelera’s Form 10-K for 2013 reported revenues of $411,036. In reality, +approximately $375,882 of the $411,036 was the revenue of BHCA, not Accelera. Accelera’s +Form 10-K for 2014 reported revenues of $2,715,523. In reality, approximately $2,448,157 of +the $2,715,523 was the revenue of BHCA, not Accelera. Accelera’s Form 10-K for 2015 +10 + +reported revenues of $3,623,131. In reality, approximately $2,489,000 of the $3,623,131 was the +revenue of BHCA, not Accelera. + +39. Accelera never actually owned or controlled BHCA. Accelera agreed to buy +BHCA, but never consummated the acquisition of BHCA. + +40. On November 11, 2013, Accelera and BHCA entered into a Stock Purchase +Agreement (the “Stock Purchase Agreement”) whereby Accelera agreed to purchase 100% of the +shares of BHCA in exchange for a total of $4.55 million. Specifically, under the BHCA Stock +Purchase Agreement, Accelera promised to pay BHCA’s owner a total of $4.55 million. The +first $1 million was due within 90 days, and the remaining $3.55 million was to be paid in +regular installments pursuant to the terms of a promissory note. After the first payment (i.e., +$1 million), the shares of BHCA were to be placed into escrow pending the final payment. After +the final payment, the shares were to be transferred free and clear to Accelera. Before the first +payment, the shares were to remain with BHCA’s owner, and BHCA’s owner had the right to +cancel the transaction at any time. + +41. The BHCA Stock Purchase Agreement, the promissory note, and other documents +memorializing the transaction all made clear that any ownership interest in BHCA would pass +only after Accelera paid BHCA’s owner for the shares. For example: + +a. The Stock Purchase Agreement stated that 100% of the stock in BHCA +would change hands only “[u]pon payment of the purchase price set forth +in Section 1.1.1.1.” + +b. The promissory note indicated that it was only “effective upon the +payment of the purchase price set forth in Section 1.1.1.1.” + +c. The bill of sale stated that the owner of BHCA would sell to Accelera +100% of the shares of BHCA “effective upon the payment of the purchase +price set forth in Section 1.1.1.1 of the Purchase Agreement.” + +42. A&C, Wahl, and Deutchman knew about the Stock Purchase Agreement. The +Stock Purchase Agreement was included among the work papers for A&C’s engagements with +Accelera, including the 2013 audit and some of the 2015 quarterly reviews. A&C, Wahl, and +Deutchman knew, or were reckless in not knowing, that Accelera would not acquire any shares +of BHCA unless it paid for them. + +43. Accelera never made the initial $1 million payment referenced in Section 1.1.1.1 +of the Stock Purchase Agreement. In fact, Accelera never paid a single dollar for BHCA. + +44. Instead, Accelera and BHCA’s owner entered into a series of amendments to the +Stock Purchase Agreement, under which the timeline for payment was pushed back in exchange +for a certain number of shares of Accelera common stock. These amendments did not otherwise +alter the terms of the agreement. In other words, the terms of the agreement remained that +11 + +Accelera would not receive the shares of BHCA before payment. In addition, BHCA’s owner +could cancel the transaction at any time before payment. + +45. A&C, Wahl, and Deutchman knew about the amendments to the Stock Purchase +Agreement. The amendments to the Stock Purchase Agreement were among the work papers for +the A&C engagements with Accelera, including the 2014 audit. Both Wahl and Deutchman +reviewed and signed off on those work papers. The amendments to the Stock Purchase +Agreement also were included among the work papers for the 2015 audit and the 2015 quarterly +reviews. + +46. Accelera never acquired BHCA. BHCA was not Accelera’s subsidiary at any +time. + +47. Accelera never acquired any shares of BHCA, let alone all of the shares of +BHCA. Accelera did not acquire any shares of BHCA because it never paid for them. + +48. A&C, Wahl, and Deutchman knew, or were reckless in not knowing, that +Accelera never paid for any shares of BHCA. + +49. Throughout the pendency of the Stock Purchase Agreement, Accelera never +controlled BHCA in any way. BHCA controlled its own business and affairs. BHCA kept the +revenue it earned, and never allocated any portion of its earnings to Accelera. Accelera did not +direct any hiring or firing or other managerial decisions at BHCA. Accelera did not exercise +day-to-day control over BHCA’s operations. BHCA’s management ran the business as it always +had. + +50. On March 31, 2016, BHCA’s owner and Accelera entered into an agreement +officially terminating the Stock Purchase Agreement, effective retroactively to January 1, 2016. + +51. A&C, Wahl, and Deutchman knew, or were reckless in not knowing, that +Accelera did not own or control BHCA. A&C, Wahl, and Deutchman knew, or were reckless in +not knowing, that Accelera could not claim as its own the revenues of a separate company that +Accelera did not own or control. + +52. Consolidating Accelera’s financials with BHCA’s financials – even though +Accelera did not own or control BHCA – violated GAAP. See ASC 805 and 810. + +53. By misstating its revenue in its publicly-filed financial statements, as described +above, Accelera violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder. + +54. Without A&C, Wahl, and Deutchman’s substantial assistance, Accelera would not +have been able to file its erroneous Form 10-Qs and Form 10-Ks. + +12 + +Red Flags Indicating BHCA Was Improperly Consolidated + +55. In addition to the clear language of the BHCA Stock Purchase Agreement and the +other agreements, A&C had other reasons to question the propriety of consolidating BHCA into +Accelera’s financial statements. There were multiple red flags indicating that the consolidation +of BHCA was inappropriate and that Accelera’s financial statements were therefore materially +inaccurate. A&C failed to identify, analyze, or document those red flags. + +56. For example, BHCA told A&C that Accelera had not acquired the company. +During field work in 2014, 2015, and 2016, BHCA’s owner told A&C staff that Accelera did not +own or control BHCA. BHCA’s owner also instructed A&C staff not to mention Accelera to +any BHCA staff. During the 2014 audit field work, BHCA’s owner told Deutchman and another +A&C employee not to disclose the purpose of the audit to any BHCA employees, because those +employees were not aware of any deal with Accelera. + +57. For the 2014 and 2015 year-end audits, A&C requested that BHCA’s owner +execute confirmations of liability that made clear that the entire purchase price – all of the +$4.55 million owed by Accelera under the Stock Purchase Agreement – was unpaid. The +“Original amount of note” and the “Unpaid principal balance” were the same: “$4,550,000.” In +each instance, BHCA’s President and owner signed the confirmations, and thus made clear that +Accelera had not paid any of the purchase price for the BHCA shares. He added language +clarifying that, “[t]o the extent the terms of this letter conflict with the terms of the Parties’ Stock +Purchase Agreement, the terms of the Stock Purchase Agreement shall control.” + +58. A&C, Wahl, and Deutchman knew about the confirmations of liability. The +confirmations of liability were included among the work papers. + +59. During the fall of 2014 and the winter of 2015, Accelera’s newly-hired CFO +raised concerns to A&C about the consolidation of BHCA on several occasions. For example: + +a. In December 2014, the CFO wrote to Deutchman that he “thought these +entities were inappropriately consolidated.” He asked that Deutchman +share A&C’s “research and analysis” supporting consolidation. Neither +Deutchman nor anyone else from A&C ever provided the CFO with any +research or analysis. + +b. In February 2015, the CFO wrote Deutchman to set up a conference call +among himself, A&C, and Accelera’s counsel to discuss, among other +things, “[t]o consolidate or not consolidate [BHCA].” He requested that +Deutchman include Wahl on the call. The CFO also wrote that Accelera’s +“subsidiary never controlled [BHCA] so it doesn’t sound to me there +should have been a consolidation.” + +c. During the conference call, which took place in February 2015, and which +was attended by at least Deutchman from A&C, the CFO advocated that +Accelera restate its financials to remove BHCA. +13 + +60. Accelera declined to heed the CFO’s advice regarding the propriety of past and +future consolidation of BHCA, and A&C did not object. The CFO ultimately resigned, shortly +before Accelera filed its Form 10-K for 2014. + +61. A&C, Wahl, and Deutchman knew, or were reckless in not knowing, that +Accelera never filed an 8-K containing BHCA’s financial statements. Items 2.01 and 9.01 of +Form 8-K requires reporting companies to file financial statements of acquired businesses. See +also Exchange Act Rule 13a-11. Here, if Accelera had, in fact, acquired BHCA, Accelera would +have had the obligation to file a Form 8-K with financial statements for BHCA. Accelera’s +failure to file an 8-K with financial statements for BHCA was a sign that Accelera never +acquired BHCA at all. + +62. Accelera’s management took a different approach to accounting for other, similar +potential acquisitions. In late 2014 and early 2015, Accelera entered into three new purchase +agreements with other entities that contained substantially identical terms to the BHCA Stock +Purchase Agreement. As with BHCA, Accelera never made any payments toward these +purchases. Instead, as with BHCA, the parties entered into extension agreements. However, +despite the similarities, Accelera never consolidated those other companies into its financial +statements. This disparity did not prompt A&C to re-examine Accelera’s treatment of BHCA. + +63. As of October 1, 2015, Accelera was in default on the Stock Purchase Agreement +(the final extension entered into by the parties expired on September 30, 2015). + +64. In or around late-2015, Accelera’s Chief Strategic Officer contacted Gandhi (the +engagement partner for the 2015 audit of Accelera’s financial statements). She argued that +Accelera should restate its financials to remove BHCA, and explained that Accelera had never +had control over BHCA. Gandhi, after consultation with Wahl, said that restatement was +unnecessary. + +65. In March of 2016, Accelera provided Gandhi and Wahl with a draft termination +agreement from BHCA’s owner’s attorney. The draft required Accelera to “disclos[e] that +[Accelera] did not own an interest in [BHCA] and should not have recognized on its books and +records the revenue and expenses of [BHCA] for the years of 2012 [sic], 2013, 2014, and 2015.” +In a cover email transmitting the draft agreement, an Accelera officer wrote to Gandhi, “[t]his +continues to be an issue …. I need to know how we can remove the revenue and restate all those +years.” In response to the e-mail and draft, Gandhi asked if it was “possible to negotiate this +section” of the termination agreement. Ultimately, the final version of the termination agreement +did not include a restatement requirement. Later, Gandhi bragged to Accelera about his handling +of this issue, writing to Accelera that “[o]ur firm helped you, through my own guidance, to +review and point out flaws in the legal agreements related to the [BHCA] termination and avoid +multiple years of restatements. Not just any accounting firm would be able to provide this kind +of value.” + +66. Notwithstanding the red flags described above, A&C – through Wahl (for 2013 +and 2014) and Gandhi (for 2015) – signed the auditor reports for the Form 10-Ks that Accelera +filed in 2013, 2014, and 2015. Deutchman provided concurring approval, without which A&C +14 + +would not have been able to grant permission to Accelera to use A&C’s audit report for its 2014 +Form 10-K. In addition, A&C – through Wahl – approved the issuance of Accelera’s 2014 and +2015 interim reviews, and Deutchman provided a concurring approval for the issuances in the +third quarter of 2014 and the first and second quarters of 2015. + +Inadequate Procedures Regarding the BHCA Transaction + +67. A&C’s audits were fundamentally flawed. A&C performed inadequate audit +procedures to verify the propriety of consolidating BHCA, to the extent that A&C performed any +audit procedures at all. + +68. During the 2013 audit of Accelera, a newly-hired staff accountant with no audit +experience drafted a memorandum ostensibly analyzing the BHCA transaction (the “Acquisition +Memo”). The Acquisition Memo contains faulty, inadequate, conclusory, and incomplete +analysis, and it does not support the conclusion that Accelera had control over BHCA in 2013. + +69. For example, the Acquisition Memo states that a “key” question when +determining if a transaction constitutes a business combination is “did someone gain control.” +But the memo does not analyze whether Accelera, in fact, controlled BHCA. Instead, the memo +states that Accelera may control BHCA in the future: “Under the terms of the Agreement . . . the +Acquirer will obtained [sic] 100% ownership.” + +70. As a second example, the Acquisition Memo emphasizes that the “acquisition +date” is “the date the acquirer obtains control,” and is “not necessarily the date of an agreement +or reaching binding terms.” But the memo never actually identifies an acquisition date for the +BHCA transaction, and never analyzes whether Accelera had, in fact, obtained control over +BHCA. + +71. As another example, the Acquisition Memo acknowledges that Accelera had not +yet paid for the BHCA shares. The memo states that the payment would take place sometime in +the future: “the Issuer will pay BHCA $4,550,000.” The memo does not analyze when Accelera +would pay for the shares, or whether Accelera would own the BHCA shares before paying for +them. + +72. The Acquisition Memo states that BHCA “would become” a “wholly owned +subsidiary of the Issuer” as a result of the payment of $4,550,000. + +73. As a final example, the Acquisition Memo uses the future tense when describing +Accelera’s control of BHCA. “Revenue will begin to accrue to the Issuer from Target operations +prospectively from the date the Issuer obtains control.” + +74. A&C prepared no other documentation analyzing whether Accelera had acquired +or controlled BHCA, or analyzing whether it was appropriate to consolidate their financials. + +75. Apart from drafting the Acquisition Memo and reviewing the Stock Purchase +Agreement and other agreements documenting the transaction, the engagement team did not +15 + +perform any procedures to analyze the propriety of consolidating BHCA into Accelera during the +2013 audit. + +76. Despite the fact that Accelera failed to make any payments toward the purchase of +BHCA during 2014, A&C did not perform any analysis of the propriety of consolidating BHCA +into Accelera’s financials in conducting Accelera’s quarterly reviews for the year 2014. By the +time A&C conducted those reviews, BHCA’s owner had already told A&C that Accelera did not +own or control BHCA. + +77. In auditing Accelera’s year-end financial statements for 2014, Wahl and the other +members of the engagement team never discussed the propriety of consolidating BHCA. +Instead, the team deferred, without analysis, to the audit team’s 2013 conclusion that +consolidation was appropriate. As Deutchman testified, he “just assumed that [the 2013 +engagement team] had made the right decisions.” Deutchman also testified that he ignored all of +the issues raised by the CFO, both because he did not respect the CFO and because he believed +A&C was a good firm. + +78. Despite the multiple red flags raised during 2015 – including, but not limited to, +Accelera’s CFO advising that consolidation was inappropriate – A&C never addressed the +propriety of Accelera’s decision to consolidate BHCA into Accelera’s financial statements +during the quarterly reviews conducted during 2015. + +79. Although A&C personnel claim that the BHCA consolidation was discussed +internally during the 2015 year-end audit engagement, there is no documentation of those +discussions or analysis. In addition, key documents regarding the BHCA transaction – including +the Acquisition Memo, the Stock Purchase Agreement, and the promissory note – are not among +the 2015 audit work papers. + +Failure to Appropriately Staff the Engagements and to Properly Supervise Staff + +80. A&C violated professional auditing standards when it assigned staff to the +Accelera audits. A&C assigned staff who did not have the requisite experience and expertise, or +the requisite availability, to perform the audits. A&C also failed to adequately supervise the staff +who were assigned. In addition, Deutchman, as EQR, played an inappropriate role in the 2014 +audit. + +81. Under PCAOB Standard AU § 210, Training and Proficiency of the Independent +Auditor, the auditor is required to have “adequate technical training and proficiency as an +auditor.” (AU § 210.01).8 In addition, under PCAOB Standard AU § 230, Due Professional +Care in the Performance of Work, an auditor “should possess ‘the degree of skill commonly +possessed’ by other auditors.” (AU § 230.05). + + +8 References