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1
+
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+ UNITED STATES OF AMERICA
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+ Before the
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+ SECURITIES AND EXCHANGE COMMISSION
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+
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+ SECURITIES EXCHANGE ACT OF 1934
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+ Release No. 84980 / January 9, 2019
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+
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+ INVESTMENT ADVISERS ACT OF 1940
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+ Release No. 5100 / January 9, 2019
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+
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+ ACCOUNTING AND AUDITING ENFORCEMENT
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+ Release No. 4013 / January 9, 2019
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+
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+ ADMINISTRATIVE PROCEEDING
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+ File No. 3-18966
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+
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+ In the Matter of
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+
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+ Katz, Sapper & Miller, LLP,
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+ and Scott C. Price, CPA,
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+
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+ Respondents.
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+
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+
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+
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+
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+ ORDER INSTITUTING PUBLIC
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+ ADMINISTRATIVE AND CEASE-AND-
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+ DESIST PROCEEDINGS PURSUANT TO
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+ SECTION 203(k) OF THE INVESTMENT
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+ ADVISERS ACT OF 1940, SECTION 4C OF
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+ THE SECURITIES EXCHANGE ACT OF
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+ 1934, AND RULE 102(e) OF THE
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+ COMMISSION’S RULES OF PRACTICE,
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+ MAKING FINDINGS, AND IMPOSING
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+ REMEDIAL SANCTIONS AND A CEASE-
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+ AND-DESIST ORDER
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+
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+
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+ I.
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+
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+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
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+ administrative and cease-and-desist proceedings be, and hereby are, instituted against Katz, Sapper
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+ & Miller, LLP (“KSM”), and Scott C. Price, CPA (“Price”) (collectively “Respondents”) pursuant
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+ to Section 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), Section 4C1 of the
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+
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+ 1 Section 4C provides, in relevant part, that:
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+
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+ The Commission may censure any person, or deny, temporarily or permanently,
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+ to any person the privilege of appearing or practicing before the Commission in
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+ any way, if that person is found . . . (1) not to possess the requisite qualifications
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+ to represent others; (2) to be lacking in character or integrity, or to have engaged
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+ in unethical or improper professional conduct; or (3) to have willfully violated, or
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+ willfully aided and abetted the violation of, any provision of the securities laws or
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+ the rules and regulations issued thereunder.
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+
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+ 2
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+ Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s
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+ Rules of Practice.2
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+
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+ II.
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+
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+ In anticipation of the institution of these proceedings, Respondents have submitted Offers
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+ of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the
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+ purpose of these proceedings and any other proceedings brought by or on behalf of the
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+ Commission, or to which the Commission is a party, and without admitting or denying the findings
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+ herein, except as to the Commission’s jurisdiction over Respondents and the subject matter of
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+ these proceedings, which are admitted, and except as provided herein in Section V, Respondents
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+ consent to the entry of this Order Instituting Public Administrative and Cease-And-Desist
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+ Proceedings Pursuant to Section 203(k) of the Investment Advisers Act of 1940, Section 4C of the
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+ Securities Exchange Act of 1934, and Rule 102(e) of the Commission’s Rules of Practice, Making
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+ Findings, and Imposing Remedial Sanctions and a Cease-And-Desist Order (“Order”), as set forth
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+ below.
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+
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+ III.
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+
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+ On the basis of this Order and Respondents’ Offers, the Commission finds3 that:
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+
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+ Summary
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+
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+ This matter involves improper professional conduct by Respondents in completing audits
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+ pursuant to Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder (the “Custody Rule”).
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+ In January 2013, Mohlman Asset Management Fund, LLC (“MAMF”), a former SEC-registered
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+ investment adviser, engaged KSM to audit the financial statements of two pooled investment
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+ vehicles MAMF advised, Mohlman Asset Management Fund 2010, LLC (“Fund I”) and Mohlman
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+ Asset Management Fund II, LLC (“Fund II”) (collectively, “the Funds”). The first engagement in
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+ 2013 covered Fund I from its inception in 2010 and Fund II from its inception in 2011 to
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+ December 31, 2012, which is the Funds’ fiscal year -end.4 MAMF engaged KSM to audit the
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+ Funds in 2014, 2015, and 2016, covering the Funds’ fiscal years ending on December 31, 2013,
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+ 2014, and 2015. The first engagement in 2013 and the second in 2014 also included KSM drafting
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+ the Funds’ 2012 and 2013 year -end financial statements in accordance with generally accepted
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+
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+ 2 Rule 102(e)(1)(ii) provides, in pertinent part, that:
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+
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+ The Commission may . . . deny, temporarily or permanently, the privilege of
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+ appearing or practicing before it . . . to any person who is found . . . to have
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+ engaged in unethical or improper professional conduct.
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+
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+ 3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not
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+ binding on any other person or entity in this or any other proceeding.
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+
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+ 4 The Funds’ fiscal year corresponds with the calendar year, January 1 to December 31.
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+ 3
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+ accounting principles (“GAAP”) in the United States. The audits were supposed to be conducted
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+ in accordance with generally accepted auditing standards (“GAAS”) in the United States
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+ established by the AICPA Auditing Standards Board. MAMF engaged KSM to conduct the audits
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+ in an effort to enable MAMF to comply with an exception to the Custody Rule because MAMF
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+ had custody of client assets invested in the Funds. Audits performed pursuant to the Custody Rule
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+ exception require SEC independence.
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+
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+ Unbeknownst to MAMF, KSM and Price, the audit partner on all of the engagements,
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+ failed to meet the requirements of the Custody Rule in conducting their audits of the Funds. KSM
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+ was not independent because it prepared the Funds’ 2012 and 2013 year-end financial statements
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+ and then audited them. As a result, Respondents KSM and Price caused MAMF’s 2012 and 2013
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+ violations of the Custody Rule.
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+
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+ KSM and Price also engaged in improper professional conduct within the meaning of
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+ Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by
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+ failing to: (a) have relevant knowledge, training and experience; (b) issue a modified opinion with
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+ respect to Fund II’s 2013 and 2014 year-end financial statements, even though they should have
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+ been aware of a related party transaction and a loan that had not been properly disclosed in the
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+ financial statements; and (c) exercise due professional care. In addition, KSM failed to establish
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+ sufficient quality control standards.
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+
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+ Respondents
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+
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+ 1. Katz Sapper & Miller, LLP is an Indiana limited liability partnership
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+ headquartered in Indianapolis, Indiana. KSM offers audit, accounting, tax and consulting services
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+ for a wide range of industries, and is registered with the Public Company Accounting Oversight
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+ Board. As of June 28, 2018, KSM had 264 accountants and approximately 169 additional firm
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+ personnel located in three offices in two states.
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+
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+ 2. Scott Price, CPA, age 46, is a resident of Carmel, Indiana. He has been a Partner
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+ at KSM since January 1, 2012, and has led KSM’s Financial Services Practice Group since 2017.
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+ He is a certified public accountant licensed in the State of Indiana. Price served as the engagement
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+ partner for all of the audit and financial statement preparation work KSM performed for the Funds.
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+
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+ Other Relevant Entities
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+
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+ 3. Mohlman Asset Management Fund, LLC is an Indiana limited liability company,
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+ with its principal place of business in Fort Wayne, Indiana. MAMF became a SEC-reporting
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+ investment adviser in March 2010. In September 2017, MAMF filed a Form ADV-W to withdraw
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+ its registration, and its registration was terminated, effective September 19, 2017. Although MAMF
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+ was a SEC-registered investment adviser, the same Indiana limited liability company operated as a
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+ pooled investment vehicle, i.e., Fund I. MAMF was the adviser to the Funds during the relevant
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+ 4
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+ time period.5 Louis G. Mohlman, Jr. (“L. Mohlman”) owned and controlled MAMF until its
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+ registration terminated.
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+
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+ 4. MAM, LLC is an Indiana limited liability company, with its principal place of
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+ business in Fort Wayne, Indiana. MAM, LLC became a SEC-reporting investment adviser in
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+ September 2009. On or about February 28, 2018, MAM, LLC filed a Form ADV-W to withdraw
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+ its registration, and its registration was terminated, effective March 3, 2018. L. Mohlman, who
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+ served as MAM, LLC’s President and Chief Compliance Officer (“CCO”) from approximately
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+ September 2009 until December 2017, owned and controlled MAM, LLC.
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+
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+ 5. Mohlman Asset Management Fund 2010, LLC is an Indiana limited liability
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+ company that was formed in or around January 2010 and began operating as a private fund in
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+ February 2010. It meets the definition of a pooled investment vehicle under Rule 206(4)-8(b) of the
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+ Advisers Act. At all relevant times, MAMF managed Fund I.
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+
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+ 6. Mohlman Asset Management Fund II, LLC is an Indiana limited liability
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+ company that was formed in or around November 2011 and operates as a private fund. It meets the
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+ definition of a pooled investment vehicle under Rule 206(4)-8(b) of the Advisers Act. At all
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+ relevant times, MAMF managed Fund II.
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+
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+ 7. Annya Capital Management, Inc. is an Indiana corporation that was formed in
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+ December 2012. It is a shell company L. Mohlman created and used to facilitate various
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+ transactions with MAM, LLC’s and MAMF’s current and potential advisory clients. At all relevant
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+ times, Mohlman controlled Annya as its Principal. Annya is not registered with the SEC.
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+
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+ Facts
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+
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+ 8. Between at least February 2010 and December 31, 2015, MAMF had custody of
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+ client assets invested in the Funds and was required to comply with the Custody Rule.
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+
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+ 9. The Custody Rule requires, among other things, that registered investment advisers
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+ with custody of client assets maintain those funds and securities with a qualified custodian, who
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+ must provide account statements to the investors at least quarterly, and requires client assets to be
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+ verified through an annual surprise examination by an independent public accountant.
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+
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+ 10. An adviser may satisfy the Custody Rule requirements if, in connection with a
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+ limited partnership, it completes and distributes annual audited financial statements prepared in
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+ accordance with GAAP to each limited partner within 120 days of the end of the partnership’s
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+ fiscal year (the “Audit Exception”). See Rule 206(4)-2(b)(4) under the Advisers Act. The
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+
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+ 5 In October 2011, Mohlman amended the registration paperwork for this entity with the State of
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+ Indiana and changed the name to Mohlman Asset Management Fund, LLC. Notwithstanding
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+ this name change with the State of Indiana, Fund I’s Private Offering Memorandum,
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+ Subscription Agreements, and Operating Agreement identify the fund’s name as Mohlman Asset
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+ Management Fund 2010, LLC.
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+ 5
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+ financial statements must be audited by an independent public accountant that is registered with,
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+ and subject to regular inspection as of the commencement of the professional engagement period,
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+ and as of each calendar year-end, by the PCAOB. See Rule 206(4)-2(b)(4)(i and ii) under the
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+ Advisers Act. To be considered independent, a public accountant must meet the standards of
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+ independence described in Rule 2-01(b) and (c) of Regulation S-X. See Rule 206(4)-2(d)(3) under
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+ the Advisers Act.
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+
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+ MAMF Engaged KSM to
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+ Audit the Funds’ 2012 through 2015 Year-End Financial Statements
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+
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+ 11. MAMF engaged KSM to perform audits of the Funds’ year-end financial
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+ statements since inception through 2015. The audit engagement letters stated that the audits were
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+ to be performed in accordance with AICPA standards. KSM knew that the Funds’ audits were
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+ being performed so that MAMF could comply with the Custody Rule.
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+
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+ 12. Price was the KSM engagement partner on all of the MAMF engagements, and was
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+ thus ultimately responsible for the Funds’ audit engagements and their performance, and for
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+ recommending that KSM issue its audit reports.
212
+
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+ KSM was not Independent because It Prepared
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+ and Audited the Funds’ 2012 and 2013 Year-End Financial Statements
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+
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+ 13. KSM was not independent because it prepared the Funds’ 2012 and 2013 financial
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+ statements and notes to the financial statements, which it then audited.
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+
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+ 14. Each year, MAMF provided the Funds’ bank statements to KSM. To draft the
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+ Funds’ 2012 and 2013 year-end financial statements, KSM used the bank statements and other
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+ records MAMF provided to create a trial balance and then the financial statements, including the
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+ notes to the financial statements. KSM subsequently performed audit procedures, whereby KSM
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+ audited its own work.
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+
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+ 15. After the engagement team prepared the financial statements and notes, it provided
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+ L. Mohlman with drafts, so that he could approve them.
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+
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+ 16. Under Rule 2-01(c)(4)(i) of Regulation S-X, an accountant is not independent if the
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+ accountant provides certain bookkeeping or other services, related to the accounting records or
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+ financial statements unless it is reasonable to conclude that the results of those services will not be
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+ subject to audit procedures during an audit of the audit client’s financial statements.
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+
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+ 17. The financial statements and accompanying notes that KSM prepared were subject
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+ to the audit procedures that KSM performed during its audits of the Funds. The KSM engagement
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+ team did not apply the SEC independence standards to the work it performed for the Funds’ 2012
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+ and 2013 year-end financial statements.
237
+
238
+
239
+ 6
240
+
241
+ KSM did not Conduct the Audits of the Funds’
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+ 2012 through 2015 Year-End Financial Statements in Accordance with
243
+ Certain Applicable Professional Standards
244
+
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+ 18. KSM’s engagement letters for the audits of the Funds’ 2012 through 2015 year-end
246
+ financial statements state that the audits would be performed in accordance with AICPA standards.
247
+ However, in connection with the audits of the Funds, KSM and Price failed to adhere to certain
248
+ professional auditing standards, and KSM failed to adhere to certain professional quality control
249
+ standards as described in paragraphs 19 through 47 below.
250
+
251
+ Failure to Have Relevant Knowledge, Training, and Experience – Respondents KSM and Price
252
+
253
+ 19. KSM and Price did not sufficiently evaluate the engagement team’s relevant
254
+ knowledge of, and training and experience in, the Custody Rule and the applicable SEC
255
+ independence standards, in accordance with AICPA Quality Control Standard 10, A Firm’s System
256
+ of Quality Control (“QC”), at .12, .31, .33, and .34.
257
+
258
+ 20. The KSM engagement team conducted the audits of the Funds’ 2012 and 2013
259
+ year-end financial statements with limited experience in conducting financial statement audits of
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+ funds required to comply with the Custody Rule. The engagement team members did not receive
261
+ any training on the knowledge and competency required in conducting financial statement audits of
262
+ funds required to comply with the Custody Rule.
263
+
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+ 21. The KSM engagement team also conducted the audits of the Funds’ 2012 and 2013
265
+ year-end financial statements without proper training in the SEC independence standards. The
266
+ engagement team had no training concerning SEC independence standards prior to, or in
267
+ conjunction with, any of the Funds’ audits. KSM’s workpapers for the Funds’ audits do not
268
+ document that any member of the engagement team reviewed the SEC independence standards for
269
+ the audits of the Funds’ 2012 and 2013 year-end financial statements.
270
+
271
+ 22. Price did not receive any formal training on the SEC independence standards until
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+ approximately the fall of 2014. He first became aware that the SEC independence standards
273
+ applied to the Funds’ audits in the fall of 2014.
274
+
275
+ 23. AICPA Quality Control Standards require an auditing firm to establish policies and
276
+ procedures that provide the firm with reasonable assurance that the firm and its personnel comply
277
+ with professional standards and applicable legal and regulatory requirements. See QC 10.12, .31,
278
+ .33, and .34. These standards also require the firm to establish policies specifically designed to
279
+ address the competencies of audit partners, including a requirement that they have the appropriate
280
+ competence, capabilities, and authority to perform the role. See QC 10.33. Firm policies and
281
+ procedures should also provide reasonable assurance that the policies and procedures concerning
282
+ the system of quality control “are relevant, adequate, and operating effectively.” QC 10.52; see
283
+ also AU-C 220, Quality Control for Engagement Conducted in Accordance with Generally
284
+ Accepted Auditing Standards, at .24.
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+ 7
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+
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+ Audit Procedures for Related Party Transactions – Respondents KSM and Price
288
+
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+ 24. GAAS concerning related party transactions states that an auditor’s objective,
290
+ among other things, is to “obtain sufficient appropriate audit evidence about whether related party
291
+ relationships and transactions have been appropriately identified, accounted for, and disclosed in
292
+ the financial statements.” AU-C 550, Related Parties, at .09. To form an opinion on the financial
293
+ statements, the auditor should evaluate whether “the identified related party relationships and
294
+ transactions have been appropriately accounted for and disclosed” and “the effects of the related
295
+ party relationships and transactions prevent the financial statements from achieving fair
296
+ presentation.” AU-C 550, at .26. Disclosures of related party transactions must include (1) the
297
+ nature of the relationships involved; (2) a description of the transactions and other such
298
+ information deemed necessary to an understanding of the effects of the transactions on the
299
+ financial statements; and (3) the terms and manner of settlement. Accounting Standard
300
+ Codification Topic 850-10-50-1.
301
+
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+ 25. In February 2014, in preparation for the financial statement and audit work KSM
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+ would be performing for the Funds’ 2013 fiscal year, the KSM engagement team requested
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+ documents from L. Mohlman concerning the Funds’ investments, including but not limited to, any
305
+ of the offering or like documents for investments made in 2013, as well as evidence of the
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+ investments. In response to that request, L. Mohlman provided the KSM engagement team with
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+ documents concerning Annya and a transaction that Fund II had engaged in with Person A to
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+ obtain shares of Annya. The documents included Annya’s private offering memorandum
309
+ (“POM”), a Subscription Agreement between Person A and Annya, and a Share Purchase
310
+ Agreement between Person A and Fund II.
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+
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+ 26. Annya’s POM identified MAMF as its manager, and L. Mohlman as its principal.
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+ Price and at least one other KSM engagement team member were aware that Annya and MAMF
314
+ were controlled by L. Mohlman. When KSM prepared Footnote One of Fund II’s 2013 year-end
315
+ financial statements, it noted that the principal of Fund II was also the manager of Annya. KSM
316
+ and Price therefore knew Annya was a related party.
317
+
318
+ 27. The Subscription Agreement between Person A and Annya and the Share Purchase
319
+ Agreement between Person A and Fund II pertained to a transaction whereby MAMF caused Fund
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+ II to purchase 100 shares of Annya from Person A in exchange for Person A becoming an advisory
321
+ client of MAM, LLC (the “Person A Transaction”). MAMF, MAM, LLC, and Annya were all
322
+ controlled by L. Mohlman at this time, and KSM and Price were aware of this.
323
+
324
+ 28. According to the Subscription Agreement, Person A purchased 100 shares of
325
+ Annya for $1,000. The Share Purchase Agreement shows that Fund II purchased 100 shares of
326
+ Annya from Person A for $51,000, and in exchange, Person A had to maintain a portfolio value of
327
+ at least $4,000,000 with MAM, LLC, or its affiliates, for a three-year period. Person A did become
328
+ a client of MAM, LLC as a result of the Share Purchase Agreement and remained as such until
329
+ 2015.
330
+
331
+ 8
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+ 29. Based on their review of the Subscription Agreement and Share Purchase
333
+ Agreements, and discussions with L. Mohlman, the KSM engagement team, including Price,
334
+ should have been aware that Fund II purchased Annya shares and MAM, LLC obtained Person A
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+ as a client as a result of the transaction.
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+
337
+ 30. Fund II’s 2013 and 2014 year-end financial statements, however, did not
338
+ adequately disclose the Person A Transaction as a related party transaction. Fund II’s 2013 and
339
+ 2014 year-end financial statements included the Person A Transaction on the Schedule of
340
+ Investments as an investment in an early stage company and identified the company as Annya.
341
+ Footnote One of Fund II’s 2013 and 2014 year-end financial statements merely described the
342
+ Person A Transaction as an investment in the common stock of Annya, and noted that the principal
343
+ of Fund II was also the manager of Annya. The footnotes did not further describe the nature of the
344
+ relationships involved, or the Person A Transaction and its terms, specifically, the portfolio
345
+ management rights portion of the transaction.
346
+
347
+ 31. Despite being aware of the related party and the related party transaction, KSM
348
+ issued an audit report containing an unmodified opinion with respect to Fund II’s 2013 and 2014
349
+ year-end financial statements, even though the related party transaction had not been properly
350
+ disclosed. Price approved KSM’s 2013 and 2014 reports before they were issued.
351
+
352
+ Failure to Exercise Due Professional Care – Respondents KSM and Price
353
+
354
+ 32. KSM and Price, for the audits of the Funds’ 2012 through 2015 year-end financial
355
+ statements, failed to exercise due professional care in planning and performing the Funds’ audits,
356
+ in accordance with AU-C 200, Objectives of the Independent Auditor and the Conduct of an Audit
357
+ in Accordance With Generally Accepted Auditing Standards.
358
+
359
+ 33. KSM and Price were not independent pursuant to SEC independence standards
360
+ when they performed the audits of the Funds’ 2012 and 2013 year-end financial statements, and
361
+ failed to have relevant knowledge, training and experience, or properly evaluate the disclosures of
362
+ a related party transaction and loan.
363
+
364
+ 34. The loan concerned a 2013 transaction whereby Fund II loaned money to an
365
+ individual, Person B, and his wife, Person C. Fund II’s 2013, 2014, and 2015 year-end financial
366
+ statements identified the transaction on the Condensed Schedule of Investments as an investment
367
+ with an early stage company in the form of a promissory note with Company A, as opposed to an
368
+ unsecured loan and promissory note with Persons B and C. While the footnotes to the financial
369
+ statements provided details concerning the terms and amount of the note, they also erroneously
370
+ identified the promissory note as being with Company A, as opposed to Persons B and C.
371
+
372
+ 35. Price did not adequately consider the appropriate independence standards for the
373
+ audits of the Funds’ 2012 and 2013 year-end financial statements. Rather than apply the SEC
374
+ independence standards, the engagement team applied the AICPA independence standards. There
375
+ is no documentation in the workpapers that Price reviewed the SEC independence standards in
376
+ connection with the audits of the Funds’ 2012 and 2013 year-end financial statements.
377
+ 9
378
+
379
+ 36. AU-C 200 requires auditors to exercise due professional care in the planning and
380
+ performance of the audit and the preparation of the report. See AU-C 200 at .16, .A16, and .A19.
381
+ The engagement partner should be satisfied that the engagement team has the appropriate
382
+ competence and capabilities to perform the audit in the engagement in accordance with
383
+ professional standards and applicable legal and regulatory requirements. See AU-C 220 at .16.
384
+ The engagement partner should take responsibility for the direction, supervision, and performance
385
+ of the audit engagement in compliance with professional standards, applicable legal and regulatory
386
+ requirements, and the firm’s policies and procedures; and the auditor’s report being appropriate
387
+ under the circumstances. Id. at .17(a) and (b).
388
+
389
+ Failure to Adhere to the Quality Control Standards – Respondent KSM
390
+
391
+ 37. Although the relevant engagement letters stated that the Funds’ audits would be
392
+ performed in accordance with AICPA standards, KSM failed to establish sufficient quality control
393
+ standards in accordance with AICPA Quality Control standard 10 or AU 220 at .13.
394
+
395
+ 38. KSM failed to establish adequate policies with respect to its compliance with SEC
396
+ independence standards for engagements performed to satisfy the Custody Rule. See QC 10 at .22
397
+ and .27. The engagement team did not have the adequate training or experience in SEC
398
+ independence standards. Price did not have the relevant knowledge, training and experience
399
+ required.
400
+
401
+ 39. KSM’s failure to establish adequate quality control policies was reflected in KSM’s
402
+ failure to maintain independence in performing the Funds’ audits described above.
403
+
404
+ 40. AICPA Quality Control standard 10 requires that a system of quality control be
405
+ established and maintained. See QC 10 at .17. One of the elements of a system of quality control
406
+ is personnel management. See QC 10 at .17, .31. The objective of the firm is to establish and
407
+ maintain a system of quality control to provide it with reasonable assurance that the firm and its
408
+ personnel comply with the professional standards. See QC 10 at .12.
409
+
410
+ Respondents’ Misconduct Under Section 4C of the Exchange Act and Rule 102(e)
411
+
412
+ 41. Rule 102(e)(1) of the Commission’s Rules of Practice and Section 4C of the
413
+ Exchange Act allow the Commission to censure a person, or deny the person, either permanently
414
+ or temporarily, from appearing or practicing before the Commission if the Commission finds the
415
+ person to be lacking in character or integrity or to have engaged in unethical or improper
416
+ professional conduct. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the
417
+ Commission’s Rules of Practice.
418
+
419
+ KSM and Price’s Improper Professional Conduct
420
+
421
+ 42. KSM and Price engaged in improper professional conduct within the meaning of
422
+ Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by negligently engaging in highly
423
+ 10
424
+ unreasonable conduct that resulted in a violation of applicable professional standards in
425
+ circumstances for which heightened scrutiny is warranted, or by negligently engaging in repeated
426
+ instances of unreasonable conduct, each resulting in a violation of the applicable professional
427
+ standards.
428
+
429
+ 43. KSM and Price failed to comply with the SEC independence standards for the
430
+ audits of the Funds’ 2012 and 2013 year-end financial statements, for which heightened scrutiny
431
+ was warranted. The KSM engagement team unreasonably concluded that AICPA independence
432
+ standards applied, as opposed to SEC independence standards.
433
+
434
+ 44. KSM and Price also failed to have relevant knowledge, training and experience
435
+ prior to conducting the audits of the Funds’ 2012 and 2013 year-end financial statements. KSM
436
+ failed to establish sufficient quality control standards to determine whether independence conflicts
437
+ had been appropriately reviewed and addressed.
438
+
439
+ 45. In addition, KSM and Price failed to exercise due professional care in connection
440
+ with the Funds’ audits because: (1) for the audits of the Funds’ 2012 and 2013 year-end financial
441
+ statements, they violated the SEC independence standards; and (2) for the audits of Fund II’s 2013,
442
+ 2014, and 2015 year-end financial statements, they violated AICPA audit standards.