herein to the PCAOB standards are to the standards that were in effect at the +time of the relevant conduct. +16 + +82. PCAOB Standard AS No. 10, Supervision of the Audit Engagement, states that the +engagement partner “is responsible for proper supervision of the work of engagement team +members and for compliance with PCAOB standards.” To determine the extent of supervision +necessary, the engagement partner should take into account, among other things, “[t]he risks of +material misstatement” and “[t]he knowledge, skill, and ability of each engagement team +member.” (AS No. 10.6). In addition, under QC § 20, the amount of supervision required +depends on the ability and experience of the personnel. (QC § 20.11). + +83. PCAOB Standard AS No. 7, Engagement Quality Review, states that the EQR +must be independent of the company, perform the engagement quality review with integrity, and +maintain objectivity in performing the review. (AS No. 7.6). In particular, the EQR should not +“assume any of the responsibilities of the engagement team.” (AS No. 7.7). + +84. The 2013 audit of Accelera was staffed by: (a) a newly-hired staff accountant who +had no audit experience; (b) a second staff accountant with one year of experience; and (c) Wahl, +who was – at the time – allegedly working 80 to 100 hours a week and acting as the engagement +partner for half of the firm’s clients. There was no manager assigned to the 2013 audit. + +85. The newly-hired staff accountant, who had no audit experience, and who had +never before analyzed or researched these topics, was tasked with preparing the Acquisition +Memo. As discussed above, the Acquisition Memo was flawed, did not support the conclusion +that Accelera had control over BHCA, and contained faulty, inadequate, conclusory, and +incomplete analysis. Although Wahl purportedly supervised this staff accountant’s work in +drafting the memorandum, these issues and errors were not resolved. + +86. A&C assigned Deutchman as EQR on the 2014 audit and on the quarterly reviews +from the third quarter of 2014 through the second quarter of 2015. By the time A&C started +work on the 2014 Accelera audit, A&C had reprimanded Deutchman twice for failure to properly +supervise staff accountants and for substandard job performance. + +87. Notwithstanding Deutchman’s disciplinary issues, he was given responsibilities +far exceeding those typically or appropriately assigned to an EQR. Deutchman fulfilled many of +the roles that should have been filled by Wahl as the engagement partner. For example, +Deutchman handled communications with Accelera and Accelera’s counsel and, according to +audit staff, was more actively involved than Wahl. This level of involvement compromised his +ability to operate objectively, as required by AS No. 7. + +88. A&C did not staff any partner-level employees on the engagement for the third +quarter 2015 quarterly review of Accelera. + +Failure to Obtain Sufficient Appropriate Audit Evidence + +89. A&C did not support its audit opinion with sufficient appropriate audit evidence. +A&C did not gather sufficient evidence to support its opinion, including evidence that Accelera +owned or controlled BHCA. A&C also did not give sufficient weight to evidence that +undermined its opinion. +17 + +90. PCAOB Standard AS No. 15, 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.” (AS No. 15.4). Further, “[i]f audit evidence obtained from one +source is inconsistent with that obtained from another … the auditor should perform the audit +procedures necessary to resolve the matter and should determine the effect, if any, on other +aspects of the audit.” (AS No. 15.29). Among other things, “[e]vidence obtained from a +knowledgeable source that is independent of the company is more reliable than evidence +obtained only from internal company sources.” (AS No. 15.8). Appropriate audit evidence must +be “both relevant and reliable in providing support for the conclusions on which the auditor’s +opinion is based.” (AS No. 15.6-15.8). Similarly, for the interim reviews, A&C was required to +perform “procedures to obtain 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.” PCAOB Standard AU § 722, Interim Financial +Information at AU § 722.15. If, in performing its review of interim financial information, A&C +became aware of information indicating that that information may not be in conformity with +GAAP in all material respects, A&C was required to “make additional inquiries or perform other +procedures” that it considered “appropriate to provide a basis for communicating whether [it +was] aware of any material modifications that should be made to the interim financial +information.” (AU § 722.22). + +91. PCAOB Standard AU § 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 also 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 +Standard AS No. 3, Audit Documentation, states that “audit documentation must include +information the auditor has identified relating to significant findings or issues that is inconsistent +with or contradicts the auditor’s final conclusions.” (AS No. 3.8). + +92. AS No. 7 required Deutchman, as EQR, to evaluate whether appropriate +consultations took place on any “difficult or contentious matters.” (AS No. 7.10(h), 7.15(f)). + +93. A&C issued audit reports containing unqualified opinions, and Wahl approved the +issuance of the audit reports. However, they failed to obtain sufficient appropriate audit +evidence to provide a reasonable basis for their opinions, to understand the highly material +transaction with BHCA, or to resolve inconsistencies. + +94. A&C knew that Accelera had material weaknesses in its internal control over +financial reporting. In its Forms 10-K, Accelera reported that its internal control over financial +reporting was ineffective as of December 31, 2014 and 2015. A&C noted in its 2014 and 2015 +audit planning memoranda that it had “determined not to rely on the internal control of the +company based on past audit experience.” +18 + +95. In addition, as of July of 2015, A&C became aware that Accelera was under an +SEC investigation relating to its financial reporting, and specifically relating to the consolidation +of BHCA. + +96. A&C and Wahl also improperly relied on Accelera management’s representations +in the face of contrary evidence. Among other things, Accelera’s agreements with BHCA +contradicted management’s representations regarding ownership of BHCA. Also, the draft +termination agreement from BHCA’s owner, which indicated that Accelera had never controlled +BHCA, contradicted Accelera’s accounting treatment of BHCA. Moreover, the representations +from some Accelera officers (that consolidation was inappropriate and that Accelera did not +control BHCA) contradicted the representations from other Accelera officers (that consolidation +was appropriate). However, A&C and Wahl did not perform audit procedures necessary to +resolve these conflicts. + +97. As EQR, Deutchman failed to properly evaluate the engagement team’s audit +work and conclusions regarding the BHCA consolidation. He knew that Accelera’s agreements +with BHCA indicated that Accelera would not own BHCA until it had paid, and he knew +Accelera had not paid for BHCA. Also, Accelera’s CFO had repeatedly called into question the +accounting treatment of the BHCA transaction. However, Deutchman did nothing to determine +whether the engagement team had appropriately considered that transaction. + +Failure to Document Significant Findings or Issues + +98. A&C did not properly document its significant findings or issues about +consolidating Accelera’s financials with BHCA. + +99. PCAOB standards require accountants to document the procedures performed, +evidence obtained, and conclusions reached. (AS No. 3.6). In particular, auditors are required to +document any significant findings or issues, such as the results of procedures that indicate +financial statements could be materially misstated, as well as the actions taken to address those +findings. (AU § 722.52; AS No. 3.12). Audit documentation must contain, among other things, +information sufficient to allow an experienced auditor with no connection to the work to +understand the procedures performed, evidence obtained, and conclusions reached and to +determine who performed the work, when the work was completed, the person who reviewed the +work, and the date of the review. (AS No. 3.6). + +100. A&C and Wahl failed to document communications that called into question the +BHCA consolidation, including the communications raising the issue of restatement from +BHCA’s owner, Accelera’s former CFO, and Accelera’s Chief Strategic Officer, as discussed +above. + +101. Apart from the Acquisition Memo, A&C did not document any procedures that it +performed, if any, to address the issue of BHCA’s consolidation. + +19 + +Failure to Exercise Due Professional Care + +102. A&C did not exercise due professional care during the Accelera audits. + +103. PCAOB Standard AU § 230, Due Professional Care in the Performance of Work, +requires auditors to exercise due professional care throughout the audit, including by “exercise of +professional skepticism.” Under this standard, “[p]rofessional skepticism is an attitude that +includes a questioning mind and a critical assessment of audit evidence” (at AU § 230.07), and +auditors “consider the competency and sufficiency of the evidence” (at AU § 230.08) and +“neither assume[] that management is dishonest nor assume[] unquestioned honesty” (at +AU § 230.09). (See also AU § 722.01). + +104. For the reasons outlined above, A&C, Deutchman, and Wahl failed to meet +AU § 230. + +Failure to Maintain an Adequate System of Quality Control for Audits and Interim +Reviews + +105. PCAOB Standard QC § 20, System of Quality Control for a CPA Firm's +Accounting and Auditing Practice, provides that a CPA firm shall have a system of quality +control for its accounting and auditing practice. (QC § 20.01). Quality control includes adopting +policies and establishing procedures to provide the firm with reasonable assurance of complying +with professional standards. (QC § 20.04). Policies and procedures should be established to +encompass all phases of the design and execution of the engagement. (QC § 20.17-.18). Policies +and procedures should also address engagement quality reviews pursuant to PCAOB Standard +AS No. 7, Engagement Quality Review. (QC § 20.18). + +106. A&C failed to design and maintain an adequate system of quality control for audit +and interim review engagements and engagement quality reviews because A&C’s quality control +policies and procedures manual failed to adequately address all phases of the design and +execution of these engagements. The policies and procedures covering audits were deficient +because they did not discuss, for example: (1) how the assessment of inherent risk, control risk, +and fraud risk affects the audit procedures performed; (2) a description of the test of controls and +substantive audit procedures, and how the test of controls affects the substantive audit procedures +performed; (3) the purpose of audit work papers and what should be included in the work papers; +(4) evaluating the audit evidence obtained to determine whether the evidence is sufficient and +appropriate to support the conclusions reached; and (5) evaluating misstatements identified by +the accountant or brought to the accountant’s attention. + +107. With regard to interim reviews, A&C’s manual included interim review +procedures for privately held companies, but did not include interim review procedures for +publicly-held companies. Even if the manual’s interim review procedures for privately held +companies were applied to publicly-held companies, the procedures would be deficient. For +example, the procedures did not discuss: (1) the objective of a review; (2) inquiring of a +predecessor auditor when conducting an initial review; (3) obtaining an understanding of a +company’s internal control as it relates to the preparation of financial information; (4) a +20 + +description of inquiry and analytical procedures, and when and how to apply these procedures; +(5) the purpose of interim review work papers and what should be included in the work papers; +and (6) evaluating misstatements identified by the accountant or brought to the accountant’s +attention. + +108. With regard to engagement quality reviews, A&C’s policies and procedures +manual was deficient because the procedures did not discuss, for example: (1) the objective of an +engagement quality review; and (2) the EQR evaluating the engagement team’s significant +judgments and related conclusions by holding discussions with the engagement partner and other +team members and reviewing documentation. + +A&C’s False Reports + +109. By virtue of the conduct described above, A&C failed to adhere to numerous +PCAOB standards in auditing Accelera’s 2013, 2014, and 2015 financial statements. + +110. Despite the multiple egregious deviations from PCAOB standards, A&C – +through Wahl (for the 2013 and 2014 financial statements) and Gandhi (for the 2015 financial +statements) – issued reports on Accelera’s financial statements. Deutchman provided concurring +approval of the issuance of the report on the 2014 financial statements, without which A&C +would not have been able to grant permission to Accelera to use A&C’s audit report for its Form +10-K. + +111. A&C, Wahl and Deutchman knew these reports would be filed with the +Commission on Accelera’s Forms 10-K. Those reports contained A&C’s representation that the +audits were conducted in accordance with PCAOB standards and its opinion, based on those +audits, that Accelera’s financial statements fairly presented, in all material respects, the +Company’s financial position and results of operations in accordance with GAAP. A&C, +Deutchman, and Wahl knew or were reckless in not knowing that those reports were false. + +Summary of Charges Relating to Accelera Audits and Interim Reviews + +112. As a result of the conduct described above: + +a. A&C willfully violated Exchange Act Section 10(b) and Rule 10b-5(b) +thereunder, and Deutchman willfully aided and abetted A&C’s violation +of Exchange Act Section 10(b) and Rule 10b-5(b) thereunder; + +b. A&C, Wahl, and Deutchman willfully aided and abetted and were a cause +of Accelera’s violation of Section 13(a) of the Exchange Act, and Rules +13a-1 and 13a-13 thereunder; + +c. A&C willfully violated Rule 2-02(b) of Regulation S-X, and Wahl and +Deutchman willfully aided and abetted and were a cause of A&C’s +violation of Rule 2-02(b) of Regulation S-X; and + +21 + +d. A&C, Wahl, and Deutchman willfully violated or willfully aided and +abetted violations of the federal securities laws or the rules and regulations +thereunder for the purposes of Section 4C(a)(3) of the Exchange Act and +Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, and 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. + +2013 PREMIER AUDIT + +Background + +Premier’s Fraudulent Valuation of the Note and Gain on the Sale of Discontinued Operations + +113. In December 2011, Randall Letcavage and an associate (“Associate A”) acquired +approximately 50% of Premier’s outstanding shares, paying $175,000 in cash to the Company’s +then-CEO and majority shareholder, and caused Premier to acquire certain assets from green +energy companies owned entirely or in large part by either Letcavage or Associate A (“related +party green energy companies”) in exchange for additional Premier stock (the “Stock-for- +Related-Party-Assets Swap”). Using these assets, and through a new wholly-owned subsidiary, +WePower Ecolutions, Premier’s business changed from selling low-priced caskets to providing +clean energy products and services. Letcavage and Associate A installed Kevin Donovan as +CEO of WePower Ecolutions and as president and CEO of Premier itself. + +114. Premier valued the assets obtained from the related party green energy companies +at zero, noting in its FY 2011 and FY 2012 financial statements that the assets had been obtained +from the two related party green energy companies and that the equipment obtained, originally +valued at approximately $16,000, had proven to be defective, and thus its value had been reduced +to zero. + +115. Premier’s performance following the change in business model remained poor, +however, and its share price declined throughout 2012. In the fourth quarter of 2012, Letcavage +and Associate A arranged for a management shake-up in which, among other changes, Letcavage +joined the board of directors and replaced Donovan as Premier’s and WePower Ecolutions’ +president and CEO and several board members were replaced. Under Letcavage’s management, +Premier then decided to discontinue the operations of WePower Ecolutions and report a roughly +$750,000 loss on the discontinued operations. + +The Discontinued-Operations-for-Note Swap + +116. In January 2013, after protracted negotiations with Donovan over his exit +package, Premier effectively sold WePower Ecolutions to a newly-formed company (WePower +Eco Corp. (“New Eco”)), to be run by Donovan. In exchange, New Eco gave Premier an +unsecured note with a $5 million face value (the “Note”), and purportedly assumed certain +Premier liabilities (the “Discontinued-Operations-for-Note Swap”). +22 + +117. The terms of the Note were extremely generous to New Eco. Among other +things, the Note was unsecured and secondary to all other debt New Eco might incur, the interest +rate was below market at 2%, and repayment was scheduled over twenty years, with no principal +payments due for five years and no interest due for eleven months. Neither the face amount nor +the terms of the Note were based on a valuation, independent or otherwise, of the assets +transferred to New Eco. + +118. Given that the Note was received in exchange for assets and not cash, under +GAAP, upon receipt the Note should have been “recorded at the fair value of the property, +goods, or services or at the amount that reasonably approximates the fair value of the note +[receivable], whichever is the more clearly determinable.” ASC 310-10-30-5, Receivables. + +119. Premier management’s estimate of the fair value of the Note at the time of receipt +was $869,000 – a figure that was inconsistent with GAAP but rather was chosen to achieve the +desired accounting result. See ASC 820-10-30, Fair Value Measurement. The $869,000 figure +was the largest of three fair value figures that appeared on a document provided to Premier by an +independent valuation firm the company had engaged to value the Note (“Valuation Firm”). +This document, which Premier later characterized as a “preliminary valuation,” consisted solely +of Excel spreadsheets illustrating the Valuation Firm’s valuation models, as applied to outdated +and unsupported revenue projections for New Eco.9 The Valuation Firm sought updated revenue +projections and support for such projections from New Eco, and sought Premier’s help in getting +such information, but never received it.10 + +120. In its financial statements for the first quarter of 2013, Premier reported a loss +before non-controlling interest and discontinued operations of $519,601 and a gain of $985,138 +on discontinued operations, based on the $869,000 “preliminary valuation” of the Note and New +Eco’s purported assumption of $116,000 of WePower Ecolutions’ debt. (Premier treated the + +9 The Valuation Firm needed current revenue projections for New Eco and support for the +projections in order to value New Eco, the borrower. The Firm was trying to value the +borrower, because the collectability of the Note was entirely dependent on the borrower’s +(New Eco’s) ability to pay because the Note was unsecured and not guaranteed. The +$869,000 figure was one of the two – unsupported – figures for the fair value of New Eco +that appeared on the spreadsheets; the third was an unsupported figure for the fair value +of the Note. + +10 The Valuation Firm ultimately completed its work without the requested information, +valuing the Note at zero and New Eco at less than $10,000. The Firm’s findings and +analysis were set forth in a draft valuation report, which the Firm sent to Premier +management on or about April 9, 2014. As explained in the report, the Firm’s valuations +were primarily based on the 2012 performance of WePower Ecolutions, which had not +been known to the Firm when it generated the “preliminary valuation” and the terms of +the Note. All of that information was known, recklessly disregarded, or should have been +known, to Wahl during the audit. + +23 + +entire value of the Note as a gain on the sale of WePower Ecolutions because, as described +above, it had valued those assets at zero when it acquired them in the Stock-for-Related Party- +Assets Swap.) The reported $869,000 value of the Note, along with the purported elimination of +debt, thus converted a quarterly loss to net income for the quarter of $466,147. Premier also +reported the Note as an asset worth $869,000 on its balance sheet. + +121. On each reporting date in 2013, Premier failed to evaluate the Note for +impairment as required by GAAP. See ASC 310-10-35, Receivables. Instead Premier reported +the value of the Note as $869,000, making the Note Premier’s largest tangible asset, constituting +at least 12% of the company’s total assets. + +The Note-for-Stock Swap + +122. The first payment on the Note – an interest payment of $50,000 – was due on +December 7, 2013. New Eco failed to make the payment and the Note went into default on +December 22, 2013. Without assessing the Note for impairment or collectability, Premier +continued to report the Note as an asset valued at $869,000 on its December 31, 2013 balance +sheet. + +123. The company made no effort to collect on the Note. Instead, on or about +February 27, 2014, Premier exchanged the Note with WePower LLC for the return of 2.5 million +shares of Premier common stock held by WePower LLC (the “Note-for-Stock Swap”). +WePower LLC was a related party;11 it was also the source of most of the worthless related party +green energy assets upon which New Eco’s business was based (and the discontinued WePower +Ecolution’s operations had been based). + +124. Premier disclosed the Note-for-Stock swap in a Subsequent Events note to its +2013 financial statements. The company failed to disclose, however, that the Note was in default +on December 31, 2013. + +Premier’s Improper Accounting for the TPC Stake + +125. On February 28, 2013, Premier acquired an 80% interest in The Power Company +USA, LLC TPC (“TPC”), a privately-held deregulated power broker, along with an option to +purchase the remaining 20% interest within 120 days, in exchange for 30 million shares of +Premier common stock. + + +11 Related parties include owners of record or known beneficial owners of more than 10% +of the voting interests of the entity and their immediate families. ASC 850-10-20. +WePower LLC, which was owned by Associate A, was a related party because it was an +owner of record or beneficial owner of more than 10% of Premier’s voting stock, directly +and/or through another company purportedly controlled by Associate A’s son. + +24 + +126. In its financial statements for the first three quarters of 2013 and its audited +FY 2013 financial statements, Premier valued its interest in TPC at $4.5 million – the purported +value of the 30 million shares issued to the sellers as consideration for the acquisition – and +allocated the entire amount to goodwill, which then constituted a majority of the company’s +assets. The company explained that it had allocated the $4.5 million amount to goodwill because +an independent valuation of the identifiable assets and liabilities it had acquired had not yet been +completed. + +127. Premier’s accounting for its stake in TPC did not conform to GAAP in several +respects. First, according to ASC 805, Business Combinations, before recognizing goodwill +from an acquisition, all identifiable assets and liabilities acquired (including identifiable +intangible assets) must be assigned a portion of the purchase price based on their fair values. +Only after this valuation of, and allocation to, identifiable assets is performed can the remaining +unallocated purchase price be recorded as goodwill. If, as the company represented in public +statements around the time it purchased TPC, Premier had acquired certain customer contracts +and receivables that purportedly had value, to comply with GAAP, the company should have +assigned a portion of the purported purchase price to such assets.12 + +128. Second, after recording the $4.5 million in goodwill for its stake in TPC, Premier +later failed to adequately assess that goodwill for impairment, in accordance with ASC 350-20, +Goodwill, Subsequent Measurement. Premier determined, incorrectly, that as of December 31, +2013, the $4.5 million of goodwill attributable to its TPC stake – which constituted +approximately 99% of its goodwill and 65% of its total assets reported as of December 31, 2013 +– was not impaired. It was not until the fourth quarter of 2014 that Premier recognized any +impairment to its TPC-related goodwill. + +Respondents A&C and Wahl Failed to Audit Premier’s FY 2013 Financial Statements in +Accordance with Applicable Professional Standards and Ignored Multiple Indications of +Fraud + +129. 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 fraud or error. PCAOB Standard AU § 316.01, Consideration of Fraud in a Financial +Statement Audit, citing AU §110. + +130. Wahl was the engagement partner on A&C’s audit of Premier’s FY 2013 financial +statements. + +12 Premier engaged the Valuation Firm to prepare a purchase price allocation report, which +would have assigned fair value estimates to the identifiable assets and liabilities the +company had acquired with its acquisition of its stake in TPC, but failed to provide the +Firm with the information it needed to perform its analysis. As a result, by the time of +the 2013 audit, and to this day, the Valuation Firm prepared neither a report nor an +underlying analysis. + +25 + +131. In planning the 2013 audit, Wahl identified as significant risks relating to the +financial statements and fraud risks: (a) the weakness in the company’s control environment, +(b) significant transactions between related parties, and (c) revenue recognition. Wahl also +identified the following additional significant risks: (d) the overstatement of assets, (e) the Note, +and (f) goodwill, and planned for the audit to focus on accounts receivable and sales +confirmation and substantive testing in commercial and residential customers for TPC, the +collectability of the Note and related party transactions and disclosures. + +132. Wahl identified several risks associated with the company’s control environment +with respect to financial reporting and disclosures, including the inexperience with financial +reporting of the board and CEO, the absence of an audit committee or a full-time CFO who was +sufficiently competent to achieve financial reporting objectives, and the lack of sufficient +internal control to achieve the financial reporting and disclosures control. + +133. Despite the significant risks, including fraud risks, that Wahl knew were present, +he failed to exercise the appropriate level of due professional care and professional skepticism in +gathering and evaluating audit evidence related to the collectability and valuation of the Note and +the allocation and impairment of goodwill purportedly arising from the TPC acquisition, in +accordance with PCAOB Standard AU § 316.13, Consideration of Fraud in a Financial +Statement Audit, The Importance of Exercising Professional Skepticism. + +134. Specifically, Wahl failed to (a) perform audit procedures in a manner that +addressed the assessed risk of material misstatement due to error or fraud as required by PCAOB +Standard AS No. 13, The Auditor’s Responses to the Risks of Material Misstatement, and +(b) obtain sufficient appropriate audit evidence, as required by PCAOB Standard AS No. 15, to +support A&C’s conclusion that Premier management’s estimate of the fair value of the Note and +Premier’s stake in TPC was fairly presented in conformity with GAAP. + +A&C’s and Wahl’s Failures in Auditing Management’s $869,000 Valuation of the Note + +135. A&C and Wahl failed to obtain sufficient appropriate audit evidence, as required +by PCAOB Standards AS No. 14, Evaluating Audit Results, and AS No. 15, Audit Evidence, of +the status and collectability of the Note. The audit team sent a confirmation request to New Eco +but received no response and failed to perform alternative procedures, as required by PCAOB +Standard AU § 330, The Confirmation Process, Alternative Procedures, at .31 -.32. Had the +team reviewed Premier’s cash receipts for payments due on the Note, see AU § 330.32, for +example, it would have discovered that the Note was in default. The work papers do not +document any alternative procedures to obtain evidence regarding the status of the Note and do +not reflect the default. + +136. A&C and Wahl also failed to obtain sufficient appropriate audit evidence, as +required by AS No. 14 and AS No. 15 of the estimated $869,000 fair value of the Note. The +team asked the Valuation Firm for a copy of a valuation report but was told by the Firm that it +had prepared only spreadsheets and had not drafted a report. The team sought Premier’s +assistance in obtaining a valuation report but was told, incorrectly, that there was no need for one +because the valuation of the Note had been addressed during the 2012 audit. Nonetheless, +26 + +according to the work papers, the team concluded that the estimated fair value of the Note was +fairly stated based on the Valuation Firm’s spreadsheets –– the spreadsheets the Valuation Firm +had prepared to demonstrate its models, using outdated and unsupported revenue projections. + +137. Although the engagement team had not obtained the requested valuation report, or +any other form of findings by the Valuation Firm, the audit work papers indicate that the team +treated the spreadsheets as findings by a specialist and tried – but failed – to adhere to the +standard for the use of the work of a specialist set forth in PCAOB Standard AU § 336, Using the +Work of a Specialist.13 For example, the team failed to obtain an understanding of the +assumptions used by the Valuation Firm to arrive at the $869,000 fair value figure shown on the +spreadsheets, as required by AU § 336.12. Had they done so, they would have learned, among +other things, that (a) the assumptions underlying that figure were based on revenue projections +that were outdated and unsupported, (b) the data supporting the projections had not been tested, +(c) the Firm had been unable to obtain current revenue projections and support for such +projections from New Eco, and (d) even if the Valuation Firm had been able to complete its work +and arrive at a fair value estimate for New Eco, the fair value of the Note would have to be +lower, just as the Firm’s initial fair value figure for the Note shown on the “preliminary +valuation” was lower than the initial, unsupported, fair value figures for New Eco shown there.14 + +A&C’s and Wahl’s Failures in Auditing Premier’s Accounting for its TPC Stake + +138. During the 2013 audit, A&C and Wahl also failed to audit Premier’s accounting +for its interest in TPC in accordance with PCAOB standards. A&C failed to obtain sufficient +appropriate audit evidence, as required by AS No. 15 to support the analysis it performed that +resulted in its conclusion that goodwill with respect to TPC was not impaired as of December 31, +2013. + +139. Furthermore, A&C and Wahl failed to exercise due professional care and +professional skepticism, in accordance with PCAOB Standard AU § 230, Due Professional Care +in the Performance of Work, by failing to reconcile Premier’s allocation of the entire +$4.5 million purported TPC value to goodwill with the company’s repeated public statements + +13 To use the work of a specialist, the “auditor should (a) obtain an understanding of the +methods and assumptions used by the specialist, (b) make appropriate tests of data +provided to the specialist, taking into account the auditor's assessment of control risk, and +(c) evaluate whether the specialist's findings support the related assertions in the financial +statements.” AU § 336.12, Using the Work of Specialist. + +14 In addition, the work papers failed to document, as required by AS No. 3, Audit +Documentation, important aspects of the audit team’s work and analysis that ostensibly +supported A&C’s conclusion that the value of the Note was properly stated. For +example, the work papers did not document the assumptions underlying the Valuation +Firm’s $869,000 fair value figure for New Eco or the reasons that the team purportedly +concluded that those assumptions were reasonable. Nor do they document any testing of +the data provided to the Valuation Firm, as required by AU § 336. +27 + +that as part of the TPC acquisition it would be acquiring significant identifiable assets (including +sales contracts and receivables). A&C knew of, recklessly disregarded, or should have known +of, those statements, which were filed on Forms 8-K. + +140. Instead, according to the work papers, based on discussions with management, +A&C accepted management’s assertion that the initial accounting for the TPC acquisition was +not complete and the provisional amounts recorded by Premier with respect to the acquisition +were still subject to revision because the necessary fair value evaluations were still in progress – +more than a year after the transaction had closed. At no point did A&C resolve to obtain +evidence of a fair value analysis or question whether the provisional amounts recorded by +Premier with respect to TPC were supportable by sufficient appropriate audit evidence. + +A&C and Wahl Failed to Obtain Sufficient Appropriate Audit Evidence + +141. Wahl knew that the Valuation Firm had not issued a final fair value estimate or a +valuation report or other form of findings in support of its valuation of the Note. But he did not +insist upon a valuation report and supporting findings by the Valuation Firm or by another +independent expert. Nor did he direct the engagement team to obtain a written statement from +the Valuation Firm of its estimate of the fair value of the Note as of December 31, 2013. Had the +team sought such a written statement they would have learned that the Valuation Firm did not +agree that $869,000 was a reasonable estimate of the fair value of the Note or even of New Eco. + +142. Instead of requiring a valuation report by the Valuation Firm or another +independent valuation expert or even a written statement by the Valuation Firm of the Note’s fair +value, Wahl directed the team to cease work on the Note valuation, reasoning that the $869,000 +value of the Note at December 31, 2013 was supported by the value Premier had supposedly +obtained for it in the subsequent Note-for-Stock swap described above. + +143. Had Wahl exercised the requisite due care and professional skepticism however, +he would have seen numerous indications that at December 31, 2013, if not before, the $869,000 +Note valuation was materially overstated. For example, Wahl knew, recklessly disregarded, or +should have known, that: + +• The Note was unsecured and secondary to all other debt New Eco might +incur; + +• The interest rate was below market at 2%; + +• Repayment was scheduled over twenty years, with no principal payments +due for five years and no interest due for eleven months; and + +• The face amount and terms of the Note were not based on a valuation, +independent or otherwise, of the assets transferred to the borrower (New +Eco). + +28 + +144. Additionally, Wahl knew, recklessly disregarded, or should have known, that: + +• The discontinued operations that were to be the basis of the borrower’s +business had generated over $750,000 in losses for 2012; + +• The borrower was a newly-formed, start-up company to be run by the +same individual who had run the discontinued operation at a loss; + +• The borrower had refused to provide the Valuation Firm with any +information; + +• Although the Note was the largest tangible asset on its balance sheet, and +its second largest asset overall, management had not recorded on +Premier’s year-end income statement any accrued interest or any gain or +loss as a result of change in the Note’s fair value; + +• The borrower had failed to make the first required payment and Premier +had made no attempt to collect or even evaluate the Note for impairment +or measure it for its current fair value; and + +• WePower LLC, the entity with which Premier exchanged the Note for the +return of stock, was a related party and the party from whom Premier had +originally acquired the assets, in exchange for stock. + +145. All of these facts, which Wahl knew, recklessly disregarded, or should have +known, called into question the reasonableness of management’s $869,000 estimate of the Note’s +fair value, for which the engagement team had little, if any, appropriate audit evidence. + +146. A&C’s and Wahl’s audit of Premier’s accounting for its stake in TPC was also +deficient. First, Wahl did not question Premier’s allocation of the entire purported purchase +price to goodwill on the grounds that Premier still had not received an independent valuation of +any of the identifiable assets acquired, even though more than a year had passed since the +acquisition. Second, the audit team relied entirely on management’s representations that +goodwill based on the TPC acquisition had not been impaired since the acquisition. Thus, A&C +and Wahl failed to exercise due professional care and professional skepticism in reviewing +management’s accounting for the TPC stake – which accounted for a majority of Premier’s +reported assets and had been obtained in a cashless transaction. + +A&C and Wahl Ignored Multiple Indications of Fraud + +147. Wahl was required to exercise due professional care, including professional +skepticism, in planning and performing the audits. “Professional skepticism is an attitude that +includes a questioning mind and a critical assessment of audit evidence” (PCAOB Standard AU +§ 230.07, Due Professional Care in the Performance of Work), and requires auditors to “neither +assume[] that management is dishonest nor assume[] unquestioned honesty” (AU § 230.09). +Because he failed to exercise the requisite professional skepticism, Wahl failed to view the three +29 + +swaps15 and management’s accounting for the TPC stake as indications of fraud and specifically +indications of material misstatement in Premier’s financial statements. Thus, he and A&C failed +to fulfill their responsibilities to perform their audit of Premier’s FY 2013 financial statements +“to obtain reasonable assurance about whether the financial statements [were] free from material +misstatement, whether caused by error or fraud,” as required by PCAOB Standard AU § 316, +Consideration of Fraud in a Financial Statement Audit. + +148. The three swaps and the TPC acquisition were significant unusual transactions +within the meaning of AU § 316.66. The Stock-for-Related Party-Assets Swap occurred towards +the end of the fiscal year (2011), was a related party transaction whose terms were not based on +an appraisal of the assets or the stock, and involved no exchange of cash. The Discontinued- +Assets-for-Note swap occurred barely a week after the end of the fiscal year (2012), and its +purported $869,000 value was greater than the $750,000 loss on the discontinued operations that +Premier had to declare for that year. The terms of the Note were not based on an appraisal of the +assets exchanged for it, the transaction involved no exchange of cash, and the terms of the Note +were highly advantageous to the borrower. Moreover, management had recorded no interest or +gain or loss on the Note and its asserted value of the Note was unchanged from the date of +acquisition through each reporting date in 2013. + +149. Similarly, the Note-for-Stock swap also occurred soon after the end of the fiscal +year, the terms of the transaction were not based upon an independent appraisal of the Note and +no cash changed hands. Moreover, the counter-party to the transaction, WePower LLC, was a +related party, and the party from whom Premier had acquired the bulk of WePower Ecolutions’ +assets – the assets upon which the payments promised under the Note – was based. + +150. Confronted with those significant unusual transactions, Wahl should have +“gain[ed] an understanding of the business rationale for such transactions and whether that +rationale (or the lack thereof) suggests that the transactions may have been entered into to engage +in fraudulent financial reporting. . .” (AU § 316.66). + +151. Had he sought to gain an understanding of the three swaps, Wahl would have seen +that they were in substance a round-trip of essentially worthless related party assets, effected for +their financial statement impact. By inserting the Discontinued-Operations-for-Note Swap +between the late 2011 Stock-for-Related Party-Assets Swap and the early 2014 Note-for-Stock +Swap, Premier management was able to inflate the Company’s assets and manufacture a gain of +almost one million dollars, while concealing or obscuring the fact that the assets obtained from +the related parties that controlled the company were essentially worthless. + +152. The TPC Acquisition was also a significant unusual transaction within the +meaning of AU § 316.66. As with the three swaps, the TPC acquisition occurred soon after the + +15 The three swaps are (1) the Stock-for-Related Party-Assets Swap, which occurred in late +2011, (2) the Discontinued-Operations-for-Note Swap that occurred in January 2013, and +(3) the Note-for-Stock Swap that occurred in February 2014. + +30 + +end of the fiscal year, the terms of the transaction were arrived at without an independent +valuation of the assets acquired and liabilities assumed by Premier or of the stock given as +consideration, no cash was exchanged, and the valuation of the identifiable assets and liabilities +acquired still had not been completed more than a year after the transaction closed. + +Despite Their Egregious Deviations from Professional Standards, A&C and Wahl +Represented in A&C’s Audit Report that A&C Had Audited Premier’s 2013 Financial +Statements in Accordance with Those Standards + +153. By virtue of the conduct described above, A&C and Wahl failed to adhere to +numerous PCAOB standards in auditing Premier’s 2013 financial statements, as set forth above. + +154. Despite his and the audit team’s multiple egregious deviations from PCAOB +standards, Wahl authorized the issuance of A&C’s report on Premier’s 2013 financial statements, +which he knew would be filed with the Commission on Form 10-K, and he authorized the +inclusion in that report of A&C’s false representation that the audit was conducted in accordance +with PCAOB standards and its opinion, based on that audit, that Premier’s financial statements +fairly presented, in all material respects, the Company’s financial position and results of +operations in accordance with GAAP. Wahl knew or recklessly disregarded that the +statement of audit compliance was false or did not believe the statement. Accordingly, +A&C’s report on Premier’s financial statements for the year 2013 was materially false and +misleading. + +A&C Failed to Maintain an Adequate System of Quality Control for Audits + +155. PCAOB Standard QC § 20, System of Quality Control for a CPA Firm's +Accounting and Auditing Practice (“QC § 20”), provides that a CPA firm shall have a system of +quality control for its accounting and auditing practice. (QC § 20.01). Quality control includes +adopting policies and establishing procedures to provide the firm with reasonable assurance of +complying with professional standards. (QC § 20.04). Policies and procedures should be +established to encompass all phases of the design and execution of the engagement. +(QC § 20.17-.18). Policies and procedures should also address engagement quality reviews +pursuant to PCAOB Standard AS No. 7, Engagement Quality Review. (QC § 20.18). + +156. A&C failed to design and maintain an adequate system of quality control for audit +engagements and engagement quality reviews because A&C’s quality control policies and +procedures manual failed to adequately address all phases of the design and execution of these +engagements. The policies and procedures covering audits were deficient because they did not +discuss, for example: (1) how the assessment of inherent risk, control risk, and fraud risk affects +the audit procedures performed; (2) a description of the test of controls and substantive audit +procedures, and how the test of controls affects the substantive audit procedures performed; +(3) the purpose of audit work papers and what should be included in the work papers; +(4) evaluating the audit evidence obtained to determine whether the evidence is sufficient and +appropriate to support the conclusions reached; and (5) evaluating misstatements identified by +the accountant or brought to the accountant’s attention. + +31 + +157. With regard to engagement quality reviews, A&C’s policies and procedures +manual was deficient because the procedures did not discuss, for example: (1) the objective of an +engagement quality review; and (2) the EQR evaluating the engagement team’s significant +judgments and related conclusions by holding discussions with the engagement partner and other +team members and reviewing documentation. + +Summary of Charges Relating to Premier Audit + +158. As a result of the conduct described above: + +a. A&C and Wahl willfully violated Exchange Act Section 10(b) and +Rule 10b-5(b) thereunder; + +b. Wahl willfully aided and abetted A&C’s violations of Exchange Act +Section 10(b) and Rule 10b-5(b) thereunder; + +c. A&C and Wahl willfully aided and abetted and were a cause of Premier’s +violation of Section 13(a) of the Exchange Act, and Rule 13a-1 +thereunder; + +d. A&C willfully violated Rule 2-02(b) of Regulation S-X, and Wahl +willfully aided and abetted and was a cause of A&C’s violation of +Rule 2-02(b) of Regulation S-X; and + +e. A&C and Wahl willfully violated or willfully aided and abetted violations +of the federal securities laws or the rules and regulations thereunder for the +purposes of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) +of the Commission’s Rules of Practice, and 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. + +2013 CANNAVEST INTERIM REVIEWS + +Background + +159. 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. + +160. 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 +32 + +misrepresentations and/or misleading omissions on CannaVEST’s quarterly reports filed with the +SEC for its first three quarters of 2013. + +161. 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. +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. + +162. 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. + +163. 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. + +164. In April 2014, CannaVEST restated all three quarters to reflect $8 million in +assets related to the PhytoSphere acquisition on CannaVEST’s balance sheet. + +165. A&C conducted the interim reviews for CannaVEST’s Q1 through Q3 2013 +financial information. + +166. Wahl served as the engagement partner for CannaVEST’s Q1 through Q3 2013 +interim reviews. + +167. Chung served as the EQR for CannaVEST’s Q1 interim review. + +168. Shek served as the audit manager for CannaVEST’s Q1 through Q3 interim +reviews. + +33 + +A&C, Wahl, and Shek Failed to Make Adequate Inquiries and Perform Appropriate +Analytical Procedures in CannaVEST’s Q1 and Q2 2013 Interim Reviews + +169. 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 they are 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). + +170. In the Q1 and Q2 2013 interim reviews, A&C, Wahl, and Shek failed to make +adequate inquiries of management. As a result, they failed to become aware that material +modifications should be made to the total asset value on CannaVEST’s balance sheet for those +quarters. + +171. In the Q1 2013 interim review, Wahl and 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 Wahl and Shek +failed to make inquiries of Mona for the fair value. + +172. Instead, Wahl and 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. + +173. In the Q1 2013 interim review, Wahl and Shek also failed to make inquiries of +Mona regarding how he determined the collar. If they had inquired, they 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. Wahl and 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, A&C, Wahl, and Shek would have +34 + +become aware that material modifications to the total asset value on CannaVEST’s balance sheet +should have been made.16 + +174. In the Q2 2013 interim review, A&C, Wahl, and Shek failed to perform +appropriate analytical procedures and failed to make adequate inquiries of management. As a +result, A&C, Wahl, and Shek again did not become aware that material modifications to the total +asset value on CannaVEST’s balance sheet should have been made. + +175. A&C, Wahl, and Shek failed to perform appropriate analytical procedures for the +Q2 2013 interim review because they failed to prepare balance sheet analytics that compared the +Q1 2013 balance sheet to the Q2 2013 balance sheet. See 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. + +176. Wahl and 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 A&C, Wahl, and +Shek regarding the accuracy of the $35 million total asset value for PhytoSphere. This should +have then prompted A&C, Wahl, and Shek to make inquiries of management related to the fair +value of the consideration paid by CannaVEST for PhytoSphere. If Wahl and Shek had made +such inquiries related to the fair value of the consideration, they would have become aware that +material modifications to the total asset value on CannaVEST’s balance sheet should have been +made. + + +16 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. However, 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. +35 + +A&C, Wahl, and Shek Failed to Consider Whether a Restatement of CannaVEST’s Q1 and +Q2 2013 Financial Information Was Necessary During the Q3 2013 Interim Review + +177. 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). + +178. During the Q3 2013 interim review, A&C, Wahl, and Shek failed to consider +whether a restatement of CannaVEST’s Q1 and Q2 2013 financial information was necessary. + +179. 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. Wahl +and 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. Wahl and Shek +reviewed this memo. The memo did not consider whether a restatement of CannaVEST’s Q1 +and Q2 financial information was necessary. + +180. In addition, Wahl sent CannaVEST an email that included a proposed +modification for goodwill impairment of $26,998,125 on its Q3 balance sheet and income +statement based on the $8 million valuation report. CannaVEST recorded this impairment. +Wahl even admitted in a follow-up email to CannaVEST, “…looks like this should have been +booked originally at $8.0MM, not the approximately $35MM.” Wahl, however, did not take any +action to consider whether a restatement was necessary. + +181. The valuation report should have been a red flag for Wahl and Shek that the +original $35 million total asset value reported on CannaVEST’s Q1 and Q2 2013 balance sheet +may be incorrect. This should have prompted Wahl and 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. + +A&C, Wahl, and Shek Failed to Consider and Update their Knowledge of CannaVEST’s +Internal Controls and Lack of Personnel with Appropriate Accounting Qualifications +When Planning the Q1 through Q3 2013 Interim Reviews + +182. Under PCAOB Standard AU § 722, Interim Financial Information, in planning a +review of interim financial information, the accountant should perform procedures to update +their 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). + +36 + +183. A&C, Wahl, and Shek failed to consider and update their knowledge of +CannaVEST’s internal controls and lack of personnel with appropriate accounting qualifications +when planning the Q1 through Q3 2013 interim reviews. + +184. 