443
+
444
+ 46. KSM and Price issued an audit report containing an unmodified opinion regarding
445
+ Fund II’s 2013 and 2014 year-end financial statements, even though they should have been aware
446
+ of a related party transaction that had not been properly disclosed.
447
+
448
+ 47. KSM and Price also issued an audit report containing an unmodified opinion
449
+ regarding Fund II’s 2013 through 2015 year-end financial statements, even though they should
450
+ have been aware that Fund II’s 2013 through 2015 year-end financial statements failed to properly
451
+ disclose an unsecured loan to Person B and his wife, Person C.
452
+
453
+ KSM and Price
454
+ Caused MAMF’s 2012 and 2013 Custody Rule Violations
455
+
456
+ 48. KSM and Price caused MAMF’s 2012 and 2013 violations of Section 206(4) of the
457
+ Advisers Act and Rule 206(4)-2 thereunder.
458
+
459
+ 49. KSM knew that MAMF needed the Funds’ financial statements audited to comply
460
+ with the Custody Rule. Price, as the engagement partner for all audits, was ultimately responsible
461
+ that the Funds’ audits complied with applicable AICPA standards and the Custody Rule’s
462
+ requirements, including that KSM was an independent accountant.
463
+
464
+ 50. As a result, Price approved KSM’s issuance of the Funds’ 2012 and 2013 audit
465
+ reports despite the fact that KSM’s independence was impaired.
466
+
467
+
468
+
469
+ 11
470
+ Findings
471
+
472
+ 51. As a result of the conduct described above, the Commission finds that KSM and
473
+ Price engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act
474
+ and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.
475
+
476
+ 52. As a result of the conduct described above, the Commission finds that KSM and
477
+ Price caused MAMF’s 2012 and 2013 violations of Section 206(4) of the Advisers Act and Rule
478
+ 206(4)-2 promulgated thereunder.
479
+
480
+ KSM’s and Price’s Remedial Efforts
481
+ In determining to accept the Offers, the Commission considered remedial acts undertaken
482
+ by Respondents and cooperation afforded the Commission staff. KSM already has taken steps to
483
+ improve its policies, procedures, and training, including hiring an Audit Director to provide
484
+ oversight and training for KSM’s Custody Rule audits; revising its quality control policies and
485
+ procedures – including client acceptance – and requiring SEC-specific training, twice yearly for
486
+ all Financial Services Group members. Price played a significant role in KSM’s remediation
487
+ efforts, including, but not limited to, standardizing workpapers and procedures for fund audits
488
+ and engagements performed under the Custody Rule and drafting new policies and procedures.
489
+ Price is also the person who discovered the SEC independence standards applied to the Funds’
490
+ audits and caused the engagement team to apply those standards to the audits performed for the
491
+ Funds in 2015 and 2016.
492
+ Undertakings
493
+
494
+ Respondent KSM has undertaken to:
495
+
496
+ 53. Within 60 days after entry of this Order, KSM shall retain, at KSM’s expense, an
497
+ independent consultant not unacceptable to the Commission’s staff (the “Independent Consultant”)
498
+ for a period of one year and certify, in the manner described in paragraph 61 below, that it is in
499
+ compliance with the Independent Consultant’s recommendations. KSM shall require the
500
+ Independent Consultant to:
501
+
502
+ a. conduct a comprehensive review of KSM’s policies, procedures, controls, and
503
+ training on auditor independence standards for Custody Rule audits, broker-
504
+ dealer audits, public company audits, or any other assurance service arising
505
+ from a Commission rule (collectively the “Policies & Practices”);
506
+
507
+ b. make recommendations for changes or improvements to the Policies &
508
+ Practices and a procedure for implementing the recommended changes or
509
+ improvements; and
510
+
511
+ c. conduct a review to assess whether KSM is complying with its revised Policies
512
+ & Practices and whether the revised Policies & Practices are effective in
513
+ 12
514
+ achieving their stated purposes, and make additional recommendations for
515
+ changes or improvements to the Policies & Practices, if needed.
516
+
517
+ 54. KSM undertakes that, no later than ten days following the date of the Independent
518
+ Consultant’s engagement, it will provide to the Commission staff a copy of an engagement letter
519
+ detailing the Independent Consultant’s responsibilities pursuant to paragraph 53 above. KSM shall
520
+ not have the authority to terminate the Independent Consultant without prior written approval of
521
+ the Commission’s staff.
522
+
523
+ 55. KSM undertakes that it will arrange for the Independent Consultant to issue its first
524
+ report within 90 days after the date of the Independent Consultant’s engagement. Within ten days
525
+ after the issuance of the report, KSM shall require the Independent Consultant to submit to Amy S.
526
+ Cotter, Assistant Regional Director, Division of Enforcement, Securities and Exchange
527
+ Commission, 175 West Jackson Blvd., Suite 1450, Chicago, IL 60604 a copy of the Independent
528
+ Consultant’s report. The Independent Consultant’s report shall describe the review performed and
529
+ the conclusions reached and shall include any recommendations deemed necessary to make the
530
+ Policies & Practices adequate and address the deficiencies set forth in Section III of the Order.
531
+
532
+ 56. Within 30 days of receipt of the Independent Consultant’s report, KSM undertakes
533
+ that it will adopt all recommendations contained in the report and remedy any deficiencies in its
534
+ written policies, procedures, and systems; provided, however, that as to any recommendation that
535
+ KSM believes is unnecessary or inappropriate, KSM may, within 15 days of receipt of the report,
536
+ advise the Independent Consultant in writing of any recommendations that it considers to be
537
+ unnecessary or inappropriate and propose in writing an alternative policy or procedure designed to
538
+ achieve the same objective or purpose.
539
+
540
+ 57. With respect to any recommendation with which KSM and the Independent
541
+ Consultant do not agree, KSM undertakes that it will attempt in good faith to reach an agreement
542
+ with the Independent Consultant within 30 days of receipt of the report. In the event that KSM and
543
+ the Independent Consultant are unable to agree on an alternative proposal acceptable to the
544
+ Commission’s staff, KSM will abide by the original recommendation of the Independent
545
+ Consultant.
546
+
547
+ 58. Within 30 days after the date of the Independent Consultant’s report, KSM
548
+ undertakes that it will submit an affidavit to Amy S. Cotter, Assistant Regional Director, Division
549
+ of Enforcement, Securities and Exchange Commission, 175 West Jackson Blvd., Suite 1450,
550
+ Chicago, IL 60604 stating that it has implemented any and all recommendations of the Independent
551
+ Consultant, or explaining the circumstances under which it has not implemented such
552
+ recommendations.
553
+
554
+ 59. KSM undertakes that it will cooperate fully with the Independent Consultant and
555
+ provide the Independent Consultant with access to its files, books, records and personnel as
556
+ reasonably requested for the Independent Consultant’s review.
557
+
558
+ 13
559
+ 60. KSM undertakes that it will require the Independent Consultant to enter into an
560
+ agreement that provides that for the period of engagement and for a period of two years from
561
+ completion of the engagement, the Independent Consultant shall not enter into any employment,
562
+ consultant, attorney-client, auditing or other professional relationship with KSM, or any of its
563
+ present or former affiliates, directors, officers, employees, or agents acting in their capacity. The
564
+ agreement will also provide that the Independent Consultant will require that any firm with which
565
+ he/she is affiliated or of which he/she is a member, and any person engaged to assist the
566
+ Independent Consultant in performance of his/her duties under this Order shall not, without prior
567
+ written consent of the Chicago Regional Office, enter into any employment, consultant, attorney-
568
+ client, auditing or other professional relationship with KSM, or any of its present or former
569
+ affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of
570
+ the engagement and for a period of two years after the engagement.
571
+
572
+ 61. KSM undertakes that it will certify, in writing, compliance with the undertaking(s)
573
+ set forth above. The certification shall identify the undertaking(s), provide written evidence of
574
+ compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate
575
+ compliance. The Commission staff may make reasonable requests for further evidence of
576
+ compliance, and Respondents agree to provide such evidence. The certification and supporting
577
+ material shall be submitted to Amy S. Cotter, Assistant Regional Director, Division of
578
+ Enforcement, Securities and Exchange Commission, 175 West Jackson Blvd., Suite 1450,
579
+ Chicago, IL 60604, with a copy to the Office of Chief Counsel of the Enforcement Division, no
580
+ later than sixty (60) days from the date of the completion of the undertakings.
581
+
582
+ IV.
583
+
584
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
585
+ agreed to in Respondents’ Offers.
586
+
587
+ Accordingly, pursuant to Section 203(k) of the Advisers Act, it is hereby ORDERED that:
588
+
589
+ A. Respondents KSM and Price cease and desist from committing or causing any
590
+ violations and any future violations of Section 206(4) of the Advisers Act and Rule 204-2
591
+ promulgated thereunder.
592
+
593
+ B. Respondent KSM shall comply with the undertakings enumerated in Section III.,
594
+ Paragraphs 53 through 61.
595
+
596
+ Price
597
+
598
+ C. Respondent Price is censured.
599
+
600
+
601
+
602
+
603
+
604
+ 14
605
+ D. Respondent Price shall, within 10 days of the entry of this Order, pay a civil money
606
+ penalty of $15,000.00 to the Securities and Exchange Commission for transfer to the general fund
607
+ of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not
608
+ made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.
609
+
610
+ Payment must be made in one of the following ways:
611
+
612
+ (1) Respondent may transmit payment electronically to the Commission, which
613
+ will provide detailed ACH transfer/Fedwire instructions upon request;
614
+
615
+ (2) Respondent may make direct payment from a bank account via Pay.gov
616
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
617
+
618
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
619
+ States postal money order, made payable to the Securities and Exchange
620
+ Commission and hand-delivered or mailed to:
621
+
622
+ Enterprise Services Center
623
+ Accounts Receivable Branch
624
+ HQ Bldg., Room 181, AMZ-341
625
+ 6500 South MacArthur Boulevard
626
+ Oklahoma City, OK 73169
627
+
628
+ Payments by check or money order must be accompanied by a cover letter identifying Price as a
629
+ Respondent in these proceedings, and the file number of these proceedings; a copy of the cover
630
+ letter and check or money order must be sent to Amy S. Cotter, Assistant Regional Director, 175
631
+ West Jackson Boulevard, Suite 1450, Chicago, Illinois 60604.
632
+
633
+ KSM
634
+
635
+ E. Respondent KSM shall, within 10 days of the entry of this Order, pay disgorgement
636
+ of $32,473.06 and prejudgment interest of $6,257.11, and pay a civil money penalty of $63,104.31
637
+ to the Securities and Exchange Commission for transfer to the general fund of the United States
638
+ Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment of disgorgement and
639
+ prejudgment interest is not made, additional interest shall accrue pursuant to SEC Rule of Practice
640
+ 600, and if timely payment of the civil money penalty is not made, additional interest shall accrue
641
+ pursuant to 31 U.S.C. § 3717.
642
+
643
+ Payment must be made in one of the following ways:
644
+
645
+ (1) Respondent may transmit payment electronically to the Commission, which
646
+ will provide detailed ACH transfer/Fedwire instructions upon request;
647
+
648
+ (2) Respondent may make direct payment from a bank account via Pay.gov
649
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
650
+ 15
651
+
652
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
653
+ States postal money order, made payable to the Securities and Exchange
654
+ Commission and hand-delivered or mailed to:
655
+
656
+ Enterprise Services Center
657
+ Accounts Receivable Branch
658
+ HQ Bldg., Room 181, AMZ-341
659
+ 6500 South MacArthur Boulevard
660
+ Oklahoma City, OK 73169
661
+
662
+ Payments by check or money order must be accompanied by a cover letter identifying KSM as a
663
+ Respondent in these proceedings, and the file number of these proceedings; a copy of the cover
664
+ letter and check or money order must be sent to Amy S. Cotter, Assistant Regional Director, 175
665
+ West Jackson Boulevard, Suite 1450, Chicago, Illinois 60604.
666
+
667
+ Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated as
668
+ penalties paid to the government for all purposes, including all tax purposes. To preserve the
669
+ deterrent effect of the civil penalty, Respondent s agree that in any Related Investor Action, they
670
+ shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award
671
+ of compensatory damages by the amount of any part of Respondents’ payment of a civil penalty in
672
+ this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty
673
+ Offset, Respondents agree that they shall, within 30 days after entry of a final order granting the
674
+ Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty
675
+ Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an
676
+ additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed
677
+ in this proceeding. For purposes of this para graph, a “Related Investor Action” means a private
678
+ damages action brought against Respondents by or on behalf of one or more investors based on
679
+ substantially the same facts as alleged in the Order instituted by the Commission in this
680
+ proceeding.
681
+
682
+
683
+
684
+
685
+
686
+
687
+
688
+
689
+
690
+
691
+
692
+
693
+
694
+
695
+
696
+ 16
697
+ V.
698
+ It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section
699
+ 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by
700
+ Respondent Price, and further, any debt for disgorgement, prejudgment interest, civil penalty or
701
+ other amounts due by Respondent Price under this Order or any other judgment, order, consent
702
+ order, decree or settlement agreement entered in connection with this proceeding, is a debt for the
703
+ violation by Respondent Price of the federal securities laws or any regulation or order issued under
704
+ such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19).
705
+
706
+ By the Commission.
707
+
708
+
709
+
710
+ Brent J. Fields
711
+ Secretary
raw/aaer/2019/AAER-4014.txt ADDED
@@ -0,0 +1,477 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES EXCHANGE ACT OF 1934
6
+ Release No. 84983 / January 14, 2019
7
+
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4014 / January 14, 2019
10
+
11
+ ADMINISTRATIVE PROCEEDING
12
+ File No. 3-18967
13
+
14
+
15
+
16
+ In the Matter of
17
+
18
+ LBB & ASSOCIATES LTD.,
19
+ LLP and
20
+ CARLOS LOPEZ, CPA,
21
+
22
+ Respondents.
23
+
24
+ ORDER INSTITUTING PUBLIC
25
+ ADMINISTRATIVE PROCEEDINGS
26
+ PURSUANT TO SECTION 4C OF THE
27
+ SECURITIES EXCHANGE ACT OF 1934 AND
28
+ RULE 102(e) OF THE COMMISSION’S RULES
29
+ OF PRACTICE, AND NOTICE OF HEARING
30
+
31
+
32
+ I.
33
+
34
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
35
+ administrative proceedings be, and hereby are, instituted against LBB & Associates Ltd., LLP
36
+ (“LBB”) and Carlos Lopez, CPA (“Lopez”) (collectively, “Respondents”) pursuant to Section 4C1 of
37
+ the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) 2 of the Commission’s
38
+ Rules of Practice.
39
+
40
+
41
+
42
+ 1 Section 4C provides, in relevant part, that:
43
+
44
+ The Commission may censure any person, or deny, temporarily or permanently, to any
45
+ person the privilege of appearing or practicing before the Commission in any way, if that person is
46
+ found . . . (1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in
47
+ character or integrity, or to have engaged in unethical or improper professional conduct.
48
+
49
+ 2 Rule 102(e)(1)(ii) provides, in pertinent part, that:
50
+
51
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or
52
+ practicing before it . . . to any person who is found . . . to have engaged in unethical or improper
53
+ professional conduct.
54
+ 2
55
+ II.
56
+
57
+ After an investigation, the Division of Enforcement and the Office of the Chief Accountant
58
+ allege that:
59
+
60
+ A. SUMMARY
61
+
62
+ 1. For annual audits of years 2012, 2013 and 2014, Respondents engaged in a pattern of
63
+ improper professional conduct as auditors. Specifically, Respondents failed to comply with Public
64
+ Company Accounting Oversight Board (“PCAOB”) standards in their audit of Behavioral
65
+ Recognition Systems, Inc. (now known as Giant Gray, Inc.) (“BRS”) for fiscal year 2012 and in
66
+ their engagement quality reviews (“EQR”) of the 2013 and 2014 fiscal year audits. Lopez, LBB’s
67
+ managing partner and majority owner, served as LBB’s engagement partner for the 2012 audit and
68
+ as its EQR partner for the 2013 and 2014 audits.
69
+
70
+ 2. During the 2012 audit, Lopez did not comply with PCAOB standards regarding: (i)
71
+ the identification of related party transactions or (ii) the audit procedures required when examining
72
+ known related party transactions.
73
+
74
+ 3. First, Lopez relied exclusively on BRS’s management to disclose related party
75
+ transactions to him, despite the fact that he was aware of certain red flags indicating that additional
76
+ related party transactions existed. As a result, although Blackstone Group, Inc. (“Blackstone”)
77
+ received payments of approximately $1.5 million in 2012 and was one of BRS’s largest vendors
78
+ that year, Lopez failed to apply the audit procedures set forth in AU § 334 and failed to identify
79
+ those payments as transactions involving a related party controlled by BRS’s then-CEO, Ray Davis
80
+ (“Davis”).
81
+
82
+ 4. Second, Lopez also failed to comply with PCAOB standards in Respondents’ 2012
83
+ audit of known related party transactions because, among other things, he did not (i) properly assess
84
+ the risks associated with those transactions; (ii) complete audit procedures designed to confirm the
85
+ business purpose, nature, and extent of the payments made; or (iii) exercise due professional care in
86
+ performing his audit work. Here, again, Lopez relied exclusively on BRS management to explain
87
+ an almost three-fold increase in expenses to an individual he knew was related to Davis (“Related
88
+ Party A”) without, for example, reviewing any invoices or taking any other steps to determine the
89
+ purpose, nature, and extent of the expenses and their effect on the financial statements.
90
+
91
+ 5. Respondents also failed to comply with PCAOB standards in connection with their
92
+ EQRs for both the 2013 and 2014 BRS audits. In particular, PCAOB standards prohibit a person
93
+ who served as the engagement partner on either of the two preceding audits from serving as the
94
+ EQR partner on an audit. Thus, because Lopez served as the engagement partner on the 2012 BRS
95
+ audit, Respondents failed to comply with these PCAOB standards when Lopez served as the EQR
96
+ partner on the 2013 and 2014 audits.
97
+
98
+ 6. By failing to conduct the BRS audits in accordance with PCAOB standards, LBB
99
+ and Lopez engaged in improper professional conduct.
100
+
101
+ 3
102
+ B. RESPONDENTS
103
+
104
+ 7. LBB & Associates Ltd., LLP, is a PCAOB-registered accounting and auditing firm
105
+ based in Houston, Texas with approximately 28 public company clients. LBB has two partners and
106
+ approximately eight accountants on staff.
107
+
108
+ 8. Carlos Lopez, age 55, is LBB’s managing partner and majority owner. He is a
109
+ Certified Public Accountant (“CPA”) licensed in Texas and resides in Houston. Lopez served as
110
+ the engagement partner for BRS’s 2012 audit and as the EQR partner for its 2013 and 2014 audits.
111
+
112
+ C. OTHER RELEVANT ENTITIES
113
+
114
+ 9. Behavioral Recognition Systems, Inc., now known as Giant Gray, Inc., is a private,
115
+ Texas corporation with its principal place of business in Houston, Texas and has never had an
116
+ obligation to file audited financial statements with the Commission. BRS was founded in 2005 and
117
+ sold video analytic software that allowed linked video cameras or other systems to recognize certain
118
+ abnormal or suspicious events chosen by the user. For all three fiscal years relevant to this Order,
119
+ Ray Davis served as BRS’s CEO and Chairman. On December 14, 2017, the Commission filed a
120
+ complaint against BRS, Davis, and several relief defendants alleging that BRS and Davis engaged
121
+ in a fraudulent scheme to divert BRS investor funds for Davis’s personal use, including millions of
122
+ dollars paid to Blackstone, a company controlled by Davis. SEC v. Davis et al., No. 17-cv-03774
123
+ (S.D. Tex. Dec. 14, 2017). Davis is now deceased, and Giant Gray was forced into Chapter 7
124
+ bankruptcy proceedings in April 2018.
125
+
126
+ D. FACTS
127
+
128
+ i. Background
129
+ 10. Lopez first met Davis when he was working for another audit firm and was assigned
130
+ to the team responsible for auditing a company for which Davis served as CEO.
131
+
132
+ 11. Years later, after Lopez formed LBB in 2004, Davis hired LBB to conduct a review
133
+ of BRS’s 2009 financial statements. Subsequently, Davis hired LBB to conduct audits for BRS,
134
+ which LBB did for the years 2010 through 2014. Lopez served as the engagement partner for the
135
+ 2010 through 2012 audits and, as noted, as the EQR partner for the 2013 and 2014 audits.
136
+
137
+ ii. Respondents Were Aware that BRS Audits Were High Risk and that BRS Planned to
138
+ Provide Its Audited Financial Statements to Investors
139
+ 12. For the 2012 audit, Respondents were aware that BRS was a high-risk audit client
140
+ based in part on their prior audit work for BRS. BRS had no chief financial officer and relied on a
141
+ single part-time bookkeeper to maintain its accounting records. BRS never had an audit committee,
142
+ and the board of directors consisted only of Davis and another BRS executive. As Lopez knew,
143
+ BRS’s board did not hold a single meeting in 2012.
144
+
145
+ 4
146
+ 13. At the time of the 2012 audit, Respondents were also aware of control deficiencies in
147
+ BRS’s internal controls, including a lack of any controls over Davis’s unrestricted ability to
148
+ authorize, approve, and direct payments and expenses. Respondents noted in the 2012 audit’s Risk
149
+ Assessment Summary Form that management override of internal controls presented a significant
150
+ risk in connection with the audit. Respondents further indicated that they would not test or rely on
151
+ BRS’s internal controls during the audit, but rather would base the audit on substantive audit
152
+ procedures.3
153
+
154
+ 14. Respondents knew when they conducted the 2012 audit and EQRs for the 2013 and
155
+ 2014 audits that BRS planned to provide its investors with the audited financial statements.
156
+ Moreover, in each of the signed audit reports for the 2012 through 2014 audits, Respondents stated:
157
+ “We conducted our audits in accordance with the standards of the Public Company Accounting
158
+ Oversight Board (United States).”
159
+
160
+ iii. Respondents Failed to Conduct the 2012 BRS Audit in Accordance with PCAOB
161
+ Standards
162
+
163
+ a. Failure to Conduct Audit Steps for Identifying Related Party Transactions
164
+
165
+ 15. PCAOB audit standard (“AU”) § 334.07 provided that determining the existence of
166
+ related party relationships that are not clearly evident required the application of specific audit
167
+ procedures.4 Such procedures may include evaluating the client’s process for identifying related
168
+ parties, requesting names of related parties from management, and reviewing stockholder lists. (AU
169
+ § 334.07.) The standard also outlined audit procedures designed to provide guidance for identifying
170
+ material transactions with unidentified related parties, including reviewing the nature of transactions
171
+ with major customers for indications of previously undisclosed relationships and reviewing
172
+ accounting records for large, unusual, or nonrecurring transactions, particularly those transactions
173
+ recognized at or near the end of the reporting period. (AU § 334.08(e) and (g).)
174
+
175
+ 16. During the 2012 audit, Lopez was aware of several red flags indicating the possible
176
+ existence of unidentified related party transactions. In particular, in response to an audit
177
+ questionnaire, BRS claimed that there were no related party transactions in 2012, but Lopez knew
178
+ that response was not accurate because he was aware of recurring transactions with at least two
179
+
180
+ 3 Under PCAOB standards, the audit procedures performed in response to the assessed risks
181
+ of material misstatement can be classified into two categories: “test of controls” and “substantive
182
+ procedures.” (AS § 13.10.) For significant risks, the substantive procedures should be specifically
183
+ responsive to the assessed risks and include tests of details. (AS § 13.11.) On the other hand, if the
184
+ auditor plans to assess control risk (at less than the maximum) by relying on controls, the auditor
185
+ must obtain evidence that the controls selected for testing are designed effectively and operated
186
+ effectively for the entire period during which those controls were relied upon. (AS § 13.16.)
187
+
188
+ 4 Citations to “AU” and “AS” refer to PCAOB standards in effect at the time of the conduct
189
+ discussed herein.
190
+
191
+ 5
192
+ related parties from his work on prior BRS audits. Lopez also identified control deficiencies
193
+ concerning BRS’s authorization of payments, including Davis’s unrestricted ability to direct
194
+ payments.
195
+
196
+ 17. Despite his awareness of these red flags, Lopez did not take any audit steps during
197
+ the 2012 audit to identify whether material transactions were with related parties. Rather, Lopez
198
+ relied exclusively on BRS management to identify related party transactions and did not evaluate
199
+ BRS’s procedures for identifying related parties. In fact, BRS had no policies for identifying
200
+ related parties.
201
+
202
+ 18. In 2012, BRS paid Blackstone approximately $1.5 million – comprising
203
+ approximately 9.2% of BRS’s total operating expenses – making Blackstone one of BRS’s largest
204
+ vendors for the year. Yet, Lopez did not perform the relevant audit steps outlined in AU § 334 to
205
+ evaluate whether BRS’s payments to Blackstone, which were purportedly for “web site
206
+ optimization,” involved a related party. For example, Lopez did not review stockholder lists or
207
+ examine the nature of the transactions between BRS and Blackstone by reviewing the accounting
208
+ records for large transactions. Similarly, Lopez never requested or reviewed any contract between
209
+ BRS and Blackstone.
210
+
211
+ 19. Had Lopez conducted the relevant audit steps outlined in AU §§ 334.07 and 334.08,
212
+ he may have identified that these material transactions involved a corporation created, owned, and
213
+ controlled by BRS’s CEO and Chairman, Ray Davis.