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. + +185. When planning the Q1 through Q3 2013 interim reviews, A&C, Wahl, and Shek +failed to consider and update their 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 their interim review procedures accordingly to address that risk. + +186. Moreover, when planning the Q2 and Q3 interim reviews, A&C, Wahl, and 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 Wahl and 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. + +A&C, Wahl, and Shek Failed to Identify that the Engagement Team Did Not Prepare +Adequate Documentation for CannaVEST’s Q1 through Q3 2013 Interim Reviews + +187. 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). + +188. 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 +37 + +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). + +189. A&C, Wahl, and 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, Wahl and 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, Wahl and Shek should have included a balance +sheet analytics that compared Q1 to Q2 in the work papers. For the Q3 interim review, Wahl and +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, +Wahl and 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. + +A&C, Wahl, and Shek Failed to Exercise Due Professional Care in CannaVEST’s Q1 +through Q3 2013 Interim Reviews + +190. 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). + +191. A&C, Wahl, and 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. They 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. + +A&C Failed to Maintain an Adequate System of Quality Control for Interim Reviews + +192. PCAOB Standard QC § 20, System of Quality Control for a CPA Firm's +Accounting and Auditing Practice, provides that a CPA firm shall have a system of quality +control for its accounting and auditing practice. (QC § 20.01). Quality control includes adopting +policies and establishing procedures to provide the firm with reasonable assurance of complying +with professional standards. (QC § 20.04). Policies and procedures should be established to +encompass all phases of the design and execution of the engagement. (QC § 20.17-.18). Policies +and procedures should also address engagement quality reviews pursuant to PCAOB Standard +AS No. 7, Engagement Quality Review. (QC § 20.18). + +38 + +193. A&C failed to design and maintain an adequate system of quality control for +interim review engagements and engagement quality reviews because A&C’s quality control +policies and procedures manual failed to adequately address all phases of the design and +execution of these engagements. A&C’s manual included interim review procedures for +privately held companies, but did not include interim review procedures for publicly-held +companies. + +194. Even if the manual’s interim review procedures for privately held companies were +applied to publicly-held companies, the procedures would be deficient. For example, the +procedures did not discuss: (1) the objective of a review; (2) inquiring of a predecessor auditor +when conducting an initial review; (3) obtaining an understanding of a company’s internal +control as it relates to the preparation of financial information; (4) a description of inquiry and +analytical procedures, and when and how to apply these procedures; (5) the purpose of interim +review work papers and what should be included in the work papers; and (6) evaluating +misstatements identified by the accountant or brought to the accountant’s attention. + +195. With regard to engagement quality reviews, A&C’s policies and procedures +manual was deficient because the procedures did not discuss, for example: (1) the objective of an +engagement quality review; and (2) the EQR evaluating the engagement team’s significant +judgments and related conclusions by holding discussions with the engagement partner and other +team members and reviewing documentation. + +Chung Failed to Conduct an Adequate Engagement Quality Review in CannaVEST’s Q1 +Interim Review + +196. PCAOB Standard AS No. 7, Engagement Quality Review, provides that an EQR +in an interim review evaluates the significant judgments made by the engagement team and the +related conclusions reached in forming the overall conclusion on the interim review. To evaluate +such judgments and conclusions, the EQR, to the extent necessary, holds discussions with the +engagement partner and other team members and reviews documentation. (AS No. 7.14). + +197. Furthermore, the EQR evaluates, among other things, the engagement team’s +significant judgments that relate to engagement planning, including the consideration of the +company’s business, recent significant activities, and related financial reporting issues and risks. +In addition, the EQR reviews the interim financial information for all periods presented and for +the immediately preceding interim period. (AS No. 7.15). The EQR also evaluates whether the +engagement documentation that he or she reviewed supports the conclusions reached by the +engagement team with respect to the matters reviewed. (AS No. 7.16). + +198. The EQR may provide a concurring approval of issuance only if, after performing +her review with due professional care, she is not aware of a significant engagement deficiency. +A significant engagement deficiency in an interim review includes but is not limited to: (1) the +engagement team failing to perform interim review procedures necessary in the circumstances of +the engagement; and (2) the engagement team reaching an inappropriate overall conclusion on +the subject matter of the engagement. (AS No. 7.17). + +39 + +199. Chung provided a concurring approval of issuance for CannaVEST’s Q1 interim +review. Chung, however, failed to conduct an adequate engagement quality review and identify +significant engagement deficiencies in the interim review. Specifically, Chung failed to identify +that the engagement team did not make adequate inquiries of management, did not properly plan +the engagement, and did not prepare adequate documentation for the engagement. As a result, +Chung should not have provided a concurring approval of issuance for the Q1 interim review. + +200. Chung failed to identify that the engagement team did not make adequate +inquiries of management related to the PhytoSphere acquisition. Chung discussed the +PhytoSphere acquisition with Wahl, knew the acquisition was significant, and reviewed the +PhytoSphere purchase agreement. Chung, however, failed to identify that the engagement team +did not 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. As the EQR, Chung should have identified that the +engagement team failed to make this critical inquiry regarding the value of CannaVEST’s shares. +Chung even acknowledged that if a client had a $35 million acquisition, she would have asked +the client to obtain a valuation related to the acquisition as support for the $35 million recorded +on the balance sheet. Chung, however, did not ask the engagement team to make inquires of +CannaVEST to obtain such a valuation. + +201. Chung also failed to identify that the engagement team did not properly plan the +Q1 interim review. When planning the Q1 interim review, the engagement team failed to +consider and update their 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 their interim review procedures accordingly to address that risk. As a result, the +engagement team failed to properly plan the Q1 interim review, and Chung did not identify these +planning failures. + +202. Furthermore, Chung failed to identify that the engagement team did not prepare +adequate documentation for the Q1 interim review. For example, Chung should have identified +that the work papers did not document the fair value of the consideration related to the +PhytoSphere acquisition. In addition, Chung should have identified that the planning memo did +not document relevant aspects of the engagement team’s knowledge of CannaVEST’s internal +controls and lack of accounting personnel, the associated risk of material misstatement, and plans +to address that risk. + +Chung Failed to Exercise Due Professional Care in CannaVEST’s Q1 2013 Interim Review + +203. PCAOB Standard AS No. 7, Engagement Quality Review, requires that an EQR +perform her review with due professional care. (AS No. 7.17). 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). + +204. Chung failed to exercise due professional care and failed to exercise a sufficient +level of professional skepticism when providing an engagement quality review for CannaVEST’s +Q1 interim review. As a result, Chung failed to identify the engagement team’s planning failures +40 + +and lack of adequate documentation. Chung also failed to identify that the interim review had +significant engagement deficiencies, such as the engagement team not performing adequate +inquiries, and the engagement team inappropriately concluding that CannaVEST’s Q1 financial +statements did not require any material modifications to conform to GAAP. + +Summary of Charges Relating to CannaVEST Interim Reviews + +205. As a result of the conduct described above, A&C, Wahl, Chung, and 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. + +VIOLATIONS + +206. As a result of the conduct described above in the Accelera and Premier +engagements, A&C willfully violated Exchange Act Section 10(b) and Rule 10b-5(b) thereunder, +which prohibit, in connection with the purchase or sale of securities, the use of any means or +instrumentality of interstate commerce, or of the mails, or of any facility of any national +securities exchange, 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 the light of the circumstances under +which they were made, not misleading. + +207. As a result of the conduct described above in the Premier engagement, Wahl +willfully violated, and willfully aided and abetted A&C’s violations of, Exchange Act +Section 10(b) and Rule 10b-5(b) thereunder. + +208. As a result of the conduct described above in the Accelera engagement, +Deutchman willfully aided and abetted A&C’s violation of Exchange Act Section 10(b) and +Rule 10b-5(b) thereunder. + +209. As a result of the conduct described above in the Accelera engagement, A&C, +Wahl, and Deutchman willfully aided and abetted and were causes of Accelera’s violation of +Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder, which require an +issuer to file with the Commission accurate annual and quarterly reports. + +210. As a result of the conduct described above in the Premier engagement, A&C and +Wahl willfully aided and abetted and were causes of Premier’s violation of Section 13(a) of the +Exchange Act and Rule 13a-1 thereunder, which require an issuer to file with the Commission +accurate annual reports. + +211. As a result of the conduct described above in the Accelera and Premier +engagements, A&C willfully violated Rule 2-02(b) of Regulation S-X, which requires an +41 + +accountant’s report to accurately state whether the audit was made in accordance with generally +accepted auditing standards.17 + +212. As a result of the conduct described above in the Accelera and Premier +engagement, Wahl willfully aided and abetted and was a cause of A&C’s violations of +Rule 2-02(b) of Regulation S-X. + +213. As a result of the conduct described above in the Accelera engagement, +Deutchman willfully aided and abetted and was a cause of A&C’s violations of Rule 2-02(b) of +Regulation S-X. + +214. As a result of the conduct described above in the Accelera and Premier +engagements, A&C and Wahl willfully violated or willfully aided and abetted violations of the +federal securities laws or the rules and regulations thereunder for the purposes of +Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. + +215. As a result of the conduct described above in the Accelera engagement, +Deutchman willfully aided and abetted violations of the federal securities laws or the rules and +regulations thereunder for the purposes of Section 4C(a)(3) of the Exchange Act and +Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +216. As a result of the conduct described above in the Accelera, Premier, and +CannaVEST engagements, A&C and Wahl 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, as provided under Rule 102(e)(1)(iv): (A) intentional or +knowing conduct, including reckless conduct, that results in a violation of applicable +professional standards; or (B) either of the following two types of negligent conduct: (1) a single +instance of highly unreasonable conduct that results in a violation of applicable professional +standards in circumstances in which an accountant knows, or should know, that heightened +scrutiny is warranted; 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. + +217. As a result of the conduct described above in the Accelera engagement, +Deutchman 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). + +218. As a result of the conduct described above in the CannaVEST engagement, +Chung and Shek engaged in improper professional conduct within the meaning of + +17 Pursuant to Commission interpretive guidance, GAAS, as used in Regulation S-X, means +the standards of the PCAOB and any applicable Commission rules. Securities Act Rel. +No. 8422 (May 14, 2004). +42 + +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). + +III. + +In view of the allegations made by the Division of Enforcement, the Commission deems +it necessary and appropriate in the public interest that public administrative and cease-and-desist +proceedings be instituted against A&C, Wahl, and Deutchman, and that public administrative +proceedings be instituted against Chung and Shek to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondents an opportunity to establish any defenses to such allegations; + +B. Whether, pursuant to Section 21C of the Exchange Act, Respondents A&C, Wahl, +and Deutchman should be ordered to cease and desist from committing or causing violations of, and +any future violations of, Sections 10(b) and 13(a) of the Exchange Act, and Rules 10b-5, 13a-1, +and 13a-13 thereunder, and Rule 2-02(b) of Regulation S-X; + +C. Whether, pursuant to Sections 21B(e) and 21C(e) of the Exchange Act, Respondents +A&C and Wahl should be ordered to pay disgorgement; + +D. Whether, pursuant to Section 21B(a)(2) of the Exchange Act, Respondents A&C, +Wahl, and Deutchman should be ordered to pay a civil penalty; and + +E. Whether, pursuant to Section 4C of the Exchange Act and Section 102(e) of the +Commission’s Rules of Practice, Respondents A&C, Wahl, Deutchman, Chung, and Shek 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 Respondents shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220 +of the Commission’s Rules of Practice, 17 C.F.R. § 201.220. + +If a Respondent fails to file the directed answer, or fails to appear at a hearing after being +duly notified, the Respondent may be deemed in default and the proceedings may be determined +against him upon consideration of this Order, the allegations of which may be deemed to be true as +provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission's Rules of Practice, 17 C.F.R. +§§ 201.155(a), 201.220(f), 201.221(f) and 201.310. +43 + +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/2017/AAER-3913.txt b/raw/aaer/2017/AAER-3913.txt new file mode 100644 index 0000000000000000000000000000000000000000..9dd00402d9446e1c4d9522d70b1fcb8e12267e76 --- /dev/null +++ b/raw/aaer/2017/AAER-3913.txt @@ -0,0 +1,575 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82208 / December 4, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3913 / December 4, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18294 + + + + +In the Matter of + +RAHULDEV GANDHI, CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE ACT +OF 1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Rahuldev +Gandhi, CPA (“Respondent” or “Gandhi”) pursuant to Sections 4C1 and 21C of the Securities + +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 + +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and (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: + +SUMMARY + +1. These proceedings arise out of violations of the federal securities laws and improper +professional conduct by Rahuldev Gandhi, a partner in the public accounting firm Anton & Chia, +LLP (“A&C”), relating to the 2015 audit of Accelera Innovations, Inc. (“Accelera”). Gandhi failed +to adhere to numerous standards of the Public Company Accounting Oversight Board (“PCAOB”) +and ignored a number of red flags that indicated that Accelera’s financial statements and public +filings contained material misstatements. As a result, Gandhi engaged in improper professional +conduct. +2. In addition, despite Gandhi’s deviations from applicable professional standards and +disregard of red flags indicating that Accelera’s financial statements were not in conformity with +Generally Accepted Accounting Principles (“GAAP”), A&C, by and through Gandhi, issued an + +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. + +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 + +audit report in which it represented that A&C had conducted the audit in accordance with standards +of the PCAOB and further represented that, based on that audit, in its opinion, Accelera’s financial +statements presented fairly, in all material respects, the company’s financial condition and results of +its operations in accordance with GAAP. Gandhi knew or should have known that those +representations were false and misleading. Accordingly, Gandhi willfully aided and abetted and +caused A&C’s violation of Rule 2-02(b) of Regulation S-X and Accelera’s violation of Section +13(a) of the Exchange Act and Rule 13a-1 thereunder. +RESPONDENT + +3. Rahuldev Gandhi, age 37, of Irvine, California, was a partner of A&C from +November 2014 through December 2016. He is a certified public accountant licensed in the state +of Washington. Gandhi served as the engagement partner for A&C’s 2015 annual audit of the +financial statements of Accelera. + +OTHER RELEVANT PERSONS AND ENTITIES + +4. Accelera Innovations, Inc. is a Delaware corporation with its principal place of +business located in Frankfort, Illinois. It was formerly known as Accelerated Acquisition IV, Inc. +and was incorporated in April 2008 as a shell company. The company claims to be “a healthcare +service company which is focused on acquiring companies primarily in the post-acute care patient +services and information technology services industries.” Its common stock has been quoted on +OTC Link, operated by OTC Markets Group, Inc. and formerly known as the Pink Sheets under +ticker ACNV since January 2015. Accelera 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. +Accelera’s fiscal year ends on December 31.4 + +5. Behavioral Health Care Associates, Ltd. (“BHCA”) is a health care provider +based in Schaumberg, Illinois specializing in psychiatry and substance abuse treatment. 