214
+
215
+ b. Respondents Also Failed to Conduct Appropriate Audit Steps for Known Related
216
+ Party Transactions
217
+
218
+ 20. For known related party transactions, the PCAOB standards required the auditor to
219
+ apply the procedures he or she considered necessary to obtain satisfaction regarding the purpose,
220
+ nature, and extent of the transactions and their effect on the client’s financial statements. The
221
+ procedures should be directed towards obtaining and evaluating sufficient appropriate evidence to
222
+ support BRS’s accounting treatment and were required to extend beyond simply an inquiry of
223
+ management. Specifically, the audit procedures that Respondents should have considered included:
224
+ obtaining an understanding of the business purpose of the transaction; examining invoices,
225
+ contracts, and other pertinent documents; determining whether the transactions had been approved
226
+ by the board of directors; and testing the amounts for reasonableness. (AU § 334.09.)
227
+
228
+ 21. For the BRS audit in 2012, Respondents knew about the related party transactions
229
+ involving Related Party A and were aware of significant red flags surrounding those transactions.
230
+ Yet, Respondents failed to take appropriate audit steps to understand their purpose, nature, or effect
231
+ on BRS’s financial statements and simply relied on BRS management’s representations.
232
+
233
+ 22. In particular, Lopez was aware that Davis approved the payments to Related Party A,
234
+ who he knew was related to Davis. Although BRS management disclosed in its notes to its
235
+ financial statements that Related Party A was paid for consulting services and for efforts selling
236
+ BRS securities to investors, Lopez knew that there was no written agreement outlining the services
237
+ 6
238
+ to be provided by, or the fees to be paid to, this related party. Lopez also was aware that BRS’s
239
+ board of directors did not hold any board meetings in 2012, calling into question whether the board
240
+ had approved payments to Related Party A.
241
+
242
+ 23. Moreover, during the 2012 audit, Lopez conducted an analysis showing that BRS’s
243
+ consulting expenses had increased almost ten-fold from 2011 to 2012, including a three-fold
244
+ increase in expenses for Related Party A. Specifically, consulting expenses increased from
245
+ approximately $113,000 in 2011 to approximately $1.17 million in 2012 (approximately 7.2% of
246
+ BRS’s total operating expenses for the year). In both years, the majority of BRS’s consulting
247
+ expenses concerned Related Party A. The results of this analysis should have prompted Lopez to
248
+ conduct additional audit steps, including gathering additional evidence so that Lopez could
249
+ understand what caused such a significant increase in consultant expenses. Lopez, however, did not
250
+ complete any such steps.
251
+
252
+ 24. In fact, notwithstanding the red flags outlined above, Lopez failed to obtain any
253
+ invoices, contracts, or other documents related to payments from BRS to Related Party A. Lopez
254
+ never determined whether BRS’s board of directors had approved the payments. Again, Lopez
255
+ relied exclusively on BRS’s management to explain the nature of the payments to Related Party A,
256
+ noting in his audit work papers as part of substantive analytical procedures performed that: “Per
257
+ inquiry, the increase of consulting fee is mostly due to BRS utilized [Related Party A] more this
258
+ year to help out with investor relations. Appears reasonable as the revenue is not enough to cover
259
+ the operating expenses and company needs funding through out [sic] the year.”
260
+
261
+ 25. In short, Lopez failed to perform any of the audit procedures outlined in AU §
262
+ 334.09, or any other procedures, and, thus, failed to obtain an adequate understanding of the
263
+ approximately $951,000 in 2012 consulting expenses for Related Party A—which comprised
264
+ approximately 7.7% of BRS’s net loss for that year. Accordingly, Respondents had no basis for
265
+ concluding that the consulting expenses regarding Related Party A were fairly presented in BRS’s
266
+ 2012 financial statements.
267
+
268
+ c. Other 2012 Audit Failures
269
+
270
+ 26. Respondents failed to comply with other PCAOB audit standards in connection with
271
+ their work on the 2012 BRS audit.
272
+
273
+ 27. Audit standard AU § 9334 provided that the risk associated with management’s
274
+ assertions about related party transactions is often assessed higher than many other types of
275
+ transactions because of the possibility that the parties to the transaction are motivated by reasons
276
+ other than those that exist for most business transactions. (AU § 9334.18.) That audit standard
277
+ further noted that, the higher the assessment of risk, the more extensive or effective the audit tests
278
+ should be. (AU § 9334.19.) In addition, AU § 9334 provided: “In assessing the risk of the related
279
+ party transactions the auditor obtains an understanding of the business purpose of the transactions.
280
+ Until the auditor understands the business sense of material transactions, he cannot complete his
281
+ audit.” (Id.)
282
+
283
+ 7
284
+ 28. For significant risks, the PCAOB auditing standard § 13.11 explained that the auditor
285
+ should perform substantive procedures, including tests of details that are specifically responsive to
286
+ the assessed risks. (AS §13.11.)
287
+
288
+ 29. Respondents failed to comply with both AU § 9334 and AS § 13.11. Lopez did not
289
+ assess the audit risk associated with related party transactions at BRS as high during the 2012 audit
290
+ despite the fact that he was aware of the significant red flags described above, including the lack of
291
+ contracts and controls regarding management override of payments. Payments to Related Party A,
292
+ for example, could have been motivated by Davis’s desire to funnel money to a relative. Under
293
+ these circumstances, Respondents should have expanded procedures to obtain audit evidence
294
+ regarding the services Related Party A performed and how the amounts paid for each service were
295
+ determined. Had Lopez reviewed invoices from Related Party A, he would have seen that they only
296
+ generically described the services provided as “Consulting” or “Financial Services” with no other
297
+ details or descriptions of what services, if any, were performed or how the amounts invoiced were
298
+ determined. Respondents also failed to conduct audit steps that would have allowed them to
299
+ understand the nature of the transactions.
300
+
301
+ 30. Moreover, the PCAOB standards memorialized in AU § 329 provided that, when an
302
+ auditor performs substantive analytical review procedures, its expectations should be “precise
303
+ enough to provide the desired level of assurance that differences that may be potential material
304
+ misstatements, would be identified for the auditor to investigate.” (AU § 329.17.) The standards
305
+ also noted that expectations developed at a detailed level generally have a greater chance of
306
+ detecting misstatement of a given amount than do broad comparisons. (AU §§ 329.17 and 329.19.)
307
+ Accordingly, the auditor should evaluate significant unexpected differences, and management’s
308
+ responses should ordinarily be corroborated with other evidence. (AU § 329.21.)
309
+
310
+ 31. Respondents failed to comply with AU § 329. In particular, Respondents failed to
311
+ perform audit steps with sufficient precision to adequately evaluate unexpected differences,
312
+ including, for example, the significant increase in consulting expenses from 2011 to 2012 that was
313
+ identified through the analysis described above. For the same reason, Lopez also failed to
314
+ corroborate management’s assertions that significant payments for two related parties (Related
315
+ Party A and an entity associated with a BRS executive) were made for legitimate business purposes.
316
+ In fact, Lopez did not apply any substantive audit procedures at all. Rather, he only compared year-
317
+ over-year changes in total expenses. Establishing expectations and analysis of those changes at a
318
+ more precise level was required, however, in order for the analytics to be considered substantive
319
+ audit tests.
320
+
321
+ 32. Additionally, AS § 15 required that the auditor plan and perform audit procedures to
322
+ obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion.
323
+ (AS § 15.04.) Notably, as the risk in an audit increases, the amount of evidence that the auditor
324
+ should obtain also increases. Ordinarily, more evidence is needed to respond to significant risks.
325
+ (AS § 15.05.)
326
+
327
+ 33. Respondents did not obtain sufficient appropriate audit evidence in their 2012 audit
328
+ of BRS and therefore failed to comply with AS § 15. As noted, rather than gather evidence
329
+ 8
330
+ sufficient to understand the above-described transactions, Lopez instead relied on management’s
331
+ assertions.
332
+
333
+ 34. Lastly, AU § 230 required auditors to exercise due professional care when
334
+ conducting an audit and preparing a report. (AU § 230.01.) Under AU § 230, auditors were
335
+ required to maintain an attitude of professional skepticism, which included “a questioning mind and
336
+ a critical assessment of audit evidence.” (AU § 230.07.) The standard noted that gathering and
337
+ objectively evaluating audit evidence required the auditor to consider the competency and
338
+ sufficiency of the evidence. (AU § 230.08.)
339
+
340
+ 35. By failing to gather and objectively evaluate audit evidence as described above,
341
+ however, Respondents also demonstrated their failure to conduct the 2012 BRS audit with due
342
+ professional care and an attitude of professional skepticism. Therefore, Respondents violated AU §
343
+ 230.
344
+
345
+ iv. Respondents Failed to Conduct the 2013 and 2014 BRS EQRs in Accordance with
346
+ PCAOB Standards
347
+ 36. As noted, after serving as the engagement partner for the 2012 audit, Lopez served as
348
+ the EQR partner for both the 2013 and 2014 audits. In order to maintain the objectivity of the EQR
349
+ partner, PCAOB standards do not permit a person to serve as the EQR partner on an audit if they
350
+ served as the engagement partner on either of the two prior audits. (AS §7.8.) Thus, Respondents
351
+ failed to comply with AS § 7.8 in connection with the EQRs of the 2013 and 2014 BRS audits.
352
+
353
+ E. VIOLATIONS
354
+
355
+ Section 4C of the Exchange Act and Rule 102(e)
356
+
357
+ 37. As a result of the conduct described above, Respondents engaged in improper
358
+ professional conduct within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(ii)
359
+ of the Commission’s Rules of Practice. Section 4C of the Exchange Act and Rule 102(e)(1)(ii)
360
+ provide, in pertinent part, that the Commission may censure or deny, temporarily or permanently,
361
+ the privilege of appearing or practicing before the Commission to any person who is found by the
362
+ Commission to have engaged in improper professional conduct. Exchange Act Section 4C(b) and
363
+ Rule 102(e)(1)(iv) define improper professional conduct with respect to persons licensed to practice
364
+ as accountants.
365
+
366
+ 38. Under Section 4C(b) and Rule 102(e)(1)(iv)(B), the term “improper professional
367
+ conduct” means one of two types of negligent conduct: (1) a single instance of highly unreasonable
368
+ conduct in circumstances for which heightened scrutiny is warranted; or (2) repeated instances of
369
+ unreasonable conduct that indicate a lack of competence.
370
+
371
+ 39. Respondents’ failures in the 2012 BRS audit to abide by the applicable professional
372
+ standards concerning the identification of related party transactions and audit of known related party
373
+ transactions (articulated in AU §334 and AU § 9334) constitute multiple instances of highly
374
+ 9
375
+ unreasonable conduct in circumstances that warranted heightened scrutiny. Those violations,
376
+ Respondents’ other failures during the 2012 audit to conform to applicable professional standards
377
+ (articulated in AU § 230, AU § 329, AS § 7, AS § 13, and AS § 15), and their failures in connection
378
+ with the EQRs for the 2013 and 2014 BRS audits (articulated in AS § 7) also constitute repeated
379
+ instances of unreasonable conduct.
380
+
381
+ III.
382
+
383
+ In view of the allegations made by the Division of Enforcement and the Office of the Chief
384
+ Accountant, the Commission deems it necessary and appropriate that public administrative
385
+ proceedings be instituted to determine:
386
+
387
+ A. Whether the allegations set forth in Section II hereof are true and, in connection
388
+ therewith, to afford Respondents an opportunity to establish any defenses to such allegations; and
389
+
390
+ B. Whether pursuant to Section 4C of the Exchange Act and Section 102(e) of the
391
+ Commission’s Rules of Practice, Respondents LBB and Lopez should be censured or denied,
392
+ temporarily or permanently, the privilege of appearing or practicing before the Commission as an
393
+ accountant.
394
+
395
+ IV.
396
+
397
+ IT IS ORDERED that a public hearing before the Commission for the purpose of taking
398
+ evidence on the questions set forth in Section III hereof shall be convened at a time and place to be
399
+ fixed by further order of the Commission, pursuant to Rule 110 of the Commission’s Rules of Practice,
400
+ 17 C.F.R. § 201.110.
401
+
402
+ IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations
403
+ contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220(b)
404
+ of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b).
405
+
406
+ IT IS FURTHER ORDERED that the Division of Enforcement and Respondents shall conduct
407
+ a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, 17 C.F.R. §
408
+ 201.221, within fourteen (14) days of service of the Answer. The parties may meet in person or
409
+ participate by telephone or other remote means; following the conference, they shall file a statement
410
+ with the Office of the Secretary advising the Commission of any agreements reached at said
411
+ conference. If a prehearing conference was not held, a statement shall be filed with the Office of the
412
+ Secretary advising the Commission of that fact and of the efforts made to meet and confer.
413
+
414
+ If Respondents fail to file the directed Answer, or fail to appear at a hearing or conference after
415
+ being duly notified, the Respondents may be deemed in default and the proceedings may be determined
416
+ against them upon consideration of this Order, the allegations of which may be deemed to be true as
417
+ provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§
418
+ 201.155(a), 201.220(f), 201.221(f), and 201.310.
419
+
420
+ 10
421
+ This Order shall be served forthwith upon Respondents by any means permitted by the
422
+ Commission’s Rules of Practice.
423
+
424
+ Attention is called to Rule 151(b) and (c) of the Commission’s Rules of Practice, 17 C.F.R. §
425
+ 201.151(b) and (c), providing that when, as here, a proceeding is set before the Commission, all
426
+ papers (including those listed in the following paragraph) shall be filed with the Office of the
427
+ Secretary and all motions, objections, or applications will be decided by the Commission. The
428
+ Commission requests that an electronic courtesy copy of each filing should be emailed to
429
+ APFilings@sec.gov in PDF text-searchable format. Any exhibits should be sent as separate
430
+ attachments, not a combined PDF.
431
+
432
+ The Commission finds that it would serve the interests of justice and not result in prejudice to
433
+ any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. §
434
+ 201.100(c), that notwithstanding any contrary reference in the Rules of Practice to filing with or
435
+ disposition by a hearing officer, all filings, including those under Rules 210, 221, 222, 230, 231, 232,
436
+ 233, and 250 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, 231, 232,
437
+ 233, and 250, shall be directed to and, as appropriate, decided by the Commission, and that any
438
+ motion for summary disposition shall be filed under Rule 250(a) or (b).
439
+
440
+ The Commission finds that it would serve the interests of justice and not result in prejudice to
441
+ any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. §
442
+ 201.100(c), that the Commission shall issue a decision on the basis of the record in this proceeding,
443
+ which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of Practice, 17 C.F.R.
444
+ § 201.350(a), and any other document or item filed with the Office of the Secretary and accepted into
445
+ the record by the Commission. The provisions of Rule 351 of the Commission’s Rules of Practice, 17
446
+ C.F.R. § 201.351, relating to preparation and certification of a record index by the Office of the
447
+ Secretary or the hearing officer are not applicable to this proceeding.
448
+
449
+ The Commission will issue a final order resolving the proceeding after one of the following:
450
+ (A) the completion of post-hearing briefing in a proceeding where the public hearing has been
451
+ completed; (B) the completion of briefing on a motion for a ruling on the pleadings or a motion for
452
+ summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 C.F.R. §
453
+ 201.250, where the Commission has determined that no public hearing is necessary; or (C) the
454
+ determination that a party is deemed to be in default under Rule 155 of the Commission’s Rules of
455
+ Practice, 17 C.F.R. § 201.155, and no public hearing is necessary.
456
+
457
+
458
+
459
+
460
+
461
+
462
+
463
+
464
+
465
+ 11
466
+ In the absence of an appropriate waiver, no officer or employee of the Commission engaged in
467
+ the performance of investigative or prosecuting functions in this or any factually related proceeding
468
+ will be permitted to participate or advise in the decision of this matter, except as witness or counsel in
469
+ proceedings held pursuant to notice. Since this proceeding is not “rule making” within the meaning of
470
+ Section 551 of the Administrative Procedure Act, it is not deemed subject to the provisions of Section
471
+ 553 delaying the effective date of any final Commission action.
472
+
473
+ By the Commission.
474
+
475
+
476
+ Brent J. Fields
477
+ Secretary
raw/aaer/2019/AAER-4015.txt ADDED
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1
+
2
+
3
+
4
+ UNITED STATES OF AMERICA
5
+ Before the
6
+ SECURITIES AND EXCHANGE COMMISSION
7
+
8
+ SECURITIES EXCHANGE ACT OF 1934
9
+ Release No. 84994 / January 29, 2019
10
+
11
+ ACCOUNTING AND AUDITING ENFORCEMENT
12
+ Release No. 4015 / January 29, 2019
13
+
14
+ ADMINISTRATIVE PROCEEDING
15
+ File No. 3-18969
16
+
17
+
18
+ In the Matter of
19
+
20
+ CYTODYN INC.
21
+
22
+ Respondent.
23
+
24
+
25
+
26
+
27
+
28
+ ORDER INSTITUTING CEASE-AND-DESIST
29
+ PROCEEDINGS, PURSUANT TO SECTION
30
+ 21C OF THE SECURITIES EXCHANGE ACT
31
+ OF 1934, MAKING FINDINGS, AND
32
+ IMPOSING A CEASE-AND-DESIST ORDER
33
+
34
+
35
+ I.
36
+
37
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that
38
+ cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the
39
+ Securities Exchange Act of 1934 (“Exchange Act”) against CytoDyn, Inc. (“Respondent”).
40
+
41
+ II.
42
+
43
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
44
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
45
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
46
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
47
+ herein, except as to the Commission’s jurisdiction over it and the subject matter of these
48
+ proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-
49
+ And-Desist Proceedings, Pursuant to Section 21C of the Securities Exchange Act of 1934, Making
50
+ Findings, and Imposing a Cease-And-Desist Order (“Order”), as set forth below.
51
+
52
+
53
+
54
+ 2
55
+
56
+ III.
57
+
58
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that
59
+
60
+ Summary
61
+
62
+ These proceedings involve violations of the federal securities laws in connection with the
63
+ Respondent’s Internal Control over Financial Reporting (“ICFR”). Respondent failed to create and
64
+ implement effective ICFR for nine consecutive annual reporting periods from 2008 through 2016.
65
+
66
+ Respondent
67
+
68
+ 1. CytoDyn is a clinical stage biotechnology company based in Vancouver,
69
+ Washington. Respondent is focused on the clinical development and commercialization of
70
+ humanized monoclonal antibodies to treat Human Immunodeficiency Virus (“HIV”) infection.
71
+ Respondent’s securities trade on the OTC market under the symbol CYDY. At all relevant times,
72
+ Respondent filed periodic reports with the Commission, including Forms 10-K and 10-Q, pursuant
73
+ to Section 13(a) of the Exchange Act and related rules thereunder.
74
+
75
+ Background
76
+
77
+ 2. Respondent disclosed material weaknesses in each of its Forms 10-K over a period
78
+ of nine years, from 2008 through 2016. Respondent’s disclosed material weaknesses often
79
+ repeated year after year, relating primarily to segregation of duties and the review, recording and
80
+ financial reporting of transactions.
81
+
82
+ 3. Respondent included in its public filings the same disclosure of material
83
+ weaknesses for nine years straight. From 2008 through 2016, CytoDyn’s boilerplate disclosure
84
+ indicated the company had “[s]everal material weaknesses… because of inadequate segregation of
85
+ duties over authorization, review and recording of transactions, as well as the financial reporting of
86
+ such transactions.” The general and sweeping description provided no information as to the
87
+ specific material weaknesses observed.
88
+
89
+ 4. From 2012 through 2015, Respondent reported no material changes in its internal
90
+ controls, but did take certain steps to improve controls. These remediation steps included doubling
91
+ its accounting staff by hiring a CPA; instituting certain controls around wire transfers, cash
92
+ disbursements, financial statement reconciliations, and quarterly financial statements; and
93
+ outsourcing certain of its information technology needs. After being contacted by Commission
94
+ staff, Respondent retained, for the first time, a SOX consultant. Respondent has remediated its
95
+ material weaknesses and determined that ICFR was effective as of May 31, 2017.
96
+
97
+ 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any
98
+ other person or entity in this or any other proceeding.
99
+
100
+ 3
101
+
102
+ 5. As a result of the conduct described above, Respondent violated Rule 13a-15(a)
103
+ of the Exchange Act, which require issuers with classes of securities registered pursuant to
104
+ Section 12 to maintain ICFR.
105
+
106
+ 6. As a result of the conduct described above, Respondent violated Section
107
+ 13(b)(2)(B) of the Exchange Act, which requires Section 12 registrants to devise and maintain a
108
+ system of sufficient internal accounting controls.
109
+
110
+ CytoDyn’s Remedial Efforts
111
+ 7. In determining to accept the Offer, the Commission considered remedial acts
112
+ undertaken by Respondent and cooperation afforded the Commission staff.
113
+ IV.
114
+
115
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
116
+ agreed to in Respondent��s Offer.
117
+
118
+ Accordingly, it is hereby ORDERED that:
119
+
120
+ A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from
121
+ committing or causing any violations and any future violations of Section 13(b)(2)(B) of the
122
+ Exchange Act and Rule 13a-15(a), thereunder.
123
+
124
+ B. Respondent shall, within 10 days of the entry of this Order, pay a civil money
125
+ penalty in the amount of $35,000 to the Securities and Exchange Commission for transfer to the
126
+ general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely
127
+ payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.
128
+
129
+ Payment must be made in one of the following ways:
130
+
131
+ (1) Respondent may transmit payment electronically to the Commission, which
132
+ will provide detailed ACH transfer/Fedwire instructions upon request;
133
+
134
+ (2) Respondent may make direct payment from a bank account via Pay.gov
135
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
136
+
137
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
138
+ States postal money order, made payable to the Securities and Exchange
139
+ Commission and hand-delivered or mailed to:
140
+
141
+
142
+
143
+
144
+ 4
145
+ Enterprise Services Center
146
+ Accounts Receivable Branch
147
+ HQ Bldg., Room 181, AMZ-341
148
+ 6500 South MacArthur Boulevard
149
+ Oklahoma City, OK 73169
150
+
151
+ Payments by check or money order must be accompanied by a cover letter identifying
152
+ Respondent as a Respondent in these proceedings, and the file number of these proceedings; a
153
+ copy of the cover letter and check or money order must be sent to Melissa Hodgman, Associate
154
+ Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE,
155
+ Washington, DC 20549-5553.
156
+
157
+ C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be
158
+ treated as penalties paid to the government for all purposes, including all tax purposes. To
159
+ preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
160
+ Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any
161
+ award of compensatory damages by the amount of any part of Respondent’s payment of a civil
162
+ penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a
163
+ Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting
164
+ the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the
165
+ Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed
166
+ an additional civil penalty and shall not be deemed to change the amount of the civil penalty
167
+ imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a
168
+ private damages action brought against Respondent by or on behalf of one or more investors based
169
+ on substantially the same facts as alleged in the Order instituted by the Commission in this
170
+ proceeding.
171
+
172
+
173
+ By the Commission.
174
+
175
+
176
+
177
+ Brent J. Fields
178
+ Secretary
179
+
raw/aaer/2019/AAER-4016.txt ADDED
@@ -0,0 +1,201 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+
4
+ UNITED STATES OF AMERICA
5
+ Before the
6
+ SECURITIES AND EXCHANGE COMMISSION
7
+
8
+
9
+ SECURITIES EXCHANGE ACT OF 1934
10
+ Release No. 84995 / January 29, 2019
11
+
12
+ ACCOUNTING AND AUDITING RELEASE
13
+ Release No. 4016 / January 29, 2019
14
+
15
+ ADMINISTRATIVE PROCEEDING
16
+ File No. 3-18970
17
+
18
+
19
+ In the Matter of
20
+
21
+ LIFEWAY FOODS, INC.
22
+
23
+ Respondent.
24
+
25
+
26
+
27
+
28
+
29
+ ORDER INSTITUTING CEASE-AND-DESIST
30
+ PROCEEDINGS PURSUANT TO SECTION
31
+ 21C OF THE SECURITIES EXCHANGE ACT
32
+ OF 1934, MAKING FINDINGS AND
33
+ IMPOSING A CEASE-AND-DESIST ORDER
34
+
35
+
36
+ I.
37
+
38
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that
39
+ cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the
40
+ Securities Exchange Act of 1934 (“Exchange Act”) against Lifeway Foods, Inc. (“Respondent”).
41
+
42
+ II.
43
+
44
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
45
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
46
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
47
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
48
+ herein, except as to the Commission’s jurisdiction over it and the subject matter of these
49
+ proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-
50
+ And-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making
51
+ Findings and Imposing a Cease-And-Desist Order (“Order”), as set forth below.
52
+
53
+
54
+
55
+
56
+
57
+ 2
58
+ III.
59
+
60
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that
61
+
62
+ Summary
63
+ These proceedings involve violations of the federal securities laws in connection with the
64
+ Respondent’s Internal Control over Financial Reporting (“ICFR”). Respondent failed to create and
65
+ implement effective ICFR for ten consecutive annual reporting periods and failed to complete in
66
+ certain periods the required management assessment of internal controls. In addition, Respondent
67
+ announced three financial statement restatements during the period from 2007 to 2016.
68
+ Respondent
69
+ 1. Lifeway Foods, Inc. is a Morton Grove, Illinois-based dairy food producer,
70
+ incorporated in Illinois in 1986, family controlled, and known for its production of kefir, a
71
+ cultured dairy drink. Respondent’s common stock trades on NASDAQ under the symbol LWAY.
72
+ At all relevant times, Respondent filed periodic reports with the Commission, including Forms
73
+ 10-K and 10-Q, pursuant to Section 13(a) of the Exchange Act and related rules thereunder.
74
+ Background
75
+ 2. Respondent disclosed material weaknesses in each of its Forms 10-K for a period
76
+ of nine years, from 2007 through 2015, and significant deficiencies in the aggregate that
77
+ constituted a material weakness in 2016. Respondent’s disclosed material weaknesses often
78
+ repeated year after year, and involved certain high-risk areas for the company’s financial
79
+ statement presentation. For three consecutive years from 2007 to 2009, Respondent disclosed
80
+ that it lacked a “requirement to post monthly activity to [its] general ledger,” contributing to a
81
+ material weakness in each period. In six of the ten years, Respondent disclosed material
82
+ weaknesses related to financial reporting controls.
83
+ 3. Prior to 2016, Respondent’s material weaknesses resulted from, among other
84
+ things, incomplete, inadequate and undocumented financial reporting processes; the lack of
85
+ sufficient, competent and independent financial statement review; and the failure to consistently
86
+ demonstrate effective preparation, support and review of journal entries and account
87
+ reconciliations. In four years between 2010 and 2016, Respondent disclosed a material weakness
88
+ or significant deficiencies related to its accounting for and controls related to income tax or
89
+ deferred income tax.
90
+ 4. Many of Respondent’s material weaknesses were recurring, and involved either
91
+ financial reporting, accounting, or entity controls. For the most part, the material weaknesses
92
+ were identified by Respondent’s management team in the course of its annual ICFR assessment
93
+
94
+ 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any
95
+ other person or entity in this or any other proceeding.
96
+
97
+
98
+ 3
99
+ and evaluation; however, the management team failed to complete its ICFR assessment and
100
+ evaluation in 2013 and 2014.
101
+ 5. Respondent initiated remediation efforts beginning in 2013, but did not begin to
102
+ include detailed disclosure in its filings regarding its material weaknesses remediation plans until
103
+ the quarter ended June 30, 2014. In its annual report for the period ending December 31, 2013,
104
+ Respondent disclosed the engagement of an outside SOX consultant to assist in developing a
105
+ remediation plan for its material weaknesses. Respondent also engaged a SOX consultant to
106
+ assist with its 2015 ICFR assessment and continues to work with that consultant currently.
107
+ Nonetheless, Respondent continued to disclose the existence of material weaknesses through
108
+ September 30, 2017, and did not fully remediate its material weaknesses and conclude that ICFR
109
+ was effective until its fiscal year ended December 31, 2017.
110
+ 6. Respondent’s failure to address its material weaknesses has been compounded by
111
+ three announced restatements since fiscal 2012, including two restatements announced during
112
+ fiscal 2016. The company disclosed that its restatement announced in November 2016 was
113
+ consequential to its remediation efforts. Each of the three restatements involve Respondent’s
114
+ failures to appropriately account for and assign costs related to manufacturing, cost of goods
115
+ sold, or inventory, although none of the restatements had a material effect on Respondent’s
116
+ financial results. Respondent disclosed in four of the ten years various material weaknesses
117
+ related to inventory and assignment of cost of goods sold.
118
+ 7. As a result of the conduct described above, Respondent violated Section 13(a) of
119
+ the Exchange Act and Rules 13a-1, 13a-15(a) and 13a-15(c) thereunder, which require issuers
120
+ with classes of securities registered pursuant to Section 12 to file periodic and other reports with
121
+ the Commission, maintain ICFR and to perform annual ICFR evaluations.
122
+ 8. As a result of the conduct described above, Respondent violated Section
123
+ 13(b)(2)(A) of the Exchange Act, which requires Section 12 registrants to make and keep books,
124
+ records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions
125
+ and dispositions of the assets of the issuer.
126
+ 9. As a result of the conduct described above, Respondent violated Section
127
+ 13(b)(2)(B) of the Exchange Act, which requires Section 12 registrants to devise and maintain a
128
+ system of sufficient internal accounting controls.
129
+ Lifeway’s Remedial Efforts
130
+ 10. In determining to accept the Offer, the Commission considered remedial acts
131
+ undertaken by Respondent and cooperation afforded the Commission staff.
132
+
133
+
134
+
135
+ IV.
136
+
137
+
138
+ 4
139
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
140
+ agreed to in Respondent’s Offer.
141
+
142
+ Accordingly, it is hereby ORDERED that:
143
+
144
+ A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from
145
+ committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and
146
+ 13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-15(a) and 13a-15(c), thereunder.
147
+
148
+ B. Respondent shall, within 10 days of the entry of this Order, pay a civil money
149
+ penalty in the amount of $100,000 to the Securities and Exchange Commission for transfer to the
150
+ general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely
151
+ payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.
152
+
153
+ Payment must be made in one of the following ways:
154
+
155
+ (1) Respondent may transmit payment electronically to the Commission, which
156
+ will provide detailed ACH transfer/Fedwire instructions upon request;
157
+
158
+ (2) Respondent may make direct payment from a bank account via Pay.gov
159
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
160
+
161
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
162
+ States postal money order, made payable to the Securities and Exchange
163
+ Commission and hand-delivered or mailed to:
164
+
165
+ Enterprise Services Center
166
+ Accounts Receivable Branch
167
+ HQ Bldg., Room 181, AMZ-341
168
+ 6500 South MacArthur Boulevard
169
+ Oklahoma City, OK 73169
170
+
171
+ Payments by check or money order must be accompanied by a cover letter identifying
172
+ Respondent as a Respondent in these proceedings, and the file number of these proceedings; a
173
+ copy of the cover letter and check or money order must be sent to Melissa Hodgman, Associate
174
+ Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE,
175
+ Washington, DC 20549-5553.
176
+
177
+ C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be
178
+ treated as penalties paid to the government for all purposes, including all tax purposes. To
179
+ preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
180
+ Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any
181
+ award of compensatory damages by the amount of any part of Respondent’s payment of a civil
182
+ penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a
183
+
184
+ 5
185
+ Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting
186
+ the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the
187
+ Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed
188
+ an additional civil penalty and shall not be deemed to change the amount of the civil penalty
189
+ imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a
190
+ private damages action brought against Respondent by or on behalf of one or more investors based
191
+ on substantially the same facts as alleged in the Order instituted by the Commission in this
192
+ proceeding.
193
+
194
+
195
+ By the Commission.
196
+
197
+
198
+
199
+ Brent J. Fields
200
+ Secretary
201
+
raw/aaer/2019/AAER-4017.txt ADDED
@@ -0,0 +1,238 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 84996 / January 29, 2019
8
+
9
+ ACCOUNTING AND AUDITING ENFORCEMENT
10
+ Release No. 4017 / January 29, 2019
11
+
12
+ ADMINISTRATIVE PROCEEDING
13
+ File No. 3-18972
14
+
15
+ In the Matter of
16
+ GRUPO SIMEC S.A.B. DE C.V.
17
+ Respondent.
18
+ ORDER INSTITUTING CEASE-AND-DESIST
19
+ PROCEEDINGS PURSUANT TO SECTION
20
+ 21C OF THE SECURITIES EXCHANGE ACT
21
+ OF 1934, MAKING FINDINGS, AND
22
+ IMPOSING A CEASE-AND-DESIST ORDER
23
+
24
+ I.
25
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that
26
+ cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the
27
+ Securities Exchange Act of 1934 (“Exchange Act”) against Grupo Simec S.A.B. de C.V.
28
+ (“Respondent”or “Simec”).
29
+ II.
30
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
31
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
32
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
33
+ Commission, or to which the Commission is a party, and without admitting or denying the
34
+ findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these
35
+ proceedings, which are admitted, Respondent consents to the entry of this Order Instituting
36
+ Cease-And-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934,
37
+ Making Findings, and Imposing a Cease-And-Desist Order (“Order”), as set forth below.
38
+
39
+
40
+
41
+ III.
42
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that
43
+ Summary
44
+ This matter involves violations of the federal securities laws in connection with the
45
+ Respondent’s Internal Control over Financial Reporting (“ICFR”). Respondent did not
46
+ remediate material weaknesses in ICFR for ten consecutive annual reporting periods from fiscal
47
+ year ended 2008 through fiscal year ended 2017, and it failed to complete in certain periods the
48
+ required management evaluation of internal controls.
49
+
50
+ Respondent
51
+
52
+ 1. Simec is headquartered in Guadalajara, Mexico and uses its two business segments
53
+ – one in Mexico and one in the U.S. – to manufacture, process, and distribute iron and steel alloy
54
+ products. The company’s securities trade on the New York Stock Exchange under the symbol
55
+ SIM. At all relevant times, Respondent filed periodic reports with the Commission, including
56
+ Forms 20F, pursuant to Section 13(a) of the Exchange Act and related rules thereunder.
57
+
58
+ Background
59
+
60
+ 2. Respondent disclosed material weaknesses in each of its Forms 10-K over a
61
+ period of ten years, from 2008 through 2017. In two of those years (2015 and 2016),
62
+ management disclosed it failed to complete the required management evaluation of ICFR.
63
+
64
+ 3. Respondent’s persistent and extensive material weaknesses indicate that
65
+ management did not appropriately address, and in some periods adequately assess, its admitted
66
+ ICFR material weaknesses and associated risks. For example, in each year from 2010 through
67
+ 2017 (eight years), Simec disclosed that it lacked an “appropriate consolidation system to allow
68
+ management to properly supervise the preparation of consolidated financial information...” In
69
+ certain years this disclosure was coupled with an acknowledgment that a) Simec had a “very
70
+ vulnerable procedure to determine costs due to manual calculations,” and b) “[financial
71
+ information of subsidiaries was presented at a level of detail that was insufficient to allow for a
72
+ clear and precise understanding of operations.” In each year from 2009 through 2017 (nine
73
+ years), Simec disclosed that it did not have adequate accounting resources and/or adequate
74
+ segregation of duties – corporate, or subsidiary-based, or both. In at least one year, Simec
75
+ conceded that this “prejudiced the financial statement close process.” In each year from 2011
76
+ through 2015 (five years), Simec acknowledged “inadequate supervision and controls...resulting
77
+ in material accounting errors.” From 2014 through 2016, Simec also disclosed it lacked
78
+ “specific procedures for the approval of transactions with related parties.”
79
+
80
+
81
+
82
+ 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any
83
+ other person or entity in this or any other proceeding.
84
+ 4. In addition, SIM’s CEO and CFO failed to complete their annual ICFR
85
+ evaluation in two annual reporting periods. Specifically, in both 2015 and 2016, SIM disclosed
86
+ that its “management did not assess the effectiveness” of its internal controls over financial
87
+ reporting because its “internal audit department did not carry out the functions necessary to
88
+ analyze [its] internal control during [the relevant year]; however…management considers that
89
+ the deficiencies found in [the prior year] still persist.”
90
+
91
+ 5. Although Respondent hired a SOX consultant in August 2016, there was limited
92
+ progress in devising a control structure and remediating material weaknesses prior to the staff’s
93
+ outreach in February 2017. Respondent completed the design and testing of its internal controls
94
+ during the period ending March 2018 though there continues to be material weaknesses that it is still
95
+ in the process of remediating.
96
+
97
+ Violations
98
+
99
+ 6. As a result of the conduct described above, Respondent violated Exchange Act
100
+ Rules 13a-15(a) and 13a-15(c), thereunder, which require issuers with classes of securities
101
+ registered pursuant to Section 12 to file periodic and other reports with the Commission and
102
+ maintain ICFR.
103
+ 7. As a result of the conduct described above, Respondent violated Section
104
+ 13(b)(2)(B) of the Exchange Act, which requires Section 12 registrants to devise and maintain a
105
+ system of sufficient internal accounting controls.
106
+ Simec’s Remedial Efforts
107
+ In determining to accept the Offer, the Commission considered remedial acts undertaken
108
+ by Respondent and cooperation afforded the Commission staff.
109
+ Undertakings
110
+
111
+ Respondent has undertaken to:
112
+
113
+ 8. Retain, at its own expense, a qualified independent consultant (the “Consultant”)
114
+ not unacceptable to the Commission staff, to review and evaluate Simec’s ICFR and to provide
115
+ recommendations for improvements as may be needed. This review and evaluation shall include
116
+ an assessment of Simec’s policies and procedures involving the approval and recording of
117
+ current and historic transactions with related parties.
118
+
119
+ 9. The Consultant should not have provided legal, auditing, or other services to, or
120
+ have had any affiliations with, the Respondent during the two years prior to the issuance of this
121
+ Order.
122
+
123
+ 10. Respondent and the Consultant shall agree that the Consultant is an independent
124
+ third-party and not an employee or agent of the Respondent. In addition, Respondent and the
125
+ Consultant agree that no attorney-client relationship shall be formed between them.
126
+ 11. The Consultant shall be required to enter into an agreement that provides that for
127
+ the period of engagement and for a period of two years from completion of the engagement, the
128
+ Consultant shall not enter into any employment, consultant, attorney-client, auditing or other
129
+ professional relationship with Simec, or any of its present or former affiliates, directors, officers,
130
+ employees, or agents acting in their capacity. The agreement will also provide that the
131
+ Consultant will require that any firm with which he/she is affiliated or of which he/she is a
132
+ member, and any person engaged to assist the Consultant in performance of his/her duties under
133
+ this Order shall not, without prior written consent of the staff, enter into any employment,
134
+ consultant, attorney-client, auditing or other professional relationship with Simec, or any of its
135
+ present or former affiliates, directors, officers, employees, or agents acting in their capacity as
136
+ such for the period of the engagement and for a period of two years after the engagement.
137
+ 12. Respondent shall provide, within forty five (45) days of the issuance of this
138
+ Order, a copy of the engagement letter detailing the Consultant’s responsibilities to Melissa
139
+ Hodgman, Associate Director, Division of Enforcement, Securities and Exchange Commission,
140
+ 100 F St., NE, Washington, DC 20549-5553.
141
+ 13. Respondent shall cooperate fully with the Consultant, including providing the
142
+ Consultant with access to its files, books, records, and personnel as reasonably requested for the
143
+ above-referenced review, and obtaining the cooperation of respective employees or other
144
+ persons under Simec’s control.
145
+ 14. Respondent shall require the Consultant to report to the Commission staff on its
146
+ activities as the staff may request.
147
+ 15. Respondent shall require the Consultant, within thirty (30) days of being retained
148
+ (unless otherwise extended by the Commission staff for good cause), to provide Simec and the
149
+ Commission staff with (i) an estimate of the time needed to complete the review and analysis,
150
+ and (ii) a proposed deadline, subject to the approval of the Commission staff, for the preparation
151
+ of a written report describing the review and analysis (“Report”).
152
+ 16. Respondent shall require the Consultant to issue the Report by the approved
153
+ deadline and provide the Report simultaneously to Simec and the Commission staff. The Report
154
+ shall evaluate the adequacy of Simec’s ICFR, including controls over related party transactions,
155
+ and make recommendations for improvements, as may be needed.
156
+ 17. Within thirty (30) days of the issuance of the Report, Simec and the Consultant
157
+ shall advise the staff of the date by which Simec will adopt and implement any recommendations
158
+ in the Report. As to any recommendation that Simec considers to be, in whole or in part, unduly
159
+ burdensome or impractical, Simec may submit in writing to the Consultant and the Commission
160
+ staff a proposed alternative reasonably designed to accomplish the same objectives, within thirty
161
+ (30) days of the Consultant’s issuance of the Report. Simec shall then attempt in good faith to
162
+ reach an agreement with the Consultant relating to each disputed recommendation and request
163
+ that the Consultant reasonably evaluate any alternative proposed by Simec. If, upon evaluating
164
+ Simec’s proposal, the Consultant determines that the suggested alternative is reasonably
165
+ designed to accomplish the same objectives as the recommendations in question, then the
166
+ Consultant shall approve the suggested alternative and make the recommendations. If the
167
+ Consultant determines that the suggested alternative is not reasonably designed to accomplish the
168
+ same objectives, the Consultant shall reject Simec’s proposal. The Consultant shall inform
169
+ Simec and the Commission staff of the Consultant’s final determination concerning any
170
+ recommendation that Simec considers to be unduly burdensome or impractical within fourteen
171
+ (14) days after the conclusion of the discussion and evaluation by Simec and the Consultant.
172
+ Within fourteen (14) days after the final determination of any disputed recommendation, Simec
173
+ shall submit to the Consultant and the Commission staff the date by which Simec will adopt and
174
+ implement the recommendation, subject to the approval of the Commission staff.
175
+ 18. Respondent agrees that the Commission staff may extend any of the dates set
176
+ forth above at its direction.
177
+ 19. Within thirty (30) days after Simec notifies the Consultant that the
178
+ recommendations have been implemented, Respondent shall certify, in writing, compliance with
179
+ the undertakings set forth above. The certification shall identify the undertaking(s), provide
180
+ written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient
181
+ to demonstrate compliance. The Commission staff may make reasonable requests for further
182
+ evidence of compliance, and Respondent agrees to provide such evidence. The certification and
183
+ supporting material shall be submitted to Melissa Hodgman, Associate Director, with a copy to
184
+ the Office of Chief Counsel of the Enforcement Division, no later than sixty (60) days from the
185
+ date of the completion of the undertakings.
186
+ IV.
187
+ In view of the foregoing, the Commission deems it appropriate to impose the
188
+ sanctions agreed to in Respondent’s Offer.
189
+ Accordingly, it is hereby ORDERED that:
190
+ A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist
191
+ from committing or causing any violations and any future violations of Section 13(b)(2)(B)
192
+ of the Exchange Act and Rules 13a-15(a) and 13a-15(c), thereunder.
193
+ B. Respondent shall comply with the undertakings enumerated in Paragraphs 8-
194
+ 19.
195
+ C. Respondent shall, within 10 days of the entry of this Order, pay a civil money
196
+ penalty in the amount of $200,000 to the Securities and Exchange Commission for transfer to
197
+ the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If
198
+ timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.
199
+ Payment must be made in one of the following ways:
200
+ (1) Respondent may transmit payment electronically to the Commission, which
201
+ will provide detailed ACH transfer/Fedwire instructions upon request;
202
+ (2) Respondent may make direct payment from a bank account via Pay.gov
203
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
204
+ (3) Respondent may pay by certified check, bank cashier’s check, or
205
+ United States postal money order, made payable to the Securities and
206
+ Exchange Commission and hand-delivered or mailed to:
207
+ Enterprise Services Center
208
+ Accounts Receivable Branch
209
+ HQ Bldg., Room 181, AMZ-341
210
+ 6500 South MacArthur Boulevard
211
+ Oklahoma City, OK 73169
212
+ Payments by check or money order must be accompanied by a cover letter identifying
213
+ Respondent as a Respondent in these proceedings, and the file number of these proceedings; a
214
+ copy of the cover letter and check or money order must be sent to Melissa Hodgman, Associate
215
+ Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE,
216
+ Washington, DC 20549-5553.
217
+ D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be
218
+ treated as penalties paid to the government for all purposes, including all tax purposes. To
219
+ preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
220
+ Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any
221
+ award of compensatory damages by the amount of any part of Respondent’s payment of a civil
222
+ penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a
223
+ Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting
224
+ the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the
225
+ Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed
226
+ an additional civil penalty and shall not be deemed to change the amount of the civil penalty
227
+ imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a
228
+ private damages action brought against Respondent by or on behalf of one or more investors based
229
+ on substantially the same facts as alleged in the Order instituted by the Commission in this
230
+ proceeding.
231
+
232
+ By the Commission.
233
+
234
+
235
+ Brent J. Fields
236
+ Secretary
237
+
238
+
raw/aaer/2019/AAER-4019.txt ADDED
@@ -0,0 +1,500 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 85081 / February 8, 2019
8
+
9
+ ACCOUNTING AND AUDITING ENFORCEMENT
10
+ Release No. 4019 / February 8, 2019
11
+
12
+ ADMINISTRATIVE PROCEEDING
13
+ File No. 3-18994
14
+
15
+
16
+ In the Matter of
17
+
18
+ Joseph S. Amundsen, CPA,
19
+ Michael T. Remus, CPA, and
20
+ Michael Remus CPA,
21
+
22
+ Respondents.
23
+
24
+ ORDER INSTITUTING
25
+ ADMINISTRATIVE AND CEASE-AND-
26
+ DESIST PROCEEDINGS PURSUANT TO
27
+ SECTIONS 4C AND 21C OF THE
28
+ SECURITIES EXCHANGE ACT OF 1934
29
+ AND RULE 102(e) OF THE
30
+ COMMISSION’S RULES OF PRACTICE
31
+ AND NOTICE OF HEARING
32
+
33
+
34
+ I.
35
+
36
+ The Securities and Exchange Commission (“Commission”) deems it appropriate
37
+ that public administrative and cease-and-desist proceedings be, and hereby are, instituted
38
+ pursuant to Sections 4C(a)(2)1 and (a)(3) and 21C of the Securities Exchange Act of 1934
39
+ (“Exchange Act”) and Rule 102(e)(1)(ii) and (iii)2 of the Commission’s Rules of Practice
40
+
41
+ 1 Section 4C provides, in relevant part, that:
42
+
43
+ The Commission may censure any person, or deny, temporarily or permanently, to any
44
+ person the privilege of appearing or practicing before the Commission in any way, if that
45
+ person is found . . . (1) not to possess the requisite qualifications to represent others . . .
46
+ (2) to be lacking in character or integrity, or to have engaged in unethical or improper
47
+ professional conduct; or (3) to have willfully violated, or willfully aided and abetted the
48
+ violation of, any provision of the securities laws or the rules and regulations issued
49
+ thereunder.
50
+
51
+ 2 Rule 102(e)(1)(ii) and (iii) provide, in pertinent part, that:
52
+
53
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or
54
+ practicing before it . . . to any person who is found . . . to have engaged in unethical or
55
+ improper professional conduct; or to have willfully violated, or willfully aided and
56
+ abetted the violation of any provision of the Federal securities laws or the rules and
57
+ regulations thereunder.
58
+
59
+
60
+ 2
61
+ against Joseph S. Amundsen (“Amundsen”), Michael T. Remus (“Remus”) and Michael
62
+ Remus CPA (“Remus CPA” or the “Firm”) (collectively “the Respondents”).
63
+
64
+ II.
65
+
66
+ After an investigation, the Division of Enforcement alleges that:
67
+
68
+ SUMMARY
69
+
70
+ 1. These proceedings arise out of multiple violations of the auditor
71
+ independence requirements in audits conducted of seven broker-dealers in both 2015 and
72
+ 2016. Specifically, Amundsen, a certified public accountant who in 1983 was permanently
73
+ enjoined from appearing or practicing before the Commission in any way, served as the
74
+ Engagement Quality Reviewer (“EQR”) on fourteen audits of certain broker-dealers for
75
+ which Amundsen’s daughter was the financial and operations principal (“FINOP”). The
76
+ engagement partner on these audits, Remus, of Remus CPA, was aware of Amundsen’s
77
+ familial relationship and nevertheless engaged him as EQR on these fourteen audits, and
78
+ directed the Firm to issue audit reports for each of these clients that falsely stated that they
79
+ were conducted in accordance with standards of the Public Company Accounting
80
+ Oversight Board (“PCAOB”).
81
+
82
+ A. RESPONDENTS
83
+
84
+ 2. Respondent Amundsen, age 73, is a resident of Easton,
85
+ Pennsylvania. Amundsen has been a certified public accountant (“CPA”) in New York and
86
+ California since 2002. He has been registered with the Public Company Accounting
87
+ Oversight Board (“PCAOB”) since 2008.
88
+
89
+ 3. Respondent Remus, age 61, is a resident of Hamilton Square, New
90
+ Jersey. Remus has been a CPA in New Jersey and Missouri since 1988, and he is a member
91
+ of the American Institute of Certified Public Accountants. He has been registered with the
92
+ PCAOB since at least 2014. Remus is the sole proprietor of his accounting firm, Remus
93
+ CPA.
94
+
95
+ 4. Remus CPA is a two-person accounting firm based in Remus’s home
96
+ in Hamilton Square, New Jersey. In addition to Remus (who is the Firm’s sole proprietor),
97
+ Remus CPA employs Remus’ son. The Firm prepares audit and tax documents for
98
+ individuals, small companies and broker-dealers, including broker-dealers that Respondent
99
+ Amundsen and his daughter referred to Remus CPA for auditing services. Remus shares the
100
+ Firm’s income with his son, at his own discretion.
101
+
102
+
103
+
104
+
105
+
106
+ 3
107
+ B. THE COMMISSION’S LITIGATION HISTORY WITH AMUNDSEN
108
+
109
+ 5. In 1983, the Commission brought a civil action in the United States
110
+ District Court for the Northern District of California (the “Civil Action”) against
111
+ Amundsen, alleging violations of the federal securities laws stemming from, among other
112
+ things, Amundsen’s sign-off on an audit report for a public issuer that falsely stated that the
113
+ issuer’s financial statements fairly presented its financial positions and results of its
114
+ operations in conformity with generally accepted accounting principles, and that the audit
115
+ was conducted in accordance with generally accepted auditing standards. That same year,
116
+ Amundsen consented to an injunction, without admitting or denying the allegations of the
117
+ complaint, that permanently enjoined Amundsen from (a) committing or causing future
118
+ violations of the antifraud provisions of the federal securities laws, and (b) appearing or
119
+ practicing before the Commission in any way.
120
+
121
+ 6. On the basis of this injunction, in 1986, the California Board of
122
+ Accountancy, revoked Amundsen’s CPA license. Amundsen applied for reinstatement of
123
+ his California CPA license, and for a New York CPA license, both of which were issued in
124
+ 2002.
125
+
126
+ 7. Notwithstanding the 1983 injunction, from approximately 2003 to
127
+ 2011, Respondent Amundsen had a practice of auditing financial statements of broker-
128
+ dealers, which financial statements, together with his audit reports, were filed with the
129
+ Commission. In 2011, the Commission sought a contempt order in the Civil Action against
130
+ Respondent Amundsen for violating the injunction against appearing or practicing before
131
+ the Commission. The Court held that Amundsen “should never have begun the practice in
132
+ question [of auditing financial statements of broker-dealers destined for filing with the
133
+ Commission] in the first place,” and that his “narrow reading [of the injunction] was
134
+ unreasonable in light of the regulation, as it read then as well as now.” The Court, although
135
+ declining then to hold Amundsen in contempt, ordered him “to cease preparation of all
136
+ audit reports destined for filing with the Commission, including audit reports on financial
137
+ statements for broker dealers so destined for filing with the Commission.”
138
+
139
+ 8. In 2011, the Financial Industry Regulatory Authority (“FINRA”)
140
+ barred Respondent Amundsen from association with its member firms, based on his failure
141
+ to disclose his litigation history with the Commission, and his regulatory history with the
142
+ California State Board of Accountancy, on FINRA forms he submitted in order to serve as
143
+ FINOP.
144
+
145
+ 9. From approximately 2006 to 2010, while Respondent Amundsen
146
+ was working as a FINOP at various broker-dealers, his daughter apprenticed for him in his
147
+ FINOP work. In 2010, when Amundsen stopped serving as FINOP, his daughter became a
148
+ licensed FINOP. Since then, she has served as a FINOP at more than twenty broker-
149
+ dealers, including at least seven where Amundsen previously held that position.
150
+
151
+
152
+
153
+ 4
154
+ C. RESPONDENTS’ REGULATORY
155
+ OBLIGATIONS AND PROFESSIONAL STANDARDS
156
+
157
+ Regulatory Obligations
158
+
159
+ 10. Broker-dealers are required by Section 17(a)(1) of the Exchange Act
160
+ and Rule 17a-5(d) thereunder to file annual reports containing, among other things, a
161
+ financial report and a compliance report or an exemption report, as well as reports prepared
162
+ by an independent public accountant covering the financial report and the compliance
163
+ report or the exemption report. Under Rule 17a-5(f)(1), the independent public accountant
164
+ must be qualified and independent in accordance with Rule 2-01 of Regulation S-X.3
165
+ Pursuant to Exchange Act Rule 17a-5(g)(1) and (2), the independent public accountant
166
+ engaged by the broker-dealer must undertake to prepare its reports, in accordance with
167
+ standards of the PCAOB, based on an examination of the broker-dealers’ financial report,
168
+ and an examination of certain statements in the compliance report or a review of the
169
+ exemption report. Rule 17a-5(d)(1)(i)(C), furthermore, generally requires that broker-
170
+ dealers’ annual reports include reports prepared by an independent public accountant under
171
+ the engagement provisions of paragraph (g) of Rule 17a-5.
172
+
173
+ 11. Rule 2-01(b) of Regulation S-X provides, among other things, that
174
+ “the Commission will not recognize an accountant as independent, with respect to an audit
175
+ client, if the accountant is not … capable of exercising objective and impartial judgment.”
176
+ In weighing independence, “the Commission will consider all relevant circumstances,
177
+ including all relationships between the accountant and the audit client.”
178
+
179
+ 12. Rule 2-01(c)(2)(ii) of Regulation S-X specifically provides that
180
+ independence is impaired if “a close family member of a covered person in the [audit] firm
181
+ is in an accounting role or financial reporting oversight role at an audit client, or was in
182
+ such a role during any period covered by an audit.”
183
+
184
+ 13. Rule 2-01(f)(9) of Regulation S-X explicitly provides that a “close
185
+ family member” includes a nondependent child. Rule 2-01(f)(11) of Regulation S-X
186
+ provides that a “covered person” includes partners, principals, shareholders and employees
187
+ on the audit team. Rule 2-01(f)(3)(i) provides that an “accounting role” means a role in
188
+ which a person exercises, or is in a position to exercise, more than minimal influence over
189
+ the contents of accounting records, or over anyone who prepares them.
190
+
191
+ 14. Pursuant to its Auditing Standard (“AS”) 7 (currently titled AS
192
+ 1220) issued on July 28, 2009, the PCAOB requires an engagement quality review for each
193
+ audit engagement undertaken by the independent public auditor, and, among other things,
194
+ that the EQR have “competence, independence, integrity, and objectivity.” Under PCAOB
195
+ AS 1220, an EQR from outside the accounting firm is, for independence purposes,
196
+ considered an “audit partner” and “member of the audit team” under these definitions.
197
+
198
+
199
+ 3 17 C.F.R. § 210.2-01.
200
+
201
+
202
+ 5
203
+ 15. PCAOB Rule 3520, furthermore, also directly requires that “[a]
204
+ registered public accounting firm and its associated persons must be independent of the
205
+ firm’s audit client throughout the audit and professional engagement.” For this purpose the
206
+ PCAOB requires the firm and its associated persons to comply with “the independence
207
+ criteria set out in the rules and regulations of the Commission under the federal securities
208
+ laws.” PCAOB Auditing Standards (“AU”) 4 also state that “[i]n all matters relating to the
209
+ assignment, an independence in mental attitude is to be maintained by the auditor or
210
+ auditors,” AU § 150.02, and that independent auditors should “not only be independent in
211
+ fact,” but that they should “avoid situations that may lead outsiders to doubt their
212
+ independence.” AU § 220.03. In expressly allowing accounting firms to engage EQRs
213
+ from outside the firm, the PCAOB noted that in such circumstances, the firm would “likely
214
+ need to make additional inquiries to obtain necessary information about the individual’s
215
+ qualifications,” including information about the EQR’s independence. AS 1220.
216
+
217
+ 16. Each of the foregoing regulatory obligations were in effect and
218
+ applicable to Respondents at all relevant times.
219
+
220
+ Professional Standards
221
+
222
+ 17. Under PCAOB System of Quality Control for a CPA Firm’s
223
+ Accounting and Auditing Practice (“QC”), Section 20, auditors are required to maintain a
224
+ system providing it with reasonable assurance that its personnel comply with applicable
225
+ professional standards, “[b]ecause of the public interest in the services provided by and
226
+ reliance placed on the objectivity and integrity of, CPAs.” These quality control systems
227
+ are required to include assurances and monitoring of, among other things, the integrity,
228
+ objectivity, independence, impartiality and competence or auditor personnel. QC § 20.02.
229
+ Under QC § 20.09, “[p]olicies and procedures should be established to provide the firm
230
+ with reasonable assurance that personnel maintain independence (in fact and appearance) in
231
+ all required circumstances.” An auditing firm is required to have policies and procedures
232
+ relating to personnel that maintain the quality of the firm’s work, which “ultimately
233
+ depends on the integrity, objectivity, intelligence, competence, experience, and motivation
234
+ of personnel who perform, supervise, and review the work.” QC § 20.12. Finally, quality
235
+ control systems for auditing firms require ongoing monitoring of the various elements to
236
+ provide reasonable assurance that the “elements of quality control … are suitably designed
237
+ and are being effectively applied.” QC § 20.20.
238
+
239
+ 18. Auditing standards also require that an auditor plan and perform his
240
+ or her work with due professional care. AU § 230.02. Due professional care concerns
241
+ “what the independent auditor does and how well he or she does it,” requiring the auditor
242
+ to, among other things, exercise auditing skills “with ‘reasonable care and diligence’ (that
243
+ is, with due professional care).” AU § 230.04-.05.
244
+
245
+ 4 The PCAOB adopted as interim standards, on a transitional basis, the auditing standards
246
+ promulgated by the Auditing Standards Board of the American Institute of Certified Public
247
+ Accountants as in existence on April 16, 2003, to the extent not superseded or amended by the
248
+ PCAOB. See PCAOB Rule 3200T, Interim Auditing Standards. Standards identified by the letters
249
+ “AU” are such standards
250
+
251
+
252
+ 6
253
+
254
+ 19. Each of the foregoing professional standards were in effect and
255
+ applicable to Respondents at all relevant times.
256
+
257
+ D. AMUNDSEN’S EQR WORK ON BROKER-DEALER AUDITS
258
+
259
+ 20. In 2015 and again in 2016, Remus and Remus CPA engaged
260
+ Amundsen to be the EQR on a total of 28 year-end audits of at least sixteen broker-dealers
261
+ for the fiscal years ended December 31, 2014, and December 31, 2015. Amundsen’s
262
+ daughter was the FINOP for seven of these broker-dealers. Remus and Remus CPA thus
263
+ engaged Amundsen to be EQR on a total of fourteen audits of broker-dealer clients for
264
+ these two audit periods where the FINOP was Amundsen’s daughter. Remus and Remus
265
+ CPA received fees in connection with these fourteen audits in an amount not less than
266
+ $35,000, and Amundsen received fees for his EQR services on these fourteen audits in an
267
+ amount not less than $7,000.
268
+
269
+ 21. As FINOP for these seven broker-dealers, Amundsen’s daughter had
270
+ final responsibility for their financial reports and record-keeping obligations, including
271
+ reconciliation of bank and brokerage statements, calculation of net capital, signing and
272
+ filing FOCUS reports and supplemental statement of income reports.
273
+
274
+ 22. Amundsen and his daughter maintained a close and mutually
275
+ supportive professional and business relationship of long-standing, in addition to their close
276
+ familial relationship, before and during Amundsen’s EQR work for Remus CPA. For
277
+ example:
278
+
279
+ a. Amundsen’s daughter apprenticed for Amundsen in his
280
+ FINOP business as a bookkeeper and accountant for
281
+ approximately four years before 2010.
282
+
283
+ b. When Amundsen’s daughter became a FINOP, Amundsen
284
+ regularly conferred with her in her transition into the
285
+ position, and provided informal assistance to her. In at least
286
+ one instance, Amundsen unsuccessfully attempted to prevent
287
+ a broker-dealer from terminating his daughter as FINOP by
288
+ threatening to quit as the tax preparer for the broker-dealer’s
289
+ president.
290
+
291
+ c. At one broker-dealer (“Broker-Dealer A”), for which
292
+ Amundsen was acting as EQR and his daughter was FINOP,
293
+ Amundsen personally assisted the broker-dealer in a 2015
294
+ SEC examination, and also personally intervened to
295
+ negotiate his daughter’s fees.
296
+
297
+ d. At another broker-dealer for which Amundsen was EQR and
298
+ his daughter was FINOP (and for which Amundsen had
299
+
300
+
301
+ 7
302
+ previously acted as FINOP) (“Broker-Dealer B”), Amundsen
303
+ remained personally involved in resolving operational and
304
+ accounting issues.
305
+
306
+ e. Amundsen’s daughter has regularly referred tax preparation
307
+ clients to Amundsen for his side business as a tax preparer.
308
+
309
+ 23. At the time Respondents Remus and Remus CPA engaged
310
+ Amundsen as EQR, Remus knew of the father-daughter relationship between Respondent
311
+ Amundsen and his daughter, and that Amundsen’s daughter was the FINOP for seven of
312
+ the broker-dealer clients that Remus CPA was auditing, and for which he had engaged
313
+ Amundsen to act as EQR.
314
+
315
+ 24. Respondents each knew, or recklessly and/or unreasonably
316
+ disregarded, that Amundsen’s relationship with his daughter impaired their independence
317
+ in connection with the audits they participated in, and for the audit reports they signed and
318
+ participated in, for the broker-dealer clients for which Amundsen’s daughter was FINOP.
319
+
320
+ 25. Remus and Remus CPA prepared a letter for Amundsen to sign, and
321
+ Amundsen signed it, stating that Amundsen was aware of the independence standards, that
322
+ Amundsen was independent with respect to eleven broker-dealers named in the letter
323
+ (including six named broker-dealers where Amundsen’s daughter was currently the
324
+ FINOP), and that he had “no relationships that may be reasonably thought to bear on my
325
+ independence.” Remus and Amundsen both knew, or recklessly or unreasonably
326
+ disregarded, that these assertions of Amundsen’s independence were false.
327
+
328
+ 26. For each audit engagement in which Amundsen served as EQR for
329
+ Remus and Remus CPA, he participated in pre-audit engagement team discussions about
330
+ identifying and addressing significant risks; completed an extensive checklist for each audit
331
+ of all the items he reviewed and approved, including checking net capital calculations for
332
+ each broker-dealer; proofreading the underlying financial statements, making corrections
333
+ and fixing typographical errors as necessary; and approved the audit with his signature.
334
+ Following Amundsen’s approval, Respondent Remus CPA released the audit report to its
335
+ broker-dealer clients for inclusion in their annual filings with the Commission.
336
+
337
+ 27. Remus and Remus CPA submitted purportedly independent public
338
+ accountant’s reports for these fourteen audits that falsely represented that their audits were
339
+ conducted in accordance with the standards of the PCAOB. In turn, their broker-dealer
340
+ clients submitted fourteen statements with their annual reports for 2015 and 2016 that
341
+ falsely represented that Remus CPA had conducted its audits in accordance with the
342
+ standards of the PCAOB.
343
+
344
+
345
+
346
+ 8
347
+ E. VIOLATIONS
348
+
349
+ 28. As a result of the conduct described above, Respondent Remus CPA
350
+ willfully violated Exchange Act Rules 17a-5(g) and (i) by conducting fourteen audits in
351
+ 2015 and 2016 for the 2014 and 2015 audit periods that were not in accordance with the
352
+ standards of the PCAOB, and by causing broker-dealers to file reports in connection with
353
+ each that falsely represented that they were conducted in accordance with standards of the
354
+ PCAOB.
355
+
356
+ 29. As a result of the conduct described above, Respondents Remus and
357
+ Amundsen willfully aided and abetted, and/or caused, the foregoing violations of Rules
358
+ 17a-5(g) and (i) by Remus CPA.
359
+
360
+ 30. As a result of the conduct described above, Respondents Remus
361
+ CPA, Remus and Amundsen caused at least seven broker-dealers to violate Section 17(a)
362
+ of the Exchange Act and Rule 17a-5(f) for the 2014 and 2015 audit periods, when these
363
+ broker-dealers, based on the false representations in the Firm’s independent public
364
+ accountant’s report, submitted annual reports to the Commission including reports by an
365
+ accountant who was not independent.
366
+
367
+ 31. As a result of the conduct described above, Respondents Remus
368
+ CPA and Remus engaged in improper professional conduct within the meaning of Section
369
+ 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice,
370
+ by: (i) not maintaining independence in connection with the fourteen audits and
371
+ professional engagement periods for the seven broker-dealers for which Amundsen’s
372
+ daughter was FINOP, and Remus CPA engaged Amundsen as the EQR in violation of the
373
+ Commission’s independence requirements; (ii) failing to have policies and procedures that
374
+ provide reasonable assurance that personnel maintain independence, integrity, and
375
+ objectivity, and that such policies were monitored; and (iii) failing to exercise due
376
+ professional care when it engaged Respondent Amundsen as EQR on at least fourteen
377
+ audits where his daughter prepared the financial statements subject to the audit.
378
+
379
+ 32. As a result of the conduct described above, Respondent Amundsen
380
+ engaged in improper professional conduct within the meaning of Section 4C(a)(2) of the
381
+ Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, by acting as EQR
382
+ in connection with the fourteen audits and professional engagement periods for the seven
383
+ broker-dealers for which his daughter was FINOP, in violation of the Commission’s
384
+ independence requirements.
385
+
386
+ 33. As a result of the conduct described above, Respondents Remus and
387
+ Amundsen willfully aided and abetted violations of Exchange Act Rules 17a-5(g) and (i)
388
+ and are subject to relief pursuant to Section 4C(a)(3) of the Exchange Act and Rule
389
+ 102(e)(1)(iii) of the Commission’s Rules of Practice.
390
+
391
+
392
+
393
+ 9
394
+ III.
395
+
396
+ In view of the allegations made by the Division of Enforcement, the Commission
397
+ deems it necessary and appropriate in the public interest that public administrative and
398
+ cease-and-desist proceedings be instituted to determine:
399
+
400
+ A. Whether the allegations set forth in Section II hereof are true and, in
401
+ connection therewith, to afford Respondents an opportunity to establish any defenses to such
402
+ allegations;
403
+
404
+ B. Whether, pursuant to Section 21C of the Exchange Act, Respondents should
405
+ be ordered to cease and desist from committing or causing violations of and any future
406
+ violations of Section 17(a) of the Exchange Act and Rule 17a-5 thereunder; whether
407
+ Respondents should be ordered to pay a civil penalty pursuant to Section 21B(a) of the
408
+ Exchange Act; and whether Respondents should be ordered to pay disgorgement pursuant to
409
+ Sections 21B(e) and 21C(e) of the Exchange Act; and;
410
+
411
+ C. Whether, pursuant to Section 4C of the Exchange Act and Rule 102(e) of the
412
+ Commission’s Rules of Practice, Respondents should be censured or denied, temporarily or
413
+ permanently, the privilege of appearing or practicing before the Commission in any way.
414
+
415
+ IV.
416
+
417
+ IT IS ORDERED that a public hearing before the Commission for purposes of
418
+ taking evidence on the questions set forth in Section III hereof shall be convened not earlier
419
+ than 30 days and not later than 60 days from service of this Order at a time and place to be
420
+ fixed by further order of the Commission, pursuant to Rule 110 of the Commission’s Rules
421
+ of Practice, 17 C.F.R. § 201.110.
422
+
423
+ IT IS FURTHER ORDERED that Respondents shall file an Answer to the
424
+ allegations contained in this Order within twenty (20) days after service of this Order, as
425
+ provided by Rule 220 of the Commission’s Rules of Practice, 17 C.F.R. § 201.220.
426
+
427
+ IT IS FURTHER ORDERED that the Division of Enforcement and Respondents
428
+ shall conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of
429
+ Practice, 17 C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The
430
+ parties may meet in person or participate by telephone or other remote means; following
431
+ the conference, they shall file a statement with the Office of the Secretary advising the
432
+ Commission of any agreements reached at said conference. If a prehearing conference
433
+ was not held, a statement shall be filed with the Office of the Secretary advising the
434
+ Commission of that fact and of the efforts made to meet and confer.
435
+
436
+ If any Respondent fails to file the directed Answer, or fails to appear at a hearing or
437
+ conference after being duly notified, the Respondent may be deemed in default and the
438
+ proceedings may be determined against him or it upon consideration of this Order, the
439
+ allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f)
440
+
441
+
442
+ 10
443
+ and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f),
444
+ 201.221(f) and 201.310.
445
+
446
+ This Order shall be served forthwith upon Respondents by any means permitted by
447
+ the Commission’s Rules of Practice.
448
+
449
+ Attention is called to Rule 151(b) and (c) of the Commission’s Rules of Practice,
450
+ 17 C.F.R. § 201.151(b) and (c), providing that when, as here, a proceeding is set before
451
+ the Commission, all papers (including those listed in the following paragraph) shall be
452
+ filed with the Office of the Secretary and all motions, objections, or applications will be
453
+ decided by the Commission. The Commission requests that an electronic courtesy copy of
454
+ each filing should be emailed to APFilings@sec.gov in PDF text-searchable format. Any
455
+ exhibits should be sent as separate attachments, not a combined PDF.
456
+
457
+ The Commission finds that it would serve the interests of justice and not result in
458
+ prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of
459
+ Practice, 17 C.F.R. § 201.100(c), that notwithstanding any contrary reference in the Rules
460
+ of Practice to filing with or disposition by a hearing officer, all filings, including those
461
+ under Rules 210, 221, 222, 230, 231, 232, 233, and 250 of the Commission’s Rules of
462
+ Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, 231, 232, 233, and 250, shall be directed
463
+ to and, as appropriate, decided by the Commission.
464
+
465
+ The Commission finds that it would serve the interests of justice and not result in
466
+ prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of
467
+ Practice, 17 C.F.R. § 201.100(c), that the Commission shall issue a decision on the basis
468
+ of the record in this proceeding, which shall consist of the items listed at Rule 350(a) of
469
+ the Commission’s Rules of Practice, 17 C.F.R. § 201.350(a), and any other document or
470
+ item filed with the Office of the Secretary and accepted into the record by the
471
+ Commission. The provisions of Rule 351 of the Commission’s Rules of Practice, 17
472
+ C.F.R. § 201.351, relating to preparation and certification of a record index by the Office
473
+ of the Secretary or the hearing officer are not applicable to this proceeding.
474
+
475
+ The Commission will issue a final order resolving the proceeding after one of the
476
+ following: (A) the completion of post-hearing briefing in a proceeding where the public
477
+ hearing has been completed; (B) the completion of briefing on a motion for a ruling on the
478
+ pleadings or a motion for summary disposition pursuant to Rule 250 of the Commission’s
479
+ Rules of Practice, 17 C.F.R. § 201.250, where the Commission has determined that no
480
+ public hearing is necessary; or (C) the determination that a party is deemed to be in default
481
+ under Rule 155 of the Commission’s Rules of Practice, 17 C.F.R. § 201.155 and no public
482
+ hearing is necessary.
483
+
484
+
485
+
486
+ 11
487
+ In the absence of an appropriate waiver, no officer or employee of the Commission
488
+ engaged in the performance of investigative or prosecuting functions in this or any factually
489
+ related proceeding will be permitted to participate or advise in the decision of this matter,
490
+ except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is
491
+ not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it
492
+ is not deemed subject to the provisions of Section 553 delaying the effective date of any
493
+ final Commission action.
494
+
495
+ By the Commission.
496
+
497
+
498
+
499
+ Brent J. Fields
500
+ Secretary
raw/aaer/2019/AAER-4020.txt ADDED
@@ -0,0 +1,598 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+ UNITED STATES OF AMERICA
4
+ Before the
5
+ SECURITIES AND EXCHANGE COMMISSION
6
+
7
+ SECURITIES EXCHANGE ACT OF 1934
8
+ Release No. 85115 / February 13, 2019
9
+
10
+ ACCOUNTING AND AUDITING ENFORCEMENT
11
+ Release No. 4020 / February 13, 2019
12
+
13
+ ADMINISTRATIVE PROCEEDING
14
+ File No. 3-18997
15
+
16
+
17
+ In the Matter of
18
+
19
+ DELOITTE TOUCHE TOHMATSU
20
+ LLC,
21
+ FUTOMICHI AMANO, and
22
+ YUJI ITAGAKI,
23
+
24
+ Respondents.
25
+ ORDER INSTITUTING PUBLIC
26
+ ADMINISTRATIVE AND CEASE-AND-
27
+ DESIST PROCEEDINGS PURSUANT TO
28
+ SECTIONS 4C AND 21C OF THE
29
+ SECURITIES EXCHANGE ACT OF 1934
30
+ AND RULE 102(e) OF THE COMMISSION’S
31
+ RULES OF PRACTICE, MAKING FINDINGS,
32
+ AND IMPOSING REMEDIAL SANCTIONS
33
+ AND A CEASE-AND-DESIST ORDER
34
+
35
+
36
+ I.
37
+
38
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that
39
+ public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to
40
+ Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule
41
+ 102(e)(1)(ii) of the Commission’s Rules of Practice,2 against Deloitte Touche Tohmatsu LLC
42
+ (“Deloitte Japan”), Futomichi Amano (“Amano”), and Yuji Itagaki (“Itagaki’) (collectively
43
+ “Respondents”).
44
+
45
+ 1 Section 4C provides, in relevant part, that:
46
+
47
+ The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege
48
+ of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess
49
+ the requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have
50
+ engaged in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided
51
+ and abetted the violation of, any provision of the securities laws or the rules and regulations thereunder.
52
+
53
+ 2 Rule 102(e)(1)(ii) provides, in pertinent part, that:
54
+
55
+ The Commission may censure any person, or deny, temporarily or permanently, the privilege of appearing or
56
+ practicing before it . . . to any person who is found . . . to have engaged in unethical or improper professional
57
+ conduct.
58
+
59
+
60
+ 2
61
+
62
+ II.
63
+
64
+ In anticipation of the institution of these proceedings, Respondents have submitted Offers
65
+ of Settlement (“Offers”), which the Commission has determined to accept. Solely for the
66
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
67
+ Commission, or to which the Commission is a party, and without admitting or denying the
68
+ findings herein, except as to the Commission’s jurisdiction over them and the subject matter of
69
+ these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting
70
+ Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the
71
+ Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice,
72
+ Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as
73
+ set forth below.
74
+
75
+ III.
76
+
77
+ On the basis of this Order and Respondents’ Offers, the Commission finds3 that:
78
+
79
+ A. SUMMARY
80
+
81
+ This matter arises from violations of the independence rules regarding personal financial
82
+ relationships between certain covered persons in the firm of Deloitte Japan and its audit client,
83
+ Company A, during Company A’s 2013 through 2016 fiscal years. These personal financial
84
+ relationships included personal accounts at a banking subsidiary of Company A that carried
85
+ balances exceeding the amount insured by the Deposit Insurance Corporation of Japan, in
86
+ violation of Rule 2-01(c)(1)(ii)(B) of Regulation S-X, among other things. As detailed below,
87
+ through their acts and omissions in this matter, all three respondents engaged in improper
88
+ professional conduct and were a cause of certain reporting violations by Company A. Deloitte
89
+ Japan also violated, and Amano and Itagaki were a cause of Deloitte Japan’s violations of, Rule
90
+ 2-02(b) of Regulation S-X.
91
+
92
+ B. RESPONDENTS
93
+
94
+ Deloitte Touche Tohmatsu LLC (“Deloitte Japan”) is an audit firm headquartered in
95
+ Tokyo, Japan. Since 2004, Deloitte Japan has been registered with the Public Company
96
+ Accounting Oversight Board (“PCAOB”), pursuant to the Sarbanes Oxley Act of 2002, to
97
+ prepare and issue audit reports. Deloitte Japan is an affiliate of Deloitte Tohmatsu LLC, which
98
+ was at all relevant times a member firm of Deloitte Touche Tohmatsu Limited, a U.K. private
99
+ company limited by guarantee, which is a multinational network of professional services firms.
100
+
101
+ Futomichi Amano, a resident of Tokyo, Japan, served as Deloitte Japan’s Chief
102
+ Executive Officer (“CEO”) from November 2010 to July 2015. Amano is licensed by the
103
+ Japanese Institute of Certified Public Accountants.
104
+
105
+ 3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other
106
+ person or entity in this or any other proceeding.
107
+
108
+
109
+ 3
110
+
111
+ Yuji Itagaki, a resident of Tokyo, Japan, served as Deloitte Japan’s acting Reputation
112
+ and Risk Leader (“RRL”)4 from January 2015 to July 2015, its RRL from July 2015 to August
113
+ 2015, and its Director of Independence (“DOI”) from May 2015 to August 2015. Itagaki is
114
+ licensed by the Japanese Institute of Certified Public Accountants.
115
+
116
+ C. RELEVANT ISSUER
117
+
118
+ Company A is a financial holding company headquartered in Tokyo, Japan. Company A
119
+ files annual reports on Form 20-F with the Commission as a foreign private issuer, and has
120
+ American Depositary Receipts listed on the New York Stock Exchange. At all relevant times,
121
+ Deloitte Japan has served as Company A’s external auditor.
122
+
123
+ D. FACTS
124
+
125
+ 1. The Nature of the Independence Violations
126
+
127
+ The subject auditor independence violations primarily relate to bank accounts held by
128
+ numerous Deloitte Japan partners and/or audit engagement team members5 at a banking
129
+ subsidiary of Company A (“Bank A”) that, at certain times, carried balances exceeding the
130
+ amount insured by the Deposit Insurance Corporation of Japan in violation of Rule 2-
131
+ 01(c)(1)(ii)(B) of Regulation S-X. That rule provides: “[a]n accountant is not independent …
132
+ when any covered person in the firm, or any of his or her immediate family members has …
133
+ [a]ny savings, checking, or similar account at a bank, savings and loan, or similar institution that
134
+ is an audit client, if the account has a balance that exceeds the amount insured by the Federal
135
+ Deposit Insurance Corporation or any similar insurer ….”6
136
+
137
+ (a) March 2014 Independence Inspection Uncovers Independence
138
+ Violations
139
+
140
+ In February 2014, Amano was selected for an independence inspection as part of Deloitte
141
+ Japan’s periodic independence inspections for covered persons. As part of this inspection,
142
+ Amano returned materials in March 2014 indicating that from September through November
143
+ 2013, he had a bank account balance at Bank A that exceeded the amount insured by the Deposit
144
+ Insurance Corporation of Japan.7 This violation was due, in part, to a lump-sum deposit of
145
+
146
+ 4 Deloitte Japan’s Office of Independence is part of its Reputation and Risk Office (“RRO”), which is led by its
147
+ RRL.
148
+
149
+ 5 Members of the audit engagement team, partners in the office in which the lead audit engagement partner
150
+ practices, and individuals in the chain of command are “covered persons” as defined by Rule 2 -01(f)(11) of
151
+ Regulation S-X. In 2015, there were approximately 1,000 covered persons at Deloitte Japan with respect to
152
+ Company A.
153
+
154
+ 6 The insurance limit of the Deposit Insurance Corporation of Japan is 10 million yen (which averaged
155
+ approximately $97,000, based on conversion rates during the relevant time).
156
+
157
+ 7 Prior to this inspection, in December 2013, Amano had indicated he had no independence violations in a
158
+
159
+
160
+ 4
161
+ partnership compensation from Deloitte Japan into Amano’s account at Bank A in late 2013 that
162
+ alone exceeded the deposit insurance limit. In providing the materials to the Office of
163
+ Independence, Amano acknowledged his excessive bank account balance and stated he would
164
+ change the bank account for partnership distributions.
165
+
166
+ Even though the facts about Amano’s independence violation were known to staff in the
167
+ Office of Independence, including the then-DOI, as early as March 2014, the staff did not fully
168
+ appreciate whether this violation by Deloitte Japan’s CEO could affect the independence of the
169
+ audits conducted by Deloitte Japan. Accordingly, this violation was not promptly reported at the
170
+ time to the audit engagement team. As such, even though the then-DOI and Office of
171
+ Independence were aware of the violation, it was not adequately communicated to Company A
172
+ until July 2015, as described below.
173
+
174
+ Despite the acknowledgement of this violation in March 2014, the Office of
175
+ Independence did not complete Amano’s inspection until November 2014, due in part to
176
+ inadequate staffing in the Office of Independence. In March 2014, Deloitte Japan’s Office of
177
+ Independence was staffed by approximately 7.8 full time equivalents (compared with 40.5 in
178
+ October 2018) and the then-DOI spent less than half of his time on independence matters.
179
+ During the eight-month period between the discovery of the violation and the completion of the
180
+ inspection report, no corrective actions were taken by Deloitte Japan. At the conclusion of the
181
+ inspection, the then-DOI emailed a reprimand to Amano.
182
+
183
+ (b) Disclosure of Independence Violations
184
+
185
+ Disclosures to the Audit Engagement Team: In November 2014, the Office of
186
+ Independence communicated several violations, including that of Amano, to the audit
187
+ engagement team. Pursuant to then-existing Deloitte Japan policy, the names of violators were
188
+ not provided to the engagement team and were only identified by the category of “covered
189
+ persons” to which they belonged. Initial communications from the Office of Independence
190
+ correctly identified Amano as being in the chain of command with respect to the audit of
191
+ Company A. Additional communications between the Office of Independence and audit
192
+ engagement team personnel confused the issue, leading the audit engagement team to incorrectly
193
+ conclude that the violation was by a partner in the office and not by an individual in the chain of
194
+ command.
195
+
196
+ Disclosures to Company A: In January 2015, Deloitte Japan sent a semi-annual PCAOB
197
+ Rule 3526 letter to the Company A Audit Committee that identified several personal financial
198
+ relationship violations, including that of Amano, but did not identify the violators by name.8 The
199
+ letter also wrongly stated that Amano’s (still anonymous) violation was not committed by a
200
+ member of Deloitte Japan’s chain of command based on the confused communications and
201
+ incorrect conclusion referenced above. Moreover, the existence of this violation by Amano was
202
+
203
+ monthly independence confirmation covering the period of October 2013.
204
+
205
+ 8 PCAOB Rule 3526 describes communications that the auditor must make to client Audit Committees
206
+ concerning all relationships that may reasonably be thought to bear on independence.
207
+
208
+
209
+ 5
210
+ not adequately disclosed to Company A until July 2015, including through a second semi-annual
211
+ PCAOB Rule 3526 letter in July 2015.
212
+
213
+ (c) Additional Violations Discovered
214
+
215
+ During the first half of 2015, Deloitte Japan identified other personal financial
216
+ relationship violations by Amano. Deloitte Japan voluntarily disclosed Amano’s violations and
217
+ other violations then known to Deloitte Japan to the Commission in July 2015. After this
218
+ voluntary disclosure to the Commission, Deloitte Japan hired a Japanese law firm to conduct an
219
+ independent internal investigation into Amano’s violations and the causes of those violations.
220
+ Deloitte Japan also conducted extensive additional further testing to determine whether other
221
+ violations existed. Overall, at various times between 2012 and 2016, eighty-eight (88) Deloitte
222
+ Japan covered persons had personal financial relationship violations with respect to Company A.
223
+ These individuals notably included Amano, as discussed above, and its RRL and DOI Itagaki,
224
+ who were not members of the audit engagement team, but were otherwise both covered persons
225
+ and had independence violations in successive years wherein Deloitte Japan asserted that it was
226
+ independent of Company A.
227
+
228
+ Several of the violations of Rule 2-01(c)(1)(ii)(B) were caused by Deloitte Japan’s
229
+ special distributions of year-end partnership compensation directly into personal accounts held
230
+ by covered persons at Bank A in late 2013 and late 2014. Although Deloitte Japan’s Office of
231
+ Independence knew that the 2013 payments caused at least two violations, the firm repeated this
232
+ same process in 2014, causing additional violations. CEO Amano was among those who twice
233
+ received partnership compensation into his Bank A account that caused a violation of personal
234
+ financial relationship rules with respect to audit client Company A.
235
+
236
+ Deloitte Japan’s investigations into these issues also uncovered multiple additional
237
+ personal financial relationship violations by Deloitte Japan covered persons, including credit
238
+ card balances with a subsidiary of Company A in violation of Rule 2-01(c)(1)(ii)(E) of
239
+ Regulation S-X, which prohibits “[a]ny aggregate outstanding credit card balance owed to a
240
+ lender that is an audit client that is not reduced to $10,000 or less on a current basis ….” During
241
+ those investigations, Itagaki was found to have such a balance.
242
+
243
+ 2. Deficiencies in Quality Controls Concerning Independence
244
+
245
+ Deloitte Japan’s system of quality controls did not provide reasonable assurance that the
246
+ firm and its covered persons maintained independence from its audit clients. These deficiencies
247
+ included:
248
+
249
+ Systemic deficiencies: In late 2013, Deloitte Japan initiated a practice of paying firm
250
+ partners their special year-end partnership draws via lump sum payments deposited directly into
251
+ their personal bank accounts, including accounts at Bank A. These payments caused the account
252
+ balances of certain partners to exceed the Japanese insured deposit limit of 10 million yen in
253
+ violation of Rule 2-01(c)(1)(ii)(B) and, in certain cases, the size of the payment alone exceeded
254
+ the limit. Although Deloitte Japan warned its partners to make sure that these special
255
+ distributions did not cause violations of the deposit insurance limits, those warnings were
256
+ insufficient to avoid violations from the 2013 payments, and the firm did not take any corrective
257
+
258
+ 6
259
+ action before the second round of payments in late 2014 caused additional violations.
260
+
261
+ Inadequate supervision, training, and staffing: From at least 2012 to 2015, Deloitte
262
+ Japan’s RRO did not adequately supervise or staff its Office of Independence. Acting RRL and
263
+ RRL Itagaki did not supervise the independence functions of the Office of Independence, and the
264
+ firm’s DOI during most of the subject period served on only a part-time basis, spending the
265
+ majority of his time on audit work. Additionally, certain personnel in the Office of
266
+ Independence had misconceptions about the provisions of Regulation S-X as it related to
267
+ insurance deposit limits, which contributed to the inadequacy of Deloitte Japan’s response to the
268
+ initial Amano violation. In the aftermath of its investigations into the firm’s independence
269
+ issues, Deloitte Japan more than tripled the staffing of its Office of Independence.
270
+
271
+ An internal policy of not disclosing independence violators by name: During the
272
+ subject period, Deloitte Japan had an internal policy of not disclosing the names of independence
273
+ violators, either internally or in communications with its audit clients and others. This policy led
274
+ to miscommunications and difficulties in correcting and disclosing independence violations,
275
+ including confusion regarding the initial violation by Amano. Deloitte Japan has since changed
276
+ its policy and now identifies violators by name.
277
+
278
+ E. LEGAL ANALYSIS
279
+
280
+ 1. The Financial Relationship Provisions of Regulation S-X
281
+
282
+ The basic elements of an auditor independence violation in the financial-relationship
283
+ context are (1) an independence-impairing relationship; (2) existing during all or part of the
284
+ period covered by the audit, or the period of the audit work, or both; followed by (3) issuance of
285
+ an audit report asserting the auditor’s independence from the client. See Rule 2-01(c)(1) of
286
+ Regulation S-X.9
287
+
288
+ The insured deposit limit violations and the other personal financial relationship
289
+ violations with subsidiaries of Deloitte Japan audit client Company A, during periods covered by
290
+ Deloitte Japan’s audit reports asserting its independence from Company A, fall within
291
+ Regulation S-X’s prohibition.
292
+
293
+ 2. Violation of, and Causing Violation of, Rule 2-02(b) of Regulation S-X
294
+
295
+ Each time Deloitte Japan signed an audit report for Company A, where either the period
296
+ covered by the audit or the period of the audit work (or both) overlapped with personal financial
297
+
298
+ 9 Rule 2-01(c)(3) provides:
299
+
300
+ An accountant is not independent if, at any point during the audit and professional engagement period, the
301
+ accountant has a direct financial interest or a material indirect financial interest in the accountant’s audit
302
+ client, such as … [a]ny savings, checking, or similar account at a bank, savings and loan, or similar
303
+ institution that is an audit client, if the account has a balance that exceeds the amount insured by the [FDIC]
304
+ or any similar insurer … [or] [a]ny aggregate outstanding credit card balance owed to a lender that is an
305
+ audit client that is not reduced to $10,000 or less on a current basis. . . .
306
+
307
+
308
+ 7
309
+ relationship violations by its covered persons, Deloitte Japan directly violated Rule 2-02(b) of
310
+ Regulation S-X. See Rule 2-02(b) (requiring accountant’s report to “state whether the audit was
311
+ made in accordance with generally accepted auditing standards” [“GAAS”] which, in turn,
312
+ require auditors to maintain independence — both in fact and appearance — from their audit
313
+ clients.10). Thus, the Deloitte Japan year-end audit reports for Company A’s 2013 through 2016
314
+ fiscal years incorrectly stated that they were performed in accordance with GAAS.
315
+
316
+ Further, Amano and Itagaki were a cause of Deloitte Japan’s violations of Rule 2-02(b)
317
+ of Regulation S-X as a result of their respective violations of the personal financial relationship
318
+ provisions of Regulation S-X, which were a cause of Deloitte Japan’s lack of independence
319
+ during this period.
320
+
321
+ 3. Improper Professional Conduct
322
+
323
+ Deloitte Japan’s failure to meet the requirements of Rule 2-01 of Regulation S-X
324
+ described above constitutes improper professional conduct under Section 4C of the Exchange
325
+ Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, which provide, in pertinent
326
+ part, that the Commission may “censure a person or deny, temporarily or permanently, the
327
+ privilege of appearing or practicing before it... to any person who is found... to have engaged in...
328
+ improper professional conduct.” Such conduct can be established by, inter alia, negligence in
329
+ the form of either “a single instance of highly unreasonable conduct … in circumstances
330
+ [warranting] heightened scrutiny”11 or of “repeated instances of unreasonable conduct...” See
331
+ Rule 102(e)(1)(iv)(B)(1) and (2).
332
+
333
+ Further, Amano and Itagaki both engaged in improper professional conduct by violating
334
+ the personal financial relationship provisions of Regulation S-X with respect to Company A, and
335
+ failing to correct or disclose their above-described violations in a timely manner.
336
+
337
+ 4. Causing Company A��s Annual Report Violations
338
+
339
+ Each time audit reports were filed with Company A’s annual reports on Form 20-F for
340
+ the fiscal years ended March 31, 2013, March 31, 2014, March 31, 2015, and March 31, 2016,
341
+ Company A violated Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, which
342
+ requires such annual reports to contain financial statements audited by “independent public
343
+
344
+ 10 Securities Act Release No. 33-8422 (May 24, 2004) states that reference to GAAS are to mean PCAOB
345
+ standards. Pursuant to PCAOB Professional Standards Rule 3200T, the PCAOB adopted certain preexisting
346
+ generally accepted auditing standards, as described in AICPA SAS No. 95. Those standards include AU 161 and
347
+ 220. PCAOB Rule 3500T also explicitly requires compliance with the independence standards described in
348
+ AICPA’s Code of Professional Conduct Rule 101 as in existence on April 15, 2003, to the extent not superseded or
349
+ amended by the PCAOB. Rule 3500T further provides that “The Board's Interim Independence Standards do not
350
+ supersede the Commission's auditor independence rules.” Identical language was previously found in PCAOB rule
351
+ 3600T until certain PCAOB rules were revised in 2014.
352
+
353
+ 11 Auditor independence is always an area warranting heightened scrutiny. See Adopting Release for Rule
354
+ 102(e) [Rel. Nos. 33-7593, 34-40567, 1998 SEC LEXIS 2256 (Oct. 19, 1998)] (“Because of the importance of an
355
+ accountant’s independence to the integrity of the financial reporting system, the Commission has concluded that
356
+ circumstances that raise questions about an accountant’s independence always merit heightened scrutiny.”).
357
+
358
+
359
+ 8
360
+ accountants.” Deloitte Japan, Amano, and Itagaki each caused these reporting violations because
361
+ each should have known the subject personal financial relationship violations would cause
362
+ Company A to violate the provisions listed above.
363
+
364
+ F. COOPERATION AND REMEDIAL ACTION
365
+
366
+ In determining to accept Respondent Deloitte Japan’s Offer, the Commission considered
367
+ the steps taken by the firm to enhance its independence quality control system and the
368
+ cooperation afforded the Commission staff. Since the conduct discussed in this Order, the firm
369
+ has continued to improve its independence policies and procedures concerning personal financial
370
+ relationships. The firm has, among other things, prohibited covered persons of the firm from
371
+ holding bank accounts with audit clients or subsidiaries of audit clients; restructured and
372
+ substantially increased staffing of its independence function; ended the practice of keeping the
373
+ identities of independence violators anonymous in internal and external communications;
374
+ adopted stronger disciplinary measures for independence violators; enhanced independence
375
+ training and communications throughout the firm; increased the number and frequency of its
376
+ procedures for prevention and detection of independence-impairing financial relationships as
377
+ well as its monitoring to ensure the firm’s independence controls are working effectively. In
378
+ addition, Deloitte Japan voluntarily shared the results, details, and documents related to its
379
+ internal investigation; provided translations of key documents; and facilitated the voluntary
380
+ testimony of overseas witnesses, all of which reduced the time and resources necessary for the
381
+ Commission staff to conclude the investigation.
382
+
383
+ G. FINDINGS
384
+
385
+ Based on the foregoing, the Commission finds that (a) Respondents Deloitte Japan,
386
+ Amano, and Itagaki engaged in improper professional conduct pursuant to Section 4C(a)(2) of
387
+ the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice; (b) Deloitte
388
+ Japan violated, and Amano and Itagaki caused Deloitte Japan to violate, Rule 2-02(b) of
389
+ Regulation S-X; and (c) Deloitte Japan, Amano, and Itagaki caused Company A to violate
390
+ Section 13(a) of the Exchange Act, and Rule 13a-1 thereunder.
391
+
392
+ IV.
393
+
394
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
395
+ agreed to in Respondents’ Offers.
396
+
397
+ Accordingly, it is hereby ORDERED, effective immediately, that:
398
+
399
+ A. Respondent Deloitte Japan, Amano, and Itagaki shall cease and desist from
400
+ committing or causing any violations and any future violations of Rule 2-02 of Regulation S-X.
401
+
402
+ B. Respondents Deloitte Japan, Amano, and Itagaki shall cease and desist from
403
+ committing or causing any violations and any future violations of Section 13(a) of the Exchange
404
+ Act, and Rule 13a-1 thereunder.
405
+
406
+ C. Respondent Deloitte Japan be, and hereby is, censured.
407
+
408
+ 9
409
+
410
+ D. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the
411
+ Commission’s Rules of Practice, Respondent Amano is denied the privilege of appearing or
412
+ practicing before the Commission as an accountant.
413
+
414
+ E. After two years from the date of this order, Amano may request that the
415
+ Commission consider his reinstatement by submitting an application (attention: Office of the
416
+ Chief Accountant) to resume appearing or practicing before the Commission as:
417
+
418
+ 1. a preparer or reviewer, or a person responsible for the preparation or
419
+ review, of any public company’s financial statements that are filed with
420
+ the Commission (other than as a member of an audit committee, as that
421
+ term is defined in Section 3(a)(58) of the Securities Exchange Act of
422
+ 1934). Such an application must satisfy the Commission that Amano’s
423
+ work in his practice before the Commission as an accountant will be
424
+ reviewed either by the independent audit committee of the public company
425
+ for which he works or in some other acceptable manner, as long as he
426
+ practices before the Commission in this capacity; and/or
427
+
428
+ 2. a preparer or reviewer, or a person responsible for the preparation or
429
+ review, of any public company’s financial statements that are filed with
430
+ the Commission as a member of an audit committee, as that term is
431
+ defined in Section 3(a)(58) of the Securities Exchange Act of 1934. Such
432
+ an application will be considered on a facts and circumstances basis with
433
+ respect to such membership, and the applicant’s burden of demonstrating
434
+ good cause for reinstatement will be particularly high given the role of the
435
+ audit committee in financial and accounting matters; and/or
436
+
437
+ 3. an independent accountant.
438
+
439
+ Such an application must satisfy the Commission that:
440
+
441
+ (a) Amano, or the public accounting firm with which he is associated,
442
+ is registered with the Public Company Accounting Oversight
443
+ Board (“Board”) in accordance with the Sarbanes-Oxley Act of
444
+ 2002, and such registration continues to be effective;
445
+
446
+ (b) Amano, or the registered public accounting firm with which he is
447
+ associated, has been inspected by the Board and that inspection did
448
+ not identify any criticisms of or potential defects in the
449
+ respondent’s or the firm’s quality control system that would
450
+ indicate that Amano will not receive appropriate supervision;
451
+
452
+ (c) Amano has resolved all disciplinary issues with the Board, and has
453
+ complied with all terms and conditions of any sanctions imposed
454
+ by the Board (other than reinstatement by the Commission); and
455
+
456
+
457
+ 10
458
+ (d) Amano acknowledges his responsibility, as long as he appears or
459
+ practices before the Commission as an independent accountant, to
460
+ comply with all requirements of the Commission and the Board,
461
+ including, but not limited to, all requirements relating to
462
+ registration, inspections, concurring partner reviews and quality
463
+ control standards.
464
+
465
+ F. The Commission will consider an application by Amano to resume appearing or
466
+ practicing before the Commission provided that his Japanese Institute of Certified Public
467
+ Accountants (“JICPA”) license is current and he has resolved all other disciplinary issues with
468
+ all other boards of accountancy. However, if Amano’s licensure is dependent on reinstatement
469
+ by the Commission, the Commission will consider an application on its other merits. The
470
+ Commission’s review may include consideration of, in addition to the matters referenced above,
471
+ any other matters relating to Amano’s character, integrity professional conduct, or qualifications
472
+ to appear or practice before the Commission as an accountant. Whether an application
473
+ demonstrates good cause will be considered on a facts and circumstances basis with due regard
474
+ for protecting the integrity of the Commission’s processes.
475
+
476
+ G. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the
477
+ Commission’s Rules of Practice, Respondent Itagaki is denied the privilege of appearing or
478
+ practicing before the Commission as an accountant.
479
+
480
+ H. After one year from the date of this order, Itagaki may request that the
481
+ Commission consider his reinstatement by submitting an application (attention: Office of the
482
+ Chief Accountant) to resume appearing or practicing before the Commission as:
483
+
484
+ 1. a preparer or reviewer, or a person responsible for the preparation or
485
+ review, of any public company’s financial statements that are filed with
486
+ the Commission (other than as a member of an audit committee, as that
487
+ term is defined in Section 3(a)(58) of the Securities Exchange Act of
488
+ 1934). Such an application must satisfy the Commission that Itagaki’s
489
+ work in his practice before the Commission as an accountant will be
490
+ reviewed either by the independent audit committee of the public company
491
+ for which he works or in some other acceptable manner, as long as he
492
+ practices before the Commission in this capacity; and/or
493
+
494
+ 2. a preparer or reviewer, or a person responsible for the preparation or
495
+ review, of any public company’s financial statements that are filed with
496
+ the Commission as a member of an audit committee, as that term is
497
+ defined in Section 3(a)(58) of the Securities Exchange Act of 1934. Such
498
+ an application will be considered on a facts and circumstances basis with
499
+ respect to such membership, and the applicant’s burden of demonstrating
500
+ good cause for reinstatement will be particularly high given the role of the
501
+ audit committee in financial and accounting matters; and/or
502
+
503
+ 3. an independent accountant.
504
+
505
+
506
+ 11
507
+ Such an application must satisfy the Commission that:
508
+
509
+ (a) Itagaki, or the public accounting firm with which he is associated,
510
+ is registered with the Public Company Accounting Oversight
511
+ Board (“Board”) in accordance with the Sarbanes-Oxley Act of
512
+ 2002, and such registration continues to be effective;
513
+
514
+ (b) Itagaki, or the registered public accounting firm with which he is
515
+ associated, has been inspected by the Board and that inspection did
516
+ not identify any criticisms of or potential defects in the
517
+ respondent’s or the firm’s quality control system that would
518
+ indicate that Itagaki will not receive appropriate supervision;
519
+
520
+ (c) Itagaki has resolved all disciplinary issues with the Board, and has
521
+ complied with all terms and conditions of any sanctions imposed
522
+ by the Board (other than reinstatement by the Commission); and
523
+
524
+ (d) Itagaki acknowledges his responsibility, as long as he appears or
525
+ practices before the Commission as an independent accountant, to
526
+ comply with all requirements of the Commission and the Board,
527
+ including, but not limited to, all requirements relating to
528
+ registration, inspections, concurring partner reviews and quality
529
+ control standards.
530
+
531
+ I. The Commission will consider an application by Itagaki to resume appearing or
532
+ practicing before the Commission provided that his JICPA license is current and he has resolved
533
+ all other disciplinary issues with all other boards of accountancy. However, if Itagaki’s JICPA
534
+ licensure is dependent on reinstatement by the Commission, the Commission will consider an
535
+ application on its other merits. The Commission’s review may include consideration of, in
536
+ addition to the matters referenced above, any other matters relating to Itagaki’s character,
537
+ integrity professional conduct, or qualifications to appear or practice before the Commission as
538
+ an accountant. Whether an application demonstrates good cause will be considered on a facts
539
+ and circumstances basis with due regard for protecting the integrity of the Commission’s
540
+ processes.
541
+
542
+ J. Respondent Deloitte Japan shall, within ten (10) days of the entry of this Order,
543
+ pay (i) disgorgement of $971,722, plus prejudgment interest of $159,397.70, and (ii) a civil
544
+ money penalty in the amount of $880,000, for a total of $2,011,119.70, to the Securities and
545
+ Exchange Commission for transfer to the general fund of the United States Treasury, subject to
546
+ Exchange Act Section 21F(g)(3). If timely payment of disgorgement and prejudgment interest is
547
+ not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. If timely
548
+ payment of a civil penalty is not made, additional interest shall accrue pursuant to 31 U.S.C. §
549
+ 3717.