100% of +its stock is owned by its founder, director, and sole owner. In or around October of 2012, the +owner, through a broker, placed BHCA for sale. + +6. Anton & Chia, LLP is a PCAOB-registered audit firm since 2009 and 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 Georgia Chung, and is +currently co-owned by Chung and her husband, Gregory Wahl. A&C conducted year-end audits + +4 On September 29, 2017, the Commission filed a civil injunctive action against Accelera, +its Chairman, and a related company in the United States District Court for the Northern +District of Illinois. (Case No. 17-cv-7052). On the same day, the Commission also filed +a civil injunctive action in that district against Accelera’s CFO, and later filed a motion +for entry of judgment based on a bifurcated settlement. (Case No. 17-cv-7057). + +4 + +and quarterly reviews of Accelera’s financial statements from December 17, 2012 through +November 15, 2016. 5 +FACTS + +BACKGROUND + +7. Accelera is a Delaware corporation based in Frankfort, Illinois. It has common +stock registered under Section 12 of the Exchange Act and consequently a reporting obligation +under Section 13(a) of the Exchange Act. + +8. A&C performed audits of Accelera’s year-end financial statements for 2013, 2014, +and 2015. Audit reports containing unqualified opinions were included in Accelera’s Forms 10-K +filed for each of those years. In addition, A&C performed the quarterly reviews of Accelera’s +financial statements throughout 2014 and 2015. + +9. Gandhi was the engagement partner for the 2015 audit of Accelera’s financial +statements. The 2015 audit was completed in August 2016. Gandhi did not participate in the 2013 +or 2014 audits or any of the quarterly reviews for 2014 or 2015. +IMPROPER CONSOLIDATION OF BHCA INTO ACCELERA’S FINANCIAL STATEMENTS + +10. Beginning with the year-end financial statements for 2013, Accelera began +consolidating into its publicly-filed financial statements the financial results of a purported +subsidiary, BHCA. Accelera continued to consolidate BHCA’s financials with Accelera’s through +the Form 10-K for the year ending December 31, 2015, which was filed in August of 2016. + +5 On December 4, 2017, the Commission instituted an 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 against A&C, as well as several of its current or past +personnel, Gregory A. Wahl, CPA, Michael Deutchman, CPA, Georgia Chung, CPA, and +Tommy Shek, CPA, concerning their conduct in the audits and/or interim reviews for +Accelera, Premier, Holding Corporation (“Premier”), and/or CannaVEST Corp. +(“CannaVEST”) (Rel. No.34-82206). Also on December 4, 2017, the Commission +instituted an 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 against Richard Koch, CPA, an A&C audit +partner, related to his conduct in an audit for Premier and two interim reviews for +CannaVEST (Rel. No. 34-82207).6 The financial statements in Accelera’s Form 10-K +for the fiscal year 2016 were audited by a different auditing firm, as opposed to A&C. + +5 + +11. BHCA’s revenue comprised approximately 90% of Accelera’s revenue in 2013 and +2014, and 69% in 2015. +12. Accelera never owned or controlled BHCA. Instead, Accelera and BHCA entered +into a stock purchase agreement (the “Stock Purchase Agreement”) whereby Accelera was to +purchase 100% of the shares of BHCA in exchange for a total of $4.55 million. Specifically, under +the BHCA SPA, Accelera promised to pay BHCA’s owner a total of $4.55 million, the first $1 +million of which was due within 90 days, and the remaining $3.55 million of which was to be paid +in regular installments pursuant to the terms of a promissory note. After the first payment, the +shares of BHCA would be placed into escrow pending the final payment, after which time the +shares would transfer free and clear to Accelera. Prior to the first payment, the shares would +remain with BHCA’s owner, and BHCA’s owner would have the right to cancel the transaction at +any time. +13. The Stock Purchase Agreement, the promissory note, and other documents +memorializing the transaction all made clear that any ownership interest in BHCA would pass only +after Accelera paid BHCA’s owner the initial $1 million. For example, +a) The Stock Purchase Agreement stated that 100% of the stock in BHCA would +change hands only “[u]pon payment of the purchase price set forth in Section 1.1.1.1.,” i.e., the +initial $1 million payment. +b) The promissory note indicated that it was only “effective upon the payment of the +purchase price set forth in Section 1.1.1.1.” +c) The bill of sale stated that the owner of BHCA would sell to Accelera 100% of the +shares of BHCA “effective upon the payment of the purchase price set forth in Section 1.1.1.1 of +the Purchase Agreement.” + +14. Accelera never made the initial $1 million payment referenced in Section 1.1.1.1 of +the Stock Purchase Agreement. In fact, Accelera never paid a single dollar for BHCA. +15. Instead, Accelera and BHCA’s owner entered into a series of amendments to the +Stock Purchase Agreement, under which the timeline for payment was pushed back in exchange +for a certain number of shares of Accelera common stock. These amendments did not otherwise +alter the terms of the agreement. In other words, it remained true that Accelera would not receive +the shares of BHCA prior to payment. In addition, BHCA’s owner could cancel the transaction at +any time prior to payment. +16. Throughout the pendency of the Stock Purchase Agreement, Accelera never +controlled BHCA in any way. BHCA kept the revenue it earned. Accelera did not direct any +hiring or firing or other managerial decisions at BHCA. Accelera did not exercise any influence +via board representation or common executives. BHCA’s management ran the business as it +always had. + +6 + +17. On March 31, 2016, BHCA’s owner and Accelera entered into an agreement +officially terminating the Stock Purchase Agreement, effective retroactively to January 1, 2016. + +18. In its 2016 Form 10-K,6 filed on April 17, 2017, Accelera admitted that “the +financial statements of BHCA should have never been consolidated with our financial statements +since we was [sic] never able to take control of BHCA due to non-payment of the purchase price.” +Accelera restated its financial statements for 2015, resulting in a 92% decrease in total assets and a +69% decrease in revenues. + +RED FLAGS INDICATING BHCA WAS IMPROPERLY CONSOLIDATED + +19. In addition to the clear language of the Stock Purchase Agreement and the other +agreements, Gandhi had numerous other reasons to question the propriety of consolidating BHCA +into Accelera’s financial statements. There were multiple red flags indicating that the +consolidation of BHCA was inappropriate and that Accelera’s financial statements were therefore +materially inaccurate. Neither Gandhi nor any other A&C staff working on the engagement team +identified, analyzed, or documented these red flags. +20. For example, Accelera never filed a Form 8-K containing BHCA’s financial +statements, despite an SEC rule requiring it to do so within 75 days of the closing of the BHCA +transaction. +21. In late 2014 and early 2015, Accelera entered into three new purchase agreements +with other entities that featured similar terms to the Stock Purchase Agreement. As with BHCA, +Accelera never made any payments toward these purchases. Instead, as with BHCA, the parties +entered into extension agreements. However, despite the similarities, Accelera never consolidated +these other companies into its financial statements. This disparity did not prompt Gandhi to re- +examine Accelera’s treatment of BHCA. +22. For the 2015 year-end audit, A&C requested that BHCA’s owner execute a +confirmation of liability stating that the entire $4.55 million owed by Accelera under the BHCA +SPA was unpaid. The owner confirmed, and added language clarifying that, “[t]o the extent the +terms of this letter conflict with the terms of the Parties’ Stock Purchase Agreement, the terms of +the Stock Purchase Agreement shall control.” BHCA’s owner made a similar statement during the +2014 audit. +23. As of October 1, 2015, Accelera was in default on the Stock Purchase Agreement +(the final extension entered into by the parties expired on September 30, 2015). + +6 The financial statements in Accelera’s Form 10-K for the fiscal year 2016 were audited +by a different auditing firm, as opposed to A&C. + +7 + +24. In or around late-2015, an officer of Accelera contacted Gandhi, requested that +Accelera restate its financials to remove BHCA, and explained that Accelera had never had control +over BHCA. Gandhi, after consultation with A&C’s managing partner, said that restatement was +unnecessary. +25. In March 2016, Accelera provided Gandhi with a draft termination agreement from +BHCA’s owner’s attorney which required Accelera to “disclos[e] that [Accelera] did not own an +interest in [BHCA] and should not have recognized on its books and records the revenue and +expenses of [BHCA] for the years of 2012 [sic], 2013, 2014, and 2015.” In a cover email +transmitting the draft agreement, an Accelera officer wrote to Gandhi, “[t]his continues to be an +issue …. I need to know how we can remove the revenue and restate all those years.” In response +to the e-mail and draft, Gandhi asked if it was “possible to negotiate this section” of the +termination agreement. Ultimately, the final version of the termination agreement did not include a +restatement requirement. Later, Gandhi wrote to Accelera “[o]ur firm helped you, through my own +guidance, to review and point out flaws in the legal agreements related to the [BHCA] termination +and avoid multiple years of restatements. Not just any accounting firm would be able to provide +this kind of value.” +26. In June 2016, prior to the filing of Accelera’s 2015 Form 10-K, Accelera +provided A&C with copies of investigative subpoenas issued by Commission staff in connection +with an investigation relating to Accelera’s financial reporting, and specifically its consolidation of +BHCA. +INADEQUATE PROCEDURES REGARDING THE BHCA CONSOLIDATION +27. To the extent that A&C performed audit procedures to verify the propriety of +consolidating BHCA, those procedures were inadequate. +28. There is no documentation of any discussion or analysis regarding the consolidation +of BHCA, or any of the red flags discussed above, in the work papers for the 2015 audit. In +addition, key documents regarding the BHCA transaction – including the Stock Purchase +Agreement and the promissory note – are not included in the 2015 audit work papers.7 +FAILURE TO OBTAIN SUFFICIENT APPROPRIATE AUDIT EVIDENCE TO SUPPORT AUDIT OPINION + +29. PCAOB Auditing Standard No. 15, Audit Evidence (“AS No. 15”), requires the +auditor to “plan and perform audit procedures to obtain sufficient appropriate audit evidence to + +7 The promissory note was included in the audit work papers for the 2013 and 2014 audits, +and the Stock Purchase Agreement was included in the audit work papers for the 2013 +audit. + + +8 + +provide a reasonable basis for his or her opinion.” (AS No. 15.4.)8 Appropriate audit evidence +must be “both relevant and reliable in providing support for the conclusions on which the auditor’s +opinion is based.” (AS No. 15.6) Among other things, “[e]vidence obtained from a +knowledgeable source that is independent of the company is more reliable than evidence obtained +only from internal company sources.” (AS No. 15.8.) Further, “[i]f audit evidence obtained from +one source is inconsistent with that obtained from another, . . . the auditor should perform the audit +procedures necessary to resolve the matter and should determine the effect, if any, on other aspects +of the audit” (AS No. 15.29). +30. PCAOB Standard AU Section 333, Management Representations, (“AU §333”) +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 Section 333 also 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). +31. A&C issued its 2015 audit report containing an unqualified opinion, and Gandhi +approved the issuance of the audit report. However, Gandhi and staff working under his +supervision failed to obtain sufficient appropriate audit evidence to provide a reasonable basis for +that opinion, to understand the material transaction with BHCA, or to resolve inconsistencies +regarding the accounting for the BHCA transaction. +32. Gandhi knew that Accelera had material weaknesses in its internal control over +financial reporting. In its Forms 10-K, Accelera reported that its internal control over financial +reporting was ineffective as of December 31, 2014 and 2015. A&C noted in its 2015 audit +planning memorandum that it had “determined not to rely on the internal control of the company +based on past audit experience.” +33. In addition, before the 2015 audit was completed, Gandhi became aware that +Accelera was under an SEC investigation relating to its financial reporting, and specifically +relating to the consolidation of BHCA. +34. Gandhi also improperly relied on Accelera management’s representations in the +face of contrary evidence. Among other things, Accelera’s agreements with BHCA contradicted +management’s representations in Accelera’s public filings regarding ownership of BHCA. Also, +the draft termination agreement, which indicated that Accelera had never controlled BHCA, +contradicted Accelera’s accounting treatment of BHCA. Moreover, the representations Gandhi + +8 References herein to the PCAOB standards refer to the standards that were in effect at the +time of the relevant conduct. + +9 + +received from an Accelera officer that Accelera did not control BHCA contradicted the +representations in the public filings that Accelera had acquired BHCA. Neither Gandhi nor any +A&C staff under his supervision performed audit procedures to resolve these conflicts. +FAILURE TO DOCUMENT SIGNIFICANT FINDINGS OR ISSUES +35. PCAOB Auditing Standard No. 3, Audit Documentation (“AS No. 3”) requires +auditors to document the procedures performed, evidence obtained, and conclusions reached. (AS +No. 3.6.) Audit documentation must contain, among other things, information sufficient to allow +an experienced auditor with no connection to the work to understand the procedures performed, +evidence obtained, and conclusions reached and to determine who performed the work, when the +work was completed, the person who reviewed the work, and the date of the review. (AS No. 3.6.) +In particular, “audit documentation must include information the auditor has identified relating to +significant findings or issues that is inconsistent with or contradicts the auditor’s final +conclusions,” and “[r]isks of material misstatement that are determined to be significant risks and +the results of the auditing procedures performed in response to those risks.” (AS Nos. 3.8, 3.12(f- +1).) +36. Gandhi failed to document communications that called into question the BHCA +consolidation, including the communications from Accelera’s officer who raised the issues of lack- +of-control of BHCA and restatement of Accelera’s financial statements, as discussed above. +37. To the extent that any procedures were ever performed to address the issue of +BHCA’s consolidation, those procedures were not documented. +FAILURE TO EXERCISE DUE PROFESSIONAL CARE +38. PCAOB Standard AU Section 230, Due Professional Care in the Performance of +Work (“AU §230”) requires auditors to exercise due professional care throughout the audit, +including by “exercise of professional skepticism.” Under this standard, “[p]rofessional skepticism +is an attitude that includes a questioning mind and a critical assessment of audit evidence” (AU § +230.07), 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. For the reasons outlined above, Gandhi failed to meet AU § 230. +VIOLATIONS + +40. Rule 2-02(b)(1) of Regulation S-X requires that an audit report “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” refers to the standards issued by the PCAOB. See Sec. Act Rel. No. 33-8422. + +10 + +41. A&C, with Gandhi’s authorization, issued an audit report stating that the 2015 +Accelera audit had been performed in accordance with the required standards. As discussed above, +Gandhi and other A&C staff acting under his supervision failed to comply with numerous PCAOB +standards during the course of the audit. As such, Gandhi willfully aided and abetted and was a +cause of A&C’s violation of Rule 2-02(b) of Regulation S-X. +42. Section 13(a) of the Exchange Act and Rule 13a-1 thereunder require issuers with +securities registered under Section 12 of the Exchange Act to file annual reports with the +Commission and to keep this information current. The obligation to file such reports embodies the +requirement that they be true and correct. See, e.g., SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 +(D.C. Cir. 1978), cert. denied, 440 U.S. 913 (1979). +43. As discussed above, Gandhi caused Accelera to file a false and misleading annual +report with the Commission that misrepresented the financial results of Accelera, overstating its +revenue by approximately 69% and its total assets by approximately 92%. By his conduct +described above, Gandhi willfully aided and abetted and caused Accelera’s violations of Section +13(a) of the Exchange Act and Rule 13a-1 thereunder. +FINDINGS + +46. Based on the foregoing, the Commission finds that Gandhi (a) willfully aided and +abetted and caused A&C’s violation of Rule 2-02(b) of Regulation S-X, and (b) willfully aided +and abetted and caused Accelera’s violation of Section 13(a) of the Exchange Act, and Rule 13a-1 +promulgated thereunder. + +47. Based on the foregoing, the Commission finds that Gandhi 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, as provided under Rule +102(e)(1)(iv): (A) intentional or knowing conduct, including reckless conduct, that results in a +violation of applicable professional standards; and (B) either of the following two types of +negligent conduct: (1) a single instance of highly unreasonable conduct that results in a violation +of applicable professional standards in circumstances in which an accountant knows, or should +know, that heightened scrutiny is warranted; 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. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Gandhi’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + +11 + + A. Gandhi shall cease and desist from committing or causing any violations and any +future violations of Rule 2-02(b) of Regulation S-X, and Section 13(a) of the Exchange Act and +Rule 13a-1 promulgated thereunder. + + B. Gandhi 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, Gandhi 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 Gandhi’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) Gandhi, 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) Gandhi, 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 + +12 + +respondent’s or the firm’s quality control system that would +indicate that Gandhi will not receive appropriate supervision; + (c) Gandhi 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) Gandhi 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 Gandhi 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 Gandhi’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 civil penalties of $15,000, to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to Exchange Act +Section 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 +U.S.C. §3717. Payment shall be made in the following installments: a first installment of $5,000 +is due within 30 days of the entry of this Order; a second installment of $5,000 is due within 60 +days of the entry of this Order; and a third installment of $5,000 is due within 90 days of the entry +of this Order. If any payment is not made by the date the payment is required by this Order, the +entire outstanding balance of civil penalties, plus any additional interest accrued pursuant to 31 +U.S.C. 3717, shall be due and payable immediately, without further application. + +Payment must be made in one of the following ways: + +(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 + + +13 + +(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 +Gandhi 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 Regional Director Robert J. +Burson, Division of Enforcement, Securities and Exchange Commission, 175 West Jackson +Boulevard, Suite 1450, Chicago, IL 60604. + + 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 +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). + + + + +14 + + By the Commission. + + + + + Brent J. Fields + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3914.txt b/raw/aaer/2017/AAER-3914.txt new file mode 100644 index 0000000000000000000000000000000000000000..eca44661e1f2ba1bb2ca4d5eb25a349ef378529c --- /dev/null +++ b/raw/aaer/2017/AAER-3914.txt @@ -0,0 +1,105 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82215 / December 5, 2017 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3914 / December 5, 2017 +ADMINISTRATIVE PROCEEDING +File No. 3-11890 + +In the Matter of +Gregory Davis, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN +ACCOUNTANT + +On April 11, 2005, Gregory Davis, CPA (“Davis”) was denied the privilege of appearing +or practicing as an accountant before the Commission as a result of settled public administrative +proceedings instituted by the Commission against Davis pursuant to Rule 102(e)(1) of the +Commission’s Rules of Practice.1 This order is issued in response to Davis’s application for +reinstatement to appear and practice before the Commission as an accountant. + +The Commission found that Davis willfully violated Section 10A of the Exchange Act, +and willfully aided and abetted Chancellor Corporation Inc.’s (“Chancellor”) violations of +Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder, and engaged +in improper professional conduct under Rule 102(e)(1)(ii) of the Commission’s Rules of Practice +in connection with the audits of Chancellor’s 1998 and 1999 financial results, as well as the +interim reviews of Chancellor’s quarterly results for the first three quarters of 2000. Specifically, +Davis aided and abetted Chancellor to materially overstate its revenue, income and assets for +1998 in its Form 10-KSB. Davis also aided and abetted Chancellor, in two Forms 10-KSB-A for +1998, and in a Form 10-KSB and Form 10-KSB-A for 1999, to materially misrepresent and +improperly disclose the nature and substance of fees purportedly owed to a related party, which +was the company’s largest shareholder and controlled by the company’s CEO and chairman of +the board of directors. Finally, Davis aided and abetted Chancellor to provide materially +misleading disclosure in the Forms 10-QSB for the first three quarters of 2000 related to the use +of the proceeds from a line of credit obtained by the company. + +1 See Accounting and Auditing Enforcement Release No. 2229 dated April 11, 2005. Davis was permitted, pursuant +to the order, to apply for reinstatement after five years upon making certain showings. + +Davis has met all of the conditions set forth in the original order and, in his capacity as an +independent accountant, has stated that he will comply with all requirements of the Commission +and the Public Company Accounting Oversight Board, including, but not limited to all +requirements relating to registration, inspections, concurring partner reviews and quality control +standards. In his capacity as a preparer or reviewer, or as a person responsible for the +preparation or review, of financial statements of a public company to be filed with the +Commission, Davis attests that he will undertake to have his work reviewed by the independent +audit committee of any company for which he works, or in some other manner acceptable to the +Commission, while practicing before the Commission in this capacity. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of the information supplied, representations made, and undertakings agreed +to by Davis, it appears that he has complied with the terms of the April 11, 2005 order denying +him the privilege of appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct, or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission’s Rules of Practice, +and that Davis, by undertaking to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, in his +practice before the Commission as a preparer or reviewer of financial statements required to be +filed with the Commission, and that Davis, by undertaking to comply with all requirements of +the Commission and the Public Company Accounting Oversight Board, including, but not +limited to, all requirements relating to registration, inspections, concurring partner reviews and +quality control standards, in his practice before the Commission as an independent accountant +has shown good cause for reinstatement. Therefore, it is accordingly, + + + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) o r (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). +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Gregory Davis, CPA is hereby reinstated to appear and practice before the Commission as an +accountant. + +By the Commission. + + + +Brent J. Fields +Secretary + \ No newline at end of file diff --git a/raw/aaer/2017/AAER-3916.txt b/raw/aaer/2017/AAER-3916.txt new file mode 100644 index 0000000000000000000000000000000000000000..d2d00de6e34e81a3674d96b97476ec557a1450b6 --- /dev/null +++ b/raw/aaer/2017/AAER-3916.txt @@ -0,0 +1,562 @@ + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 82293 / December 12, 2017 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 3916 / December 12, 2017 + +ADMINISTRATIVE PROCEEDING +File No. 3-18308 + + +In the Matter of +Peter R. Culpepper, 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 +Peter R. Culpepper, CPA (“Culpepper” or “Respondent”) pursuant to Section 8A of the +Securities Act of 1933, Sections 4C1 and 21C of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the +securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + +2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over him and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondent +consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist +Proceedings Pursuant to Section 8A of the Securities Act of 1933, 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”), as set +forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +A. SUMMARY + +1. From at least 2011 to early 2016, Provectus paid its then-Chief Executive Officer +(“CEO”) H. Craig Dees approximately $3.2 million in purported business travel advances and +expense reimbursements that Dees fraudulently obtained and used for his personal benefit. Dees +submitted false cash advance requests and expense reports that contained limited details of the +claimed business trips and little, no, or fabricated supporting documentation. In addition, from at +least 2013 to 2015, Provectus paid its then-Chief Financial Officer (“CFO”), Respondent Peter +Culpepper, $199,194 in perquisites and payments for business travel that Culpepper used for +unauthorized and/or personal expenses. + +2. Provectus’ insufficient internal accounting controls contributed to and failed to +detect these improper and unauthorized payments, which were not accurately recorded in the +company’s books and records. As a result, Provectus’ annual reports and definitive proxy +statements materially understated the compensation paid to Dees and Culpepper in the form of +personal benefits and perquisites. In addition, Provectus’ annual reports stated that Provectus’ +internal control over financial reporting was effective, when it was not. These annual reports and +proxy statements were incorporated by reference in registration statements offering shares of +Provectus’ common stock. + + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +3 + + +3. As CFO, Culpepper had responsibility for Provectus’ internal accounting +controls. Culpepper failed to implement sufficient controls for travel advances and expense +reimbursements, and failed to ensure compliance with certain of Provectus’ expense payment +controls. In his role as CFO, Culpepper reviewed, determined the need for, and sought approval +of Dees’ travel expense requests even though he should have questioned whether Dees was +obtaining improper payments from Provectus. Culpepper knew or should have known that Dees’ +travel expense requests lacked sufficient supporting documentation and explanations of business +purpose. Culpepper also failed to maintain and submit accurate and complete records of certain +of his own travel expenses. Culpepper’s improper conduct was a cause of Provectus’ insufficient +accounting controls and its failure to record and disclose properly the payments made to Dees +and Culpepper. + +B. RESPONDENT AND RELEVANT INDIVIDUALS + +4. Respondent Peter R. Culpepper was Provectus’ Chief Financial Officer from +February 2004 to April 2016, Chief Operating Officer from February 2008 to December 2016, +and interim Chief Executive Officer from February 2016 until his termination in December 2016. +Culpepper is licensed as a CPA in Tennessee and Maryland. + +5. Provectus Biopharmaceuticals, Inc., incorporated in Delaware, is a development +stage biotechnology company based in Knoxville, Tennessee. Provectus’ common stock is +registered with the Commission pursuant to Section 12(g) of the Exchange Act. Provectus’ +common stock and certain of its warrants traded on the NYSE MKT from May 2014 to October +2016, when they were suspended from trading. They were ultimately delisted by the NYSE +MKT effective May 1, 2017. Provectus’ common stock currently trades on the OTCQB +Marketplace under the ticker symbol “PVCT.” From 2011 to 2016, Provectus’ only employees +were its three founding executives and Culpepper. + +6. H. Craig Dees was a co-founder of Provectus and served as its Chief Executive +Officer and Chairman of the Board from 2002 until his resignation in February 2016. + +C. FACTS + +1. Background and Provectus’ Deficient Internal Accounting Controls + +7. During at least 2011 to early 2016, Provectus’ Code of Business Conduct +prohibited personal use of corporate assets and required all business expense accounts to be +documented and recorded accurately and in a timely way. However, Provectus had limited +policies or internal accounting controls regarding travel and entertainment expenses and +reimbursements. Culpepper failed to ensure that Provectus devised and maintained sufficient +internal accounting controls related to advances and reimbursements. + +8. Provectus had insufficient internal accounting controls regarding cash advances +for travel expenses. For example, there was no requirement to substantiate the business purpose + +4 + +of an advance, to submit receipts showing the use of advanced funds, or to reconcile expenses +with advances. There was also no limit on the amount of funds that could be advanced. + +9. Provectus’ executives used their own credit cards or cash for company expenses +and Provectus’ general corporate expense reimbursement policy required employees to submit +expense reports containing an itemized list of expenses together with support for each item. As +noted below, Provectus failed to adhere to this policy when it reimbursed Dees and Culpepper +without requiring support or itemization for claimed expenses. In addition, the policy was +insufficient as applied to travel expenses. For example, the policy did not define “support” or +require the submission of third-party receipts. The policy also did not require employees to +demonstrate the business purpose of an expense or to submit expense reports or support within a +designated amount of time. + +10. Provectus also had insufficient controls, or controls that were not followed, for +review and authorization of disbursements to employees made by check or wire, which included +travel advances and expense reimbursements, as noted below. + +11. As CFO, Culpepper had responsibility for devising and maintaining Provectus’ +internal accounting controls. Culpepper assisted with the design and approved Provectus’ +corporate expense reimbursement policy. That payment policy required all company expenses, +including employee expense reports, to be processed through the CFO and to be approved by two +executives other than the CFO. The policy also required the CFO to submit employee expense +reports to the company’s provider of bookkeeping services to be reviewed for accuracy, +completeness, and supporting documentation. + +12. In 2016 and 2017, after Provectus conducted an internal investigation of certain of +Dees’ and Culpepper’s travel expenses, Provectus disclosed in its periodic reports that it had +material weaknesses in its internal control over financial reporting related to travel advances and +expense reimbursements and that its internal control over financial reporting was not effective. + +2. Provectus’ Payments to Dees + +13. From 2011 until he resigned in February 2016, Provectus paid Dees +approximately $3.2 million for purported business-related travel advances and expense +reimbursements. Dees fraudulently obtained the funds and used the majority to pay for +unauthorized personal expenses, including personal travel, cosmetic surgery procedures for +women, meals, tips and gratuities, and entertainment. Culpepper reviewed each of Dees’ +requests for travel advances or reimbursement, determined the need for them to be paid, and +requested that two other executives approve them. At times, Culpepper himself acted as one of +the two approving executives for Dees’ payments, if another approving executive was +unavailable. + +14. The majority of the $3.2 million was paid in the form of cash advances. +Provectus permitted Dees to obtain travel advances based on requests he made in emails to +Culpepper that contained vague reasons for his travel and lacked details justifying the advance +amounts. Culpepper sought approval of Dees’ advances despite these deficiencies. + +5 + + +15. In addition, Provectus permitted Dees to obtain travel advances even though he +submitted limited, fabricated, or no expense documentation reconciling his advances to his actual +expenses. For his 2011 and 2012 travel advances, Dees submitted expense reports for the +majority of the advances he received. These reports, which were submitted to Culpepper, often +lacked documentation and were deficient in numerous respects. For example, Dees failed to +apply approximately half of the advances he received to the expenses he ultimately reported. +Instead, he sought reimbursement of the full amount of those expenses without regard to the +advances he had previously received. The expense reports frequently contained no or limited +itemization of expenses and often failed to include third-party receipts. When Dees included +receipts, they were often not authentic, either because the receipt was entirely fabricated or +altered in some way, such as with Dees’ handwritten notations adding large dollar charges. The +questionable nature of the receipts was frequently apparent on their face. Finally, certain of +Dees’ 2011 and 2012 expense reports sought reimbursement of travel charges for Dees’ personal +travel companions but did not identify those charges as personal. Despite the insufficient detail +and questionable support of Dees’ expense reports, Culpepper approved or requested approval of +Dees’ reimbursements. + +16. For his 2013, 2014, and 2015 travel advances, Dees submitted no expense reports +at all. Culpepper knew or should have known that Dees was not submitting expense reports with +receipts to reconcile his travel advances. On at least one occasion during this period, Culpepper +informed Dees that he needed to resume submitting receipts as Dees had done in the past, but +Dees continued not to submit receipts or other documentation of his travel expenses. During this +period, the dollar amount of Dees’ travel advances grew substantially. In addition, Provectus +had stopped paying cash bonuses to Dees and the other executives after April 2012, and only +paid cash bonuses again for 2015, but in much smaller amounts compared to prior bonuses. + +17. In early 2016, after concerns were raised within Provectus about the lack of +support for Dees’ travel advances, Dees submitted receipts for some of his 2015 travel advances. +Most of those receipts were not authentic and concealed Dees’ use of the funds for personal +expenses. Dees failed to substantiate other expenses at all. Despite the inadequate support and +dubious nature of receipts Dees submitted, Culpepper continued to request approval of Dees’ +travel advances and reimbursements. + +18. Dees’ travel advance requests and expense reports were processed through +Culpepper and paid by wire transfer. Under Provectus’ general policy for payments by wire, +only the CFO “determined the need” for the wire and submitted a wire transfer form to two other +executives for approval. Provectus’ payment policy did not require the approving executives to +review the underlying support justifying the wire. In addition, at least for 2011 and 2012, it +appears that Culpepper did not submit Dees’ reimbursement expense reports to the company’s +provider of bookkeeping services to be reviewed for accuracy, completeness, and support, as +required by Provectus’ general expense reimbursement policy. + +19. In total, Dees received at least the following amounts of travel advances and +reimbursements that he used for his personal benefit: $238,423 in 2011; $486,974 in 2012; +$734,452 in 2013; $819,000 in 2014; $885,808 in 2015; and $67,261 in 2016. In part as a result + +6 + +of Culpepper’s conduct, Provectus failed to record the true nature of these expenses in its books +and records. + +3. Provectus’ Payments to Culpepper + +20. From 2013 through 2015, Provectus paid Culpepper $199,194 in personal benefits +and perquisites through travel advances and reimbursements. Due in part to the company’s +deficient internal accounting controls, Provectus did not authorize these personal benefits or +perquisites. + +21. From 2013 through 2015, Provectus paid Culpepper foreign currency cash +advances for approximately 130 days of overseas business travel. Culpepper used $103,649 of +those cash advances without providing a substantiated business purpose. Culpepper sought +reimbursement for the advances in expense reports that included documentation showing the +exchange of dollars for foreign currency. However, the expense reports did not include any +documentation showing Culpepper’s use of the travel advances, such as third-party receipts, +which Culpepper did not maintain and Provectus did not require Culpepper to provide. + +22. Provectus paid Culpepper $82,443 in airfare charges in 2014 and 2015 for trips +that were ultimately canceled. Culpepper failed to repay those amounts in the years he received +them. Provectus’ insufficient controls failed to detect that Culpepper did not repay these funds in +the years he received them. Instead, he used the funds for his personal benefit.4 + +23. In addition, Provectus paid Culpepper at least $13,103 in perquisites through +travel expense reimbursements in 2013 through 2015. These perquisites included hotel stays, +spa services, and products for Culpepper and his wife, and meals for his family. Culpepper +provided certain documentation for these expenses in his expense reports. But Provectus did not +require, and Culpepper generally did not submit, third-party receipts or other detailed +documentation detailing the nature of the claimed expenses. Nor did Provectus require +Culpepper to identify the business nature of the expenses on the supporting documentation he did +submit. As a result, the personal nature of these charges was not identified in the expenses +Culpepper submitted for reimbursement. + +24. Culpepper’s travel advance requests and expense reports were submitted to the +company’s provider of bookkeeping services for review and paid by check. Provectus’ policy +for payments by check required that the two executives who approve the checks review the +payments for “proper back up” and sign the checks. In practice, however, the two approving +executives authorized the payments based only on a list of checks to be paid, with the amounts +and payee included, which was provided to them by Culpepper. Culpepper generally did not + +4 In 2016 and 2017, after concerns were raised within Provectus related to Culpepper’s and +Dees’ travel expenses, Culpepper reduced certain of his 2016 travel expenses by $59,079, +claiming that he credited that amount from airfare reimbursements he had received in 2015 for +canceled trips. + +7 + +provide to the executives, and they did not review, supporting documents for the payments, such +as expense reports or third-party receipts. + +25. In total, Culpepper received the following approximate annual amounts in +personal benefits and perquisites: $13,726 in 2013; $81,596 in 2014; $103,872 in 2015. As a +result of Culpepper’s conduct, Provectus failed to record the true nature of these expenses in its +books and records. + +4. Provectus’ Failure to Disclose Compensation Paid to Dees and Culpepper + +26. In its annual reports and definitive proxy statements filed from 2012 to 2015, +Provectus failed to disclose as compensation the personal benefits and perquisites Dees received +in 2011, 2012, 2013, and 2014.5 Those benefits were material components of Dees’ +compensation: Provectus disclosed no personal benefits or perquisites for Dees in these years, +and the amounts exceeded his annual salary by 48% to 164% and his total compensation in 2013 +and 2014. + +27. The annual reports and definitive proxy statements Provectus filed from 2014 to +2016 failed to disclose as compensation the personal benefits and perquisites Culpepper +received. Those benefits were material components of Culpepper’s compensation: Provectus +disclosed no personal benefits or perquisites for Culpepper in these years, and underreported +Culpepper’s non-performance-based compensation by between 2% and 17%, and his total +compensation by between 2% and 11%. + +28. Provectus incorporated by reference the foregoing annual reports and definitive +proxy statements in registration statements filed during 2011 to 2015 that registered offerings of +shares of its common stock. + +29. Culpepper was responsible for the preparation of Provectus’ annual reports, proxy +statements, and registration statements. He reviewed, approved, and signed them. Culpepper +represented in the annual reports that Provectus’ internal control over financial reporting was +effective. As a result of Culpepper’s conduct in the approval of Dees’ travel advances and +expenses, Culpepper’s failure to implement sufficient internal accounting controls related to +travel advances and expense reimbursement, and his inadequate recordkeeping of his own travel +advances and expenses, Culpepper made and caused Provectus to make material misstatements +and omissions concerning his and Dees’ compensation and Provectus’ internal control over +financial reporting. + + + + +5 Provectus disclosed the travel expense payments Dees received in 2015 in the annual +report and definitive proxy statement it filed in 2016, which disclosed the findings of the +company’s investigation into Dees’ travel expenses. + + +8 + +D. VIOLATIONS + +30. As a result of the conduct described above, Culpepper willfully6 violated Section +17(a)(3) of the Securities Act, which prohibits any person in the offer or sale of any securities +from engaging in any transaction, practice, or course of business which operates or would +operate as a fraud or deceit upon the purchaser. + +31. As a result of the conduct described above, Culpepper willfully violated and was a +cause of Provectus’ violations of Section 14(a) of the Exchange Act and Rules 14a-3 and 14a-9 +thereunder, which, among other things, prohibits the use of proxy statements containing +materially false or misleading statements or materially misleading omissions; and prohibits any +person from soliciting any proxy with respect to any security registered pursuant to Section 12 of +the Exchange Act unless the person solicited is furnished with a definitive proxy statement +containing the information specified in Schedule 14A. + +32. As a result of the conduct described above, Culpepper was a cause of Provectus’ +violations of 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 on Form 10-K, and mandate that the reports contain such +further material information as may be necessary to make the required statements not misleading. + +33. As a result of the conduct described above, Culpepper was a cause of Provectus’ +violations of Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to +make and keep books, records and accounts which, in reasonable detail, accurately and fairly +reflect their transactions and dispositions of their assets. + +34. As a result of the conduct described above, Culpepper was a cause of Provectus’ +violations of Section 13(b)(2)(B) of the Exchange Act, which requires reporting companies to +devise and maintain a system of internal accounting controls sufficient to provide reasonable +assurances that transactions are executed in accordance with management’s general or specific +authorization and are recorded as necessary to maintain accountability for assets, and that access +to assets is permitted only in accordance with management’s general or specific authorization. + +35. As a result of the conduct described above, Culpepper willfully violated Rule +13b2-1 under the Exchange Act, which prohibits any person from directly or indirectly falsifying +or causing to be falsified, any book, record, or account subject to Section 13(b)(2)(A) of the +Exchange Act. + + + +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 + +E. FINDINGS + +36. Based on the foregoing, the Commission finds that Culpepper (a) willfully +violated Section 17(a)(3) of the Securities Act; (b) willfully violated Section 14(a) of the +Exchange Act and Rules 13b2-1, 14a-3, and 14a-9 promulgated thereunder; and (c) caused +Provectus’ violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act, +and Rules 12b-20, 13a-1, 14a-3, and 14a-9 promulgated thereunder. + +F. UNDERTAKING + +Respondent undertakes to pay Provectus, within 30 days of the entry of this Order, +disgorgement of $140,115 plus prejudgment interest of $12,261, for a total payment of $152,376. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Culpepper’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Respondent Culpepper shall cease and desist from committing or causing any +violations and any future violations of Section 17(a)(3) of the Securities Act and Sections 13(a), +13(b)(2)(A), 13(b)(2)(B), and 14(a) of the Exchange Act and Rules 12b-20, 13a-1, 13b2-1, 14a- +3, and 14a-9 thereunder. + + B. Culpepper 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 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 Culpepper’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 + +10 + +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. Such an application must satisfy the +Commission that: + + (a) Respondent, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + + (b) Respondent, or the registered public 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 Respondent will not receive appropriate supervision; + (c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Respondent acknowledges his responsibility, as long as he appears +or practices before the Commission as an independent accountant, +to comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + + D. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity professional conduct, or qualifications to appear or practice before the +Commission 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, within 30 days of the entry of this Order, pay disgorgement of +$140,115, prejudgment interest of $12,261, for a total payment of $152,376, which payment shall +be deemed satisfied by Respondent’s payment of that amount to Provectus, as set forth in +Respondent’s undertaking above. If Respondent fails to make such payment to Provectus, then + +11 + +Respondent will immediately pay $152,376 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment of the disgorgement and prejudgment interest is not made to the +Commission, additional interest shall accrue thereon pursuant to SEC Rule of Practice 600. +Payment to the Commission must be made in the same manner as set forth. In addition, within 30 +days of the entry of this Order, Respondent shall pay a civil money penalty in the amount of +$90,535 to the Securities and Exchange Commission for transfer to the general fund of the United +States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment of the civil +money penalty is not made, additional interest shall accrue thereon 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 Peter R. +Culpepper 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 Melissa Hodgman, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549-5521. + + 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 + +12 + +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. 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