550
+
551
+ K. All payments required by this Order must be made in one of the following ways:
552
+
553
+ 1. Respondent may transmit payment electronically to the Commission,
554
+
555
+ 12
556
+ which will provide detailed ACH transfer/Fedwire instructions upon
557
+ request;
558
+
559
+ 2. Respondent may make direct payment from a bank account via Pay.gov
560
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
561
+
562
+ 3. Respondent may pay by certified check, bank cashier’s check, or United
563
+ States postal money order, made payable to the Securities and Exchange
564
+ Commission and hand-delivered or mailed to:
565
+
566
+ Enterprise Services Center
567
+ Accounts Receivable Branch
568
+ HQ Bldg., Room 181, AMZ-341
569
+ 6500 South MacArthur Boulevard
570
+ Oklahoma City, OK 73169
571
+
572
+ Payments by check or money order must be accompanied by a cover letter identifying
573
+ Deloitte Japan as a Respondent in these proceedings, and the file number of these proceedings.
574
+ A copy of the cover letter and check or money order, or documentation of whatever other form
575
+ of payment is used, must be simultaneously sent to Melissa R. Hodgman, Associate Director,
576
+ Division of Enforcement, Securities and Exchange Commission, 100 F St., N.E., Washington,
577
+ DC 20549.
578
+
579
+ L. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated as
580
+ penalties paid to the government for all purposes, including all tax purposes. To preserve the
581
+ deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, it
582
+ shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of
583
+ compensatory damages by the amount of any part of Respondent’s payment of a civil penalty
584
+ in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a
585
+ Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order
586
+ granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount
587
+ of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not
588
+ be deemed an additional civil penalty and shall not be deemed to change the amount of the
589
+ civil penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor
590
+ Action” means a private damages action brought against Respondent by or on behalf of one or
591
+ more investors based on substantially the same facts as alleged in the Order instituted by the
592
+ Commission in this proceeding.
593
+
594
+ By the Commission.
595
+
596
+
597
+ Brent J. Fields
598
+ Secretary
raw/aaer/2019/AAER-4021.txt ADDED
@@ -0,0 +1,466 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES EXCHANGE ACT OF 1934
6
+ Release No. 85149 / February 15, 2019
7
+
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4021 / February 15, 2019
10
+
11
+ ADMINISTRATIVE PROCEEDING
12
+ File No. 3-19000
13
+
14
+
15
+ In the Matter of
16
+
17
+ COGNIZANT TECHNOLOGY
18
+ SOLUTIONS CORPORATION,
19
+
20
+ Respondent.
21
+
22
+
23
+
24
+ ORDER INSTITUTING CEASE-AND-
25
+ DESIST PROCEEDINGS PURSUANT TO
26
+ SECTION 21C OF THE SECURITIES
27
+ EXCHANGE ACT OF 1934, MAKING
28
+ FINDINGS, AND IMPOSING A CEASE-
29
+ AND-DESIST ORDER
30
+
31
+
32
+ I
33
+
34
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-
35
+ and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities
36
+ Exchange Act of 1934 (“Exchange Act”), against Cognizant Technology Solutions Corporation
37
+ (“Cognizant” or “Respondent”).
38
+
39
+ II
40
+
41
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
42
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
43
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
44
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
45
+ herein, except as to the Commission’s jurisdiction over it and the subject matter of these
46
+ proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-
47
+ and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making
48
+ Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below.
49
+
50
+
51
+
52
+ 2
53
+
54
+ III
55
+
56
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that:
57
+
58
+ Summary
59
+
60
+ 1. These proceedings arise from violations of the antibribery, books and records, and
61
+ internal accounting controls provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”).
62
+ [15 U.S.C. § 78dd]. Cognizant is a global provider of information technology and business process
63
+ services. Much of its business involves using technically skilled workers around the world,
64
+ including in India, to provide such services to companies in the United States and Western Europe.
65
+ Between 2014 and 2016 Cognizant, acting through executives in the United States and India,
66
+ authorized contractors to pay on the company’s behalf and reimbursed them for a total of
67
+ approximately $3.6 million in bribes to Indian government officials to obtain government
68
+ construction-related permits and operating licenses in connection with the construction and
69
+ operation of commercial office buildings.
70
+
71
+ 2. In 2014 Cognizant authorized a contractor to pay a $2 million bribe to a senior
72
+ government official for the issuance of a planning permit for a project in Chennai, India. The
73
+ payment, along with a scheme to conceal a $2.5 million reimbursement to the contractor, was
74
+ authorized by two senior executives at Cognizant’s U.S. headquarters. In 2013 and 2014,
75
+ Cognizant’s Indian subsidiary authorized the same third party contractor to pay a bribe of
76
+ approximately $770,000 to a government official for an environmental clearance for a project in
77
+ Pune, India. In 2015, the Indian subsidiary retroactively authorized and reimbursed the same third
78
+ party contractor for approximately $870,000 in bribes that it had paid to government officials for
79
+ construction-related permits in Siruseri, India. Cognizant received ill-gotten gains of approximately
80
+ $16,394,351 as a result of the conduct.
81
+
82
+ 3. The unlawful payments were paid from Cognizant India’s bank accounts and were
83
+ not accurately reflected in Cognizant’s consolidated books and records. During the relevant period
84
+ Cognizant also failed to devise and maintain a sufficient system of internal accounting controls at its
85
+ corporate headquarters and at Cognizant India. This conduct took place in an environment in which
86
+ Cognizant failed to adequately enforce its corporate antibribery and anticorruption policies.
87
+
88
+ 4. As a result of its conduct Cognizant violated Exchange Act Sections 30A,
89
+ 13(b)(2)(A), and 13(b)(2)(B).
90
+
91
+ Respondent
92
+
93
+ 5. Cognizant is a New Jersey corporation headquartered in Teaneck, N.J. Throughout
94
+ the relevant period its common stock was registered with the Commission under Exchange Act
95
+
96
+ 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on
97
+ any other person or entity in this or any other proceeding.
98
+
99
+
100
+
101
+
102
+ 3
103
+
104
+ Section 12(b) and publicly traded on NASDAQ (symbol: CTSH). Cognizant files annual and
105
+ quarterly reports under Exchange Act Section 13. Although it operates in several countries, the
106
+ majority of Cognizant’s operations are conducted in India through Cognizant India, its largest
107
+ subsidiary.
108
+ Other Relevant Individuals and Entities
109
+
110
+ 6. Senior Executive-1 served in several senior executive positions at Cognizant in the
111
+ United States until his resignation in 2016.
112
+
113
+ 7. Senior Legal Executive-1 served in Cognizant’s legal function in the United States
114
+ until his resignation in 2016.
115
+
116
+ 8. Operations Officer-1 served in a senior operation role based in India until 2016.
117
+
118
+ 9. Real Estate Officer-1 served in Cognizant India’s corporate workplace function.
119
+
120
+ 10. Contracting Firm-1 is a multinational engineering and construction firm based in
121
+ India. It is publicly traded on exchanges in India but its securities are not registered with the
122
+ Commission.
123
+
124
+ Facts
125
+
126
+ Bribe Payments in Chennai, Tamil Nadu
127
+
128
+ 11. Cognizant’s construction project in Chennai, referred to as the KITS campus,
129
+ represents the company’s largest owned facility in India, encompassing 2.7 million square feet
130
+ with a capacity for approximately 17,500 employees. Cognizant engaged Contracting Firm-1 to
131
+ build the facility and obtain all necessary government permits. Construction began in 2011 prior to
132
+ the issuance of a required planning permit.
133
+ 12. In 2014, during the course of construction, Real Estate Officer-1 was made aware
134
+ that an Indian government official had made a $2 million bribe demand to Contracting Firm-1 as a
135
+ condition for issuing the planning permit. Real Estate Officer-1 passed the information along to
136
+ his supervisor, Operations Officer-1. On April 21 and 22, 2014, the demand was discussed by
137
+ video conference among Real Estate Officer-1, Operations Officer-1, Senior Executive-1, and
138
+ Senior Legal Executive-1. Senior Executive-1 and Senior Legal Executive-1 participated in the
139
+ conference from the United States. Real Estate Officer-1 described the bribe demand in detail,
140
+ asked Senior Executive-1 and Senior Legal Executive-1 for guidance on how to proceed, and
141
+ suggested that Contracting Firm-1 could be reimbursed for the payment through a series of sham
142
+ change order requests to its contract. Senior Legal Executive-1 approved the method of
143
+ reimbursement and Senior Executive-1 authorized both the bribe payment and the suggested
144
+ method for disguising it. Real Estate Officer-1 was given the task of executing the scheme. His
145
+ direct supervisor Operations Officer-1 made no objection.
146
+
147
+ 13. In addition to discussing the bribe demand and the suggested method of disguising
148
+ the reimbursement during the videoconferences, Senior Executive-1 directed his subordinates to
149
+
150
+
151
+
152
+ 4
153
+
154
+ withhold future payments to Contracting Firm-1 if it resisted paying the bribe on Cognizant’s
155
+ behalf. Contracting Firm-1, which had been urging Cognizant to make the payment itself,
156
+ ultimately yielded to Senior Executive-1’s pressure and made the payment in late May or early
157
+ June 2014. Cognizant received the planning permit in November of that year.
158
+
159
+ 14. Following Real Estate Officer-1’s suggestion, Cognizant concealed the $2.5 million
160
+ reimbursement to Contracting Firm-1, including both the $2 million bribe and a $500,000
161
+ commission for paying it, through a series of falsified contract change orders. Real Estate
162
+ Officer-1 selected change order requests from Contracting Firm-1 invoices that Cognizant had
163
+ previously rejected and retroactively “accepted” them, adjusting the cost amounts so that they
164
+ would total $2.5 million. The falsified invoices and supporting Excel spreadsheets were forwarded
165
+ to Senior Executive-1 for approval, with copies to Operations Officer-1. Senior Executive-1
166
+ approved payments in February and March 2015, and the payments were made to Contracting
167
+ Firm-1 in installments between March 2015 and January 2016.
168
+ Bribe Payment in Pune, Maharashtra
169
+
170
+ 15. The bribe scheme in Pune also involved the construction of a commercial office
171
+ facility with Contracting Firm-1 as Cognizant’s builder. Construction began in 2012, prior to the
172
+ issuance of necessary permits. On this occasion, Cognizant India authorized Contracting Firm-1 to
173
+ pay an Indian official $770,000 in return for issuing an environmental clearance. The payment was
174
+ made in early 2013, and the environmental clearance was issued thereafter. In April of that year,
175
+ Contracting Firm-1 sought reimbursement through a change order request with a line item for
176
+ “Liasoning [sic] and consultations charge towards Environmental clearance.” Cognizant India
177
+ rejected the change order, but later approved the payment after Contracting Firm-1 changed the
178
+ rationale to “Change in the make of Workstation from Featherlite to Art matrix.” Cognizant India
179
+ reimbursed Contracting Firm-1 for the bribe payment in January 2014.
180
+ Bribe Payment in Siruseri, Tamil Nadu
181
+
182
+ 16. In Siruseri, Cognizant India authorized Contracting Firm-1 to pay bribes totaling
183
+ $840,000 to government officials for the issuance of several construction-related permits, including
184
+ a planning permit, a power permit from the local electricity board, and an environmental clearance.
185
+ Contracting Firm-1 made the payments in or around 2012, and Cognizant subsequently received
186
+ the permits in the second half of that year. The contractor submitted change order requests for
187
+ several inflated or unjustified work items. Cognizant India rejected the initial requests, but later
188
+ approved the change orders after the sham descriptions were revised. Cognizant India reimbursed
189
+ Contracting Firm-1 for the bribe payments in installments between 2015 and 2016.
190
+
191
+ Bribes for Operating Licenses
192
+
193
+ 17. In addition to payments involving the above construction projects, Cognizant India
194
+ also made approximately $27,000 in bribe payments to government officials for the purpose of
195
+ obtaining certain operating licenses at six Indian facilities. The payments were made between
196
+ 2013 and early 2016, mostly by lower to mid-level employees in Cognizant India’s corporate
197
+ workplace services department, with the assistance of collusive third party vendors. The licenses
198
+
199
+
200
+
201
+ 5
202
+
203
+ were for kitchen operating facilities, air and water consents, fire protection, and other purposes
204
+ related to operation of the buildings. The payments were disguised in Cognizant’s books and
205
+ records by the use of false generic descriptions, such as “liaison,” “consulting,” and
206
+ “miscellaneous” charges.
207
+
208
+ Legal Standards and Violations
209
+
210
+ 18. Under Exchange Act Section 21C(a), the Commission may impose a cease-and-
211
+ desist order upon any person who is violating, has violated, or is about to violate any provision of
212
+ the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, or
213
+ would be a cause of the violation, due to an act or omission the person knew or should have known
214
+ would contribute to such violation.
215
+
216
+ FCPA Violations
217
+
218
+ 19. Exchange Act Section 30A prohibits any issuer with a class of securities registered
219
+ pursuant to Section 12 of the Exchange Act, or any officer, director, employee, or agent acting on
220
+ behalf of such issuer, in order to obtain or retain business, from corruptly giving or authorizing the
221
+ giving of, anything of value to any foreign official for the purposes of influencing the official or
222
+ inducing the official to act in violation of his or her lawful duties, or to secure any improper
223
+ advantage, or to induce a foreign official to use his influence with a foreign governmental
224
+ instrumentality to influence any act or decision of such government or instrumentality. [15 U.S.C.
225
+ § 78dd-1].
226
+
227
+ 20. As described above, Cognizant paid bribes to an Indian government official to
228
+ induce that official to direct that a permit be issued to facilitate the completion of a construction
229
+ project. Cognizant made use of the means and instrumentalities of interstate commerce by hosting
230
+ video conferences at which American executives participated in formulating the scheme and by
231
+ exchanging email messages to and from the United States to approve the concealing of the
232
+ payment. Two U.S. senior executives at Cognizant took active steps to advance the scheme, and
233
+ Cognizant is liable for their conduct by respondeat superior. As a result, Cognizant violated
234
+ Exchange Act Section 30A.
235
+
236
+ 21. Exchange Act Section 13(b)(2)(A) requires every issuer with a class of securities
237
+ registered pursuant to Exchange Act Section 12 to make and keep books, records, and accounts,
238
+ which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the
239
+ assets of the issuer. [15 U.S.C. § 78m(b)(2)(A)].
240
+
241
+ 22. Cognizant violated Exchange Act Section 13(b)(2)(A) by falsely characterizing
242
+ illicit payments to government officials as legitimate business expenses in its books and records.
243
+
244
+ 23. Exchange Act Section 13(b)(2)(B) requires every issuer with a class of securities
245
+ registered pursuant to Exchange Act Section 12 to devise and maintain a system of internal
246
+ accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in
247
+ accordance with management’s general or specific authorization; (ii) transactions are recorded as
248
+
249
+
250
+
251
+ 6
252
+
253
+ necessary (I) to permit preparation of financial statements in conformity with generally accepted
254
+ accounting principles or any other criteria applicable to such statements, and (II) to maintain
255
+ accountability for assets; (iii) access to assets is permitted only in accordance with management’s
256
+ general or specific authorization; and (iv) the recorded accountability for assets is compared with
257
+ the existing assets at reasonable intervals and appropriate action is taken with respect to any
258
+ differences. [15 U.S.C. § 78m(b)(2)(B)].
259
+
260
+ 24. Cognizant violated Section 13(b)(2)(B) by failing to devise and maintain a
261
+ sufficient system of internal accounting controls at its corporate headquarters and at Cognizant
262
+ India. Cognizant’s system for handling contractor change orders in India permitted managers to
263
+ conceal bribe payments through the manipulation of bogus construction charges. The company’s
264
+ procurement process did not include an effective review of the disbursement of funds for change
265
+ orders. Nor did it include an effective review of the application or renewal of facility permits and
266
+ licenses. Cognizant also did not adequately enforce its corporate policy against making improper
267
+ payments to government officials. And it failed to provide reasonable assurances that its Indian
268
+ subsidiary maintained accurate and complete records of transactions involving payments to
269
+ government officials.
270
+
271
+ Cognizant’s Self-Disclosure, Cooperation, and Remedial Efforts
272
+
273
+ 25. In determining to accept the Offer, the Commission considered Respondent’s self-
274
+ disclosure, cooperation, and remedial efforts. Cognizant voluntarily disclosed this misconduct to
275
+ the Commission staff and timely shared the facts developed during the course of an internal
276
+ investigation by the audit committee of its board. Cognizant also cooperated by voluntarily
277
+ producing and translating documents, and making current or former employees, including those
278
+ who needed to travel internationally, available for interviews by the Commission staff.
279
+
280
+ 26. Cognizant’s remedial actions included: (i) terminating or imposing other discipline
281
+ on officers and employees who participated in or were aware of the improper conduct;
282
+ (ii) appointing new executive personnel, including a new president, general counsel, and heads of
283
+ global real estate and procurement; (iii) enhancing its existing compliance function and headcount;
284
+ (iv) consolidating its facility management operations and removing licensure responsibilities from
285
+ third parties; (v) enhancing its internal accounting controls and compliance functions with respect
286
+ to the construction of new facilities; (vi) enhancing its FCPA compliance policies relating to due
287
+ diligence and contracting of vendors and suppliers; and (vii) conducting enhanced anticorruption
288
+ training.
289
+
290
+ Undertakings
291
+
292
+ Respondent Cognizant has undertaken to:
293
+
294
+ 27. Cooperate fully with the Commission in any and all investigations, litigations or
295
+ other proceedings relating to or arising from the matters described in the Order. Cognizant agrees
296
+ that cooperation includes the following:
297
+
298
+
299
+
300
+
301
+ 7
302
+
303
+ a. On an ongoing basis, producing, without service of a notice or subpoena, to
304
+ the Commission nonprivileged documents and other materials, wherever
305
+ located, in Respondent’s possession, custody, or control, and appropriate
306
+ privilege logs, as requested by the Division of Enforcement’s (“Division”)
307
+ staff and within 14 days of request unless otherwise agreed to in writing by
308
+ the Division’s staff;
309
+
310
+ b. Using its best efforts to secure the full, truthful, and continuing cooperation
311
+ of Respondent’s current and former directors, officers, employees and
312
+ agents, including making those persons available for interviews and the
313
+ provision of testimony in any and all investigations, litigation or other
314
+ proceedings relating to or arising from matters described in the Order when
315
+ requested to do so by the Division’s staff, at Respondent’s expense;
316
+
317
+ c. Using its best efforts to ensure its directors, officers and employees respond
318
+ to all inquiries related to any and all investigations, litigation or other
319
+ proceedings relating to or arising from the matters described in the Order
320
+ and any related proceedings when requested to do so by the Division’s staff;
321
+ and
322
+
323
+ d. Using its best efforts to ensure its directors, officers, and employees testify
324
+ at trial and other judicial or administrative proceedings when requested to
325
+ do so by the Division’s staff.
326
+
327
+ 28. In determining whether to accept the Offer, the Commission has considered these
328
+ undertakings.
329
+
330
+ IV
331
+
332
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
333
+ agreed to in Respondent Cognizant’s Offer.
334
+
335
+ Accordingly, it is hereby ORDERED that:
336
+
337
+ A. Pursuant to Section 21C of the Exchange Act, Respondent Cognizant cease and
338
+ desist from committing or causing any violations and any future violations of Sections 30A,
339
+ 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act.
340
+
341
+ B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of
342
+ $16,394,351, prejudgment interest of $2,773,017, and a civil monetary penalty of $6,000,000 to the
343
+ Securities and Exchange Commission for transfer to the general fund of the United States
344
+ Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional
345
+ interest shall accrue pursuant to 31 U.S.C. §3717 or SEC Rule of Practice 600. Payment must be
346
+ made in one of the following ways:
347
+
348
+
349
+
350
+
351
+ 8
352
+
353
+ (1) Respondent may transmit payment electronically to the Commission, which
354
+ will provide detailed ACH transfer/Fedwire instructions upon request;
355
+
356
+ (2) Respondent may make direct payment from a bank account via Pay.gov
357
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
358
+
359
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
360
+ States postal money order, made payable to the Securities and Exchange
361
+ Commission and hand-delivered or mailed to:
362
+
363
+ Enterprise Services Center
364
+ Accounts Receivable Branch
365
+ HQ Bldg., Room 181, AMZ-341
366
+ 6500 South MacArthur Boulevard
367
+ Oklahoma City, OK 73169
368
+
369
+ Payments by check or money order must be accompanied by a cover letter identifying
370
+ Cognizant as a Respondent in these proceedings, and the file number of these proceedings; a copy
371
+ of the cover letter and check or money order must be sent to Charles E. Cain, Chief, FCPA Unit,
372
+ Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC
373
+ 20549.
374
+
375
+ C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be
376
+ treated as penalties paid to the government for all purposes, including all tax purposes. To
377
+ preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
378
+ Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any
379
+ award of compensatory damages by the amount of any part of Respondent’s payment of a civil
380
+ penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a
381
+ Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting
382
+ the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the
383
+ Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed
384
+ an additional civil penalty and shall not be deemed to change the amount of the civil penalty
385
+ imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a
386
+ private damages action brought against Respondent by or on behalf of one or more investors based
387
+ on substantially the same facts as alleged in the Order instituted by the Commission in this
388
+ proceeding.
389
+
390
+ D. Respondent undertakes to:
391
+ 1) Report to the Commission staff periodically during a two-year term, the
392
+ status of its remediation and implementation of compliance measures, particularly as to
393
+ the areas of due diligence on prospective and existing third-party consultants and
394
+ vendors, FCPA training and the testing of relevant controls including the collection and
395
+ analysis of compliance data. During this period, should Respondent discover credible
396
+ evidence, not already reported to Commission staff, that questionable or corrupt
397
+
398
+
399
+
400
+ 9
401
+
402
+ payments or questionable or corrupt transfers of value may have been offered, promised,
403
+ paid, or authorized by Respondent, or any entity or person acting on behalf of
404
+ Respondent, or that related false books and records have been maintained, Respondent
405
+ shall promptly report such conduct to the Commission staff. During this two-year period,
406
+ Respondent shall: (1) conduct an initial review and submit an initial report and
407
+ (2) conduct and prepare two follow-up reviews and reports, as described below:
408
+ a. Respondent shall submit to the Commission staff a written report
409
+ within 180 calendar days of the entry of this Order setting forth a complete
410
+ description of its FCPA and anti-corruption related remediation efforts to date, its
411
+ proposals reasonably designed to improve the policies and procedures of
412
+ Respondent for ensuring compliance with the FCPA and other applicable
413
+ anticorruption laws, and the parameters of the subsequent review (the “Initial
414
+ Report”). The Initial Report shall be transmitted to Robert I. Dodge, Assistant
415
+ Director, United States Securities and Exchange Commission, 100 F Street, NE,
416
+ Washington, DC, 20549-5631. Respondent may extend the time period for
417
+ issuance of the Initial Report with prior written approval of the Commission staff.
418
+ b. Respondent shall undertake two follow-up reviews, incorporating
419
+ any comments provided by the Commission staff on the previous report, to further
420
+ monitor and assess whether the policies and procedures of Respondent are
421
+ reasonably designed to detect and prevent violations of the FCPA and other
422
+ applicable anti-corruption laws (the “Follow-Up Reports”).
423
+ c. The Follow-up Report shall be completed by no later than 270
424
+ days after the Initial Report. The second Follow-up Report shall be completed by
425
+ no later than 450 days after the completion of the Initial Report. Respondent may
426
+ extend the time period for issuance of the Follow-up Reports with prior written
427
+ approval of the Commission staff.
428
+ d. The periodic reviews and reports submitted by Respondent will
429
+ likely include proprietary, financial, confidential, and competitive business
430
+ information. Public disclosure of the reports could discourage cooperation,
431
+ impede pending or potential government investigations and thus undermine the
432
+ objectives of the reporting requirement. For these reasons, among others, the
433
+ reports and the contents thereof are intended to remain and shall remain
434
+ nonpublic, except (a) pursuant to court order, (b) as agreed by the parties in
435
+ writing, (c) to the extent that the Commission staff determines in its sole
436
+ discretion that disclosure would be in furtherance of the Commission’s discharge
437
+ of its duties and responsibilities, or (d) is otherwise required by law.
438
+ e. During this two-year period of review, Respondent shall provide
439
+ its external auditors with its annual internal audit plan and reports of the results of
440
+ internal audit procedures and its assessment of its FCPA compliance policies and
441
+ procedures.
442
+
443
+
444
+
445
+ 10
446
+
447
+ f. During the two-year period of review, Respondent shall provide
448
+ Commission staff with any written reports or recommendations provided by
449
+ Respondent’s external auditors in response to Respondent’s annual internal audit
450
+ plan, reports of the results of internal audit procedures, and its assessment of its
451
+ FCPA compliance policies and procedures.
452
+ 2) Certify, in writing, compliance with the undertaking(s) set forth above.
453
+ The certification shall identify the undertaking(s), provide written evidence of
454
+ compliance in the form of a narrative, and be supported by exhibits sufficient to
455
+ demonstrate compliance. The Commission staff may make reasonable requests for
456
+ further evidence of compliance, and Respondent agrees to provide such evidence. The
457
+ certification and supporting material shall be submitted to Robert I. Dodge, Assistant
458
+ Director, United States Securities and Exchange Commission, 100 F Street, NE,
459
+ Washington, DC, 20549-5631 no later than sixty (60) days from the date of the
460
+ completion of the undertakings.
461
+
462
+ By the Commission.
463
+
464
+
465
+ Brent J. Fields
466
+ Secretary
raw/aaer/2019/AAER-4022.txt ADDED
@@ -0,0 +1,171 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+ 1
3
+ UNITED STATES OF AMERICA
4
+ Before the
5
+ SECURITIES AND EXCHANGE COMMISSION
6
+
7
+ SECURITIES EXCHANGE ACT OF 1934
8
+ Release No. 85159 / February 15, 2019
9
+
10
+ ACCOUNTING AND AUDITING ENFORCEMENT
11
+ Release No. 4022 / February 15, 2019
12
+
13
+ ADMINISTRATIVE PROCEEDING
14
+ File No. 3-19001
15
+
16
+ In the Matter of
17
+
18
+ JEFFREY M. MATTICH,
19
+
20
+ Respondent.
21
+
22
+ ORDER INSTITUTING PUBLIC
23
+ ADMINISTRATIVE PROCEEDINGS
24
+ PURSUANT TO RULE 102(e) OF THE
25
+ COMMISSION’S RULES OF PRACTICE,
26
+ MAKING FINDINGS, AND IMPOSING
27
+ REMEDIAL SANCTIONS
28
+
29
+ I.
30
+
31
+ The Securities and Exchange Commission (“Commission”) deems it appropriate and in the
32
+ public interest that public administrative proceedings be, and hereby are, instituted against Jeffrey
33
+ M. Mattich (“Respondent” or “Mattich”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules
34
+ of Practice.1
35
+
36
+ II.
37
+
38
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
39
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
40
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
41
+
42
+ 1 Rule 102(e)(3)(i) provides, in relevant part, that:
43
+
44
+ The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . .
45
+ suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently
46
+ enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the
47
+ Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of
48
+ the rules and regulations thereunder.
49
+
50
+
51
+ 2
52
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
53
+ herein, except as to the Commission’s jurisdiction over him and the subject matter of these
54
+ proceedings, and the findings contained in Section III.3 and III.5 below, which are admitted,
55
+ Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to
56
+ Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
57
+ Sanctions (“Order”), as set forth below.
58
+
59
+ III.
60
+
61
+ On the basis of this Order and Respondent’s Offer, the Commission finds that:
62
+
63
+ 1. Mattich, age 5 7, a resident of Plano, Texas, was a certified public accountant
64
+ licensed to practice in t he State of Pennsylvania, until his license expired in 2007. He served as
65
+ Chief Financial Officer of Home Solutions of America, Inc. (“HSOA”) from January 2006 until
66
+ January 2008. Mattich was not employed by HSOA in any capacity before that time.
67
+
68
+ 2. HSOA was, at all relevant times, a Delaware corporation, headquartered in Dallas,
69
+ Texas, until it moved to New Orleans, Louisiana. HSOA was engaged construction and disaster
70
+ remediation. At all relevant times, HSOA’s common stock was registered with the Commission
71
+ pursuant to Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”). HSOA’s stock
72
+ traded on the NASDAQ National Market, until it was delisted on January 7, 2008 for failure to file
73
+ timely periodic reports. After that, HSOA traded in the Pink Sheets OTC until January 5, 2010,
74
+ when the registration of HSOA’s securities was revoked.
75
+
76
+ 3. On November 30, 2009, the Commission filed a complaint against Mattich and
77
+ others in Securities and Exchange Commission v. Home Solutions of America, Inc., Frank
78
+ Fradella, Brian M. Marshall, Jeffery M. Mattich, Rick J. O’Brien, Stephen C. Gingrich, Thomas L.
79
+ Davis, and Jeffrey T. Craft, Civil Action Number 3:09-cv-2269, in the United States District Court
80
+ for the Northern District of Texas.
81
+
82
+ 4. The Commission’s complaint alleged that, among other things, while serving as
83
+ CFO for HSOA, Mattich participated in conduct that constituted violations of antifraud and books
84
+ and records provisions of the federal securities laws. Specifically, the complaint alleged that
85
+ Mattich participated in various revenue-inflation, expense deferral, and account receivable
86
+ schemes that resulted in HSOA materially misstating its financial condition and operating results
87
+ in filings with the Commission, in offering documents, and in other statements to investors.
88
+
89
+ 5. On December 20, 2018, the court entered an order permanently enjoining Mattich,
90
+ by consent, from future violations of Sections 17(a)(2) and (a)(3) of the Securities Act of 1933
91
+ (“Securities Act”), Section 13(b)(5) of the Exchange Act and Rules 13a-14, 13b2-1, and 13b2-2
92
+ thereunder, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B)
93
+ of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. Mattich was also ordered to
94
+ pay $86,620 in disgorgement and a $50,000 civil money penalty.
95
+
96
+
97
+ 3
98
+ IV.
99
+
100
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to
101
+ impose the sanction agreed to in Respondent Mattich’s Offer.
102
+
103
+ Accordingly, it is hereby ORDERED, effective immediately, that:
104
+
105
+ A. Mattich is suspended from appearing or practicing before the Commission as
106
+ an accountant.
107
+
108
+ B. After one year from the date of this order, Mattich may request that the
109
+ Commission consider his reinstatement by submitting an application (attention: Office of the
110
+ Chief Accountant) to resume appearing or practicing before the Commission as:
111
+
112
+ 1. a preparer or reviewer, or a person responsible for the preparation or
113
+ review, of any public company’s financial statements that are filed with the Commission
114
+ (other than as a member of an audit committee, as that term is defined in Section 3(a)(58)
115
+ of the Securities Exchange Act of 1934). Such an application must satisfy the
116
+ Commission that Mattich’s work in his practice before the Commission as an accountant
117
+ will be reviewed either by the independent audit committee of the public company for
118
+ which he works or in some other acceptable manner, as long as he practices before the
119
+ Commission in this capacity; and/or
120
+
121
+ 2. a preparer or reviewer, or a person responsible for the preparation or
122
+ review, of any public company’s financial statements that are filed with the
123
+ Commission as a member of an audit committee, as that term is defined in Section
124
+ 3(a)(58) of the Securities Act of 1934. Such an application will be considered on a
125
+ facts and circumstances basis with respect to such membership, and the applicant’s
126
+ burden of demonstrating good cause for reinstatement will be particularly high given
127
+ the role of the audit committee in financial and accounting matters; and/or
128
+
129
+ 3. an independent accountant.
130
+
131
+ Such an application must satisfy the Commission that:
132
+
133
+ (a) Mattich, or the public accounting firm with which he is associated,
134
+ is registered with the Public Company Accounting Oversight Board (“Board”) in
135
+ accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be
136
+ effective;
137
+
138
+ (b) Mattich, or the registered public accounting firm with which he is
139
+ associated, has been inspected by the Board and that inspection did not identify any
140
+ criticisms of or potential defects in Mattich’s or the firm’s quality control system that
141
+ would indicate that the respondent will not receive appropriate supervision;
142
+
143
+ 4
144
+ (c) Mattich has resolved all disciplinary issues with the Board, and has
145
+ complied with all terms and conditions of any sanctions imposed by the Board (other than
146
+ reinstatement by the Commission); and
147
+
148
+ (d) Mattich acknowledges his responsibility, as long as he appears or
149
+ practices before the Commission as an independent accountant, to comply with all
150
+ requirements of the Commission and the Board, including, but not limited to, all
151
+ requirements relating to registration, inspections, concurring partner reviews and quality
152
+ control standards.
153
+
154
+ C. The Commission will consider an application by Mattich to resume
155
+ appearing or practicing before the Commission provided that his state CPA license is
156
+ current and he has resolved all other disciplinary issues with the applicable state boards of
157
+ accountancy. However, if state licensure is dependent on reinstatement by the
158
+ Commission, the Commission will consider an application on its other merits. The
159
+ Commission’s review may include consideration of, in addition to the matters referenced
160
+ above, any other matters relating to Mattich’s character, integrity, professional conduct, or
161
+ qualifications to appear or practice before the Commission as an accountant. Whether an
162
+ application demonstrates good cause will be considered on a facts and circumstances basis
163
+ with due regard for protecting the integrity of the Commission’s processes.
164
+
165
+ By the Commission.
166
+
167
+
168
+
169
+ Brent J. Fields
170
+ Secretary
171
+
raw/aaer/2019/AAER-4023.txt ADDED
@@ -0,0 +1,182 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES EXCHANGE ACT OF 1934
6
+ Release No. 85171 / February 21, 2019
7
+
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4023 / February 21, 2019
10
+
11
+ Admin. Proc. File No. 3-17950
12
+
13
+
14
+ In the Matter of
15
+
16
+ DAVID PRUITT, CPA
17
+
18
+
19
+
20
+ ORDER DENYING MOTION TO AMEND THE ORDER INSTITUTING PROCEEDINGS
21
+
22
+ David Pruitt, CPA, the former Vice President of Finance at the Army Sustainment
23
+ Division (“ASD”) of L3 Technologies, Inc., requests that we amend the order instituting
24
+ proceedings (“OIP”) in this matter.1 The OIP alleges that Pruitt caused L3 to violate Section
25
+ 13(b)(2)(A) of the Securities Exchange Act of 1934, which requires that an issuer maintain
26
+ accurate books, records and accounts, and willfully violated Exchange Act Section 13(b)(5) and
27
+ Rule 13b2-1, which prohibit a person from knowingly circumventing or failing to implement a
28
+ system of internal accounting controls or knowingly falsifying any required book, record, or
29
+ account of an issuer. According to Pruitt, evidence contradicts three of the OIP’s factual
30
+ allegations. The Division of Enforcement opposes Pruitt’s request. We deny the motion.
31
+
32
+ I. Background
33
+ The OIP alleges that Pruitt ordered subordinates to generate, but not submit, invoices for
34
+ an L3 client, the U.S. Army, thus causing L3 to improperly recognize revenue. The OIP further
35
+ alleges that Pruitt misled L3’s accounting staff and auditor that the invoices had been submitted.
36
+
37
+ Pruitt claims that “key events in the OIP are false and without basis.” First, paragraph 21
38
+ of the OIP alleges that Pruitt acted without the permission of his supervisors to invoice items as
39
+ part of L3’s contract with the Army. Pruitt claims that testimony and affidavits from Timothy
40
+ Keenan, Pruitt’s former accounting supervisor, to the effect that Keenan directed Pruitt to
41
+ prepare the invoices at issue and that Pruitt lacked the authority to determine the appropriate
42
+ accounting treatment disprove this allegation. Second, paragraph 27 of the OIP alleges that
43
+ Pruitt’s motive for generating the improper invoices was to help ASD reach its revenue goals so
44
+ that he could obtain a bonus. According to Pruitt, Keenan’s testimony that revenue recognition
45
+ did not trigger bonuses and that Pruitt was not involved in subsequent discussions regarding
46
+ adjustments senior management made to ASD’s financial results that determined bonus
47
+
48
+ 1 Exchange Act Release No. 80548, 2017 WL 1539857 (Apr. 28, 2017).
49
+ 2
50
+
51
+
52
+
53
+ eligibility contradicts this allegation. Third, paragraphs 30 and 36 of the OIP allege that the
54
+ Army was not prepared to accept the invoices at issue and that it was therefore unreasonable for
55
+ Pruitt to prepare them. Pruitt claims that an affidavit from Roderick Hynes, a former L3 Senior
56
+ Program Manager, stating that the Army did request invoices, was prepared to accept them, and
57
+ paid for a substantial portion of the work invoiced undermines this allegation.
58
+ The Division responds that the allegations in paragraph 21 that Pruitt acted without his
59
+ supervisor’s approval remain in dispute because earlier statements Keenan made supported the
60
+ allegation; the Division states that Keenan “is subject to being impeached at trial and it is the
61
+ providence of the finder of fact at trial . . . to determine which of Keenan’s versions is factual.”2
62
+ The Division also argues that the allegation in paragraph 27 that Pruitt was motivated by the
63
+ possibility of receiving a bonus is in dispute because the relevant time is when the invoices were
64
+ created “and not some later time when adjustments may have been made by others to achieve”
65
+ the requisite bonus threshold. According to the Division, Keenan also “said that the issuance of
66
+ the invoices ‘certainly’ played a part in reaching the bonus threshold . . . .” The Division argues
67
+ further that the allegations in paragraphs 30 and 36 of the OIP that the Army was not prepared to
68
+ accept the invoices at issue are in dispute based on the testimony of Karen Fletcher, the relevant
69
+ Army contracting officer, who testified that it was premature to submit the invoices.
70
+ II. Analysis
71
+ Rule of Practice 200(d)(1) provides that the Commission may amend an OIP to include
72
+ new matters of fact or law at any time, and Rule 200(d)(2) provides that prior to the filing of an
73
+ initial decision the administrative law judge presiding over the hearing may amend an OIP to
74
+ include new matters of fact or law that are within the scope of the original OIP.3 The Division
75
+ states that the claims in Pruitt’s motion concern facts that “are within the scope of the original
76
+ OIP and are so specific to the facts that will be disputed at the hearing” that the presiding
77
+ administrative law judge “is better situated to make the initial determination regarding the
78
+ content of the OIP.” We agree with the Division that the issues Pruitt’s motion raises are best
79
+ addressed by the administrative law judge at this stage in the proceeding.
80
+ We have applied Rule 200(d)(1) repeatedly to grant requested amendments that
81
+ incorporate subsequent developments in the case or correct clear errors—particularly when the
82
+ parties agree. As Pruitt notes, our practice has been to freely grant such requests subject to the
83
+ consideration that other parties not be surprised or prejudiced by the amendment.4 For example,
84
+
85
+ 2 The Division does not oppose amending paragraph 21 to read that Keenan “denied” and
86
+ “did recall” as opposed to the current version that says Keenan “denies” and does recall.”
87
+ 3 17 C.F.R. § 201.200(d).
88
+ 4 See Carl L. Shipley, Exchange Act Release No. 10870, 1974 WL 161761, at *4 (June 21,
89
+ 1974) (“Where the purpose is merely to correct an error in pleading, to conform the pleadings to
90
+ the proof, or to take into account subsequent developments which should be considered in
91
+ disposing of the proceeding, amendment should be freely granted, subject only to the
92
+ consideration that other parties should be not surprised nor should their rights be prejudiced.”);
93
+ see also Rules of Practice, Exchange Act Release No. 35833, 1995 WL 370829, at * (June 23,
94
+ 1995) (comment (d) to Rule 200) (citing Shipley and reiterating the standards therein).
95
+ 3
96
+
97
+
98
+
99
+ we have granted motions to amend an OIP to clarify relevant corporate relationships and the
100
+ proper names of parties,5 and to reflect the results of subsequent related criminal proceedings.6
101
+ But Pruitt cites no precedent—and we are unaware of any—where we have deleted allegations
102
+ based merely on a respondent’s disputed claim that they are not supported by the evidence. And
103
+ we have denied a motion to amend where a party opposed the motion on the ground that the
104
+ motion was “based on incomplete facts” and we determined that the record in the case
105
+ “require[d] further development.”7 We make that same determination here.
106
+ As we have stated, an “OIP does not establish facts, it alleges them.”8 In the case of an
107
+ OIP that sets the matter down for a hearing before an administrative law judge, the hearing
108
+ before the administrative law judge is normally the proper forum for the Division to try to
109
+ establish the basis for the allegations in the OIP and for a respondent to challenge them. Here,
110
+ the parties disagree about critical circumstances related to the allegations at issue. Given those
111
+ differences, and consistent with our rules and longstanding practice, the evidence regarding those
112
+ allegations can best be developed and assessed by the law judge in the first instance. As we have
113
+ made clear in other contexts, we are reluctant to “interfere[] with the orderly hearing process.”9
114
+ Courts have shown similar reluctance to resolve disputes that are better handled, in the first
115
+ instance, by the trier of fact, reflecting a “particular wariness about forcing appellate courts to
116
+ prematurely untangle ‘factual controversies . . . that, before trial, may seem nebulous.’”10
117
+
118
+ 5 See, e.g., Siming Yang, Exchange Act Release No. 73637, 2014 WL 6477195 (Nov. 19,
119
+ 2014) (granting Division’s unopposed motion to amend OIP to include a subsidiary and add a
120
+ statutory basis for the proceedings); Birman Managed Care, Inc., Exchange Act Release No.
121
+ 59074, 2008 WL 5169503 (Dec. 10, 2008) (granting joint motion to amend OIP to remove a
122
+ company that was not in fact a successor entity); IFG Network Secs., Inc., Exchange Act Release
123
+ No. 50008, 2004 WL 1563011 (July 13, 2004) (granting joint motion to amend OIP to dismiss
124
+ party that no longer existed and that received none of the commissions the Division sought to
125
+ disgorge); Steven Wise, Exchange Act Release No. 48850, 2003 WL 22827675 (Nov. 26, 2003)
126
+ (granting Division’s unopposed motion to amend OIP to correct identifying information).
127
+ 6 See, e.g., James S. Tagliaferri, Exchange Act Release No. 31804, 2015 WL 5139389
128
+ (Sept. 2, 2015) (granting motion to amend OIP to add respondent’s criminal conviction); Daniel
129
+ J. Gallagher, Exchange Act Release No. 70305, 2013 WL 4716026 (Sept. 3, 2013) (same);
130
+ Robert David Beauchene, Exchange Act Release No. 68974, 2013 WL 661619 (Feb. 25, 2013)
131
+ (same).
132
+ 7 Laminaire Corp. (n/k/a Cavico Corp.), Exchange Act Release No. 56685, 2007 WL
133
+ 3085021 (Oct. 22, 2007).
134
+ 8 Tagliaferri, 2015 WL 5139389, at *2.
135
+ 9 Eric David Wanger, Exchange Act Release No. 66678, 2012 WL 1037682, at *2 (Mar.
136
+ 29, 2012); see also, e.g., Gary L. McDuff, Exchange Act Release No. 78066, 2016 WL 3254513
137
+ (June 14, 2016) (denying interlocutory review on the basis of the Commission’s preference for a
138
+ single petition for review after the full development of a record).
139
+ 10 Barham v. Ramsey, 434 F.3d 565, 577 (D.C. Cir. 2006) (quoting Johnson v. Jones, 515
140
+ U.S. 304, 316-17 (1995)); see also Johnson, 515 U.S. at 317 (noting that interlocutory appeals
141
+ (continued. . . .)
142
+ 4
143
+
144
+
145
+
146
+ Pruitt argues that he “should not be forced to expend limited resources to prepare a
147
+ defense against unfairly prejudicial allegations that lack factual basis.” We fail to see how his
148
+ situation differs from that of the typical respondent who disputes the allegations made in the OIP.
149
+ To the extent a respondent believes it is entitled to a ruling as a matter of law and that there are
150
+ no disputes of material fact, Rule of Practice 250 authorizes dispositive motions.11
151
+ Although we have determined to deny Pruitt’s request under Rule of Practice 200(d)(1),
152
+ he may renew it before the law judge pursuant to Rule 200(d)(2).12 Pruitt claims that the
153
+ Division “espoused . . . new facts and legal theories” in its opposition brief and that as a result
154
+ “this motion cannot properly be directed to the ALJ for decision.” But the only motion before us
155
+ is Pruitt’s, and that motion, which seeks to delete allegations from the OIP, is clearly within the
156
+ scope of the OIP and, therefore, subject to the law judge’s authority under Rule 200(d)(2).
157
+ Pruitt also moves to stay the proceeding during our consideration of his motion to amend.
158
+ We deny that request as moot in light of our denial of the request to amend the OIP. We also
159
+ deny Pruitt’s request for oral argument because we have not determined that, pursuant to Rule of
160
+ Practice 451(a), “the presentation of facts and legal arguments in the briefs and record and the
161
+ decisional process would be significantly aided by oral argument.”13
162
+ Accordingly, IT IS ORDERED that David Pruitt’s motion to amend the Order Instituting
163
+ Proceedings is denied; and it is further ORDERED that Pruitt’s request to stay these proceedings
164
+ is denied; and it is further ORDERED that Pruitt’s request for oral argument is denied.
165
+
166
+ By the Commission.
167
+
168
+
169
+
170
+ Brent J. Fields
171
+ Secretary
172
+
173
+ (. . . .continued)
174
+ force appellate panels “to decide in the context of a less developed record, an issue very similar
175
+ to one they may well decide anyway later, on a record that will permit a better decision”).
176
+ 11 17 C.F.R. § 201.250.
177
+ 12 The parties may stipulate as to any amendments to the OIP that they agree should be
178
+ made as part of any renewed motion before the law judge pursuant to Rule 200(d)(2). See supra
179
+ note 2. We do not intend to suggest any view as to the outcome of any motion to amend the OIP
180
+ directed to the law judge or to the merits of this proceeding generally.
181
+ 13 17 C.F.R. § 201.451(a) (setting forth the standard for granting oral argument).
182
+
raw/aaer/2019/AAER-4024.txt ADDED
@@ -0,0 +1,493 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES EXCHANGE ACT OF 1934
6
+ Release No. 85233 / March 1, 2019
7
+
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4024 / March 1, 2019
10
+
11
+ ADMINISTRATIVE PROCEEDING
12
+ File No. 3-19010
13
+
14
+
15
+ In the Matter of
16
+
17
+ DLL CPAS, LLC and
18
+ DEBRA LEE LINDAMAN,
19
+ CPA,
20
+
21
+ Respondents.
22
+
23
+
24
+
25
+ ORDER INSTITUTING PUBLIC
26
+ ADMINISTRATIVE AND CEASE-AND-
27
+ DESIST PROCEEDINGS PURSUANT TO
28
+ SECTIONS 4C AND SECTION 21C OF
29
+ THE SECURITIES EXCHANGE ACT OF
30
+ 1934, AND RULE 102(e) OF THE
31
+ COMMISSION’S RULES OF PRACTICE,
32
+ MAKING FINDINGS, AND IMPOSING
33
+ REMEDIAL SANCTIONS AND A CEASE-
34
+ AND-DESIST ORDER
35
+
36
+
37
+ I.
38
+
39
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that
40
+ public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to
41
+ Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule
42
+ 102(e)(1)(ii) of the Commission’s Rules of Practice against DLL CPAS, LLC (“DLL”) and
43
+ Debra Lee Lindaman (“Lindaman”) (collectively “Respondents”).2
44
+
45
+ 1 Section 4C provides, in relevant part, that:
46
+
47
+ The Commission may censure any person, or deny, temporarily or permanently, to any
48
+ person the privilege of appearing or practicing before the Commission in any way, if that
49
+ person is found . . .(1) not to possess the requisite qualifications to represent others ; (2) to be
50
+ lacking in character or integrity, or to have engaged in unethical or imprope r professional
51
+ conduct; or (3) to have willfully violated, or willfully aided and abetted the violation of, any
52
+ provision of the securities laws or the rules and regulations thereunder.
53
+
54
+ 2 Rule 102(e)(1)(ii) provides, in pertinent part, that:
55
+
56
+
57
+ 2
58
+
59
+
60
+ II.
61
+
62
+ In anticipation of the institution of these proceedings, Respondents have submitted Offers
63
+ of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the
64
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
65
+ Commission, or to which the Commission is a party, and without admitting or denying the
66
+ findings herein, except as to the Commission’s jurisdiction over them and the subject matter of
67
+ these proceedings, which are admitted, and except as provided herein in Section V., Respondents
68
+ consent to the entry of this Order Instituting Public Administrative and Cease-and-Desist
69
+ Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule
70
+ 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
71
+ Sanctions and a Cease-and-Desist Order (“Order”), as set forth below.
72
+
73
+ III.
74
+
75
+ On the basis of this Order and Respondents’ Offers, the Commission finds3 that:
76
+
77
+ SUMMARY
78
+
79
+ 1. This matter concerns securities violations by Lindaman and her audit firm, DLL, in
80
+ conducting deficient audits and interim reviews of five public company clients in violation of the
81
+ Public Company Accounting Oversight Board’s (“PCAOB”) Auditing Standards and Regulation
82
+ S-X. Lindaman’s audits and reviews for the five issuer clients involved numerous audit
83
+ deficiencies including, among other things, the failure to obtain sufficient appropriate audit
84
+ evidence, maintain audit documentation, reconcile underlying accounting records to the issuers’
85
+ financial statements or footnotes, and perform adequate reviews of interim financial information.
86
+ In addition, with regard to two of the issuer clients, Lindaman’s audits were so deficient that they
87
+ could not be relied upon to verify the accuracy of the financial statements she audited. As a
88
+ result of these failures, Lindaman’s representations in audit reports that she conducted her audits
89
+ “in accordance with the standards of the Public Company Accounting Oversight Board” were
90
+ false.
91
+
92
+
93
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or
94
+ practicing before it . . . to any person who is found . . . to have engaged in unethical or
95
+ improper professional conduct.
96
+
97
+ 3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any
98
+ other person or entity in this or any other proceeding.
99
+
100
+ 3
101
+
102
+ RESPONDENTS AND RELEVANT ENTITIES
103
+
104
+ Respondents
105
+
106
+ 2. DLL, a Florida limited liability corporation, is a public accounting firm based in
107
+ Savannah, Georgia. Lindaman is DLL’s sole owner and proprietor. DLL, which registered with
108
+ the PCAOB on June 17, 2016, performed audits and interim reviews of the financial statements
109
+ for five issuers that are the subject of this recommendation, all of which file periodic reports with
110
+ the Commission pursuant to Section 13(a) and 15 (d) of the Securities Exchange Act of 1934
111
+ (“Exchange Act”). On July 16, 2018, after the staff put Lindaman on notice regarding potential
112
+ securities law violations by her in connection with the audits at issue, DLL applied to the
113
+ PCAOB to have its registration withdrawn, and effective August 29, 2018, DLL’s registration
114
+ was withdrawn.
115
+
116
+ 3. Debra Lee Lindaman, age 57, who resides in Savannah, Georgia, is a licensed
117
+ certified public accountant (“CPA”) in Florida, New Jersey and Georgia. Prior to forming DLL,
118
+ Lindaman had no prior experience in serving as an auditor for SEC registrants. Lindaman has no
119
+ disciplinary history, and she is no longer auditing public companies.
120
+
121
+ Relevant Entities
122
+
123
+ 4. CES Synergies, Inc. (“CES”), is a Nevada corporation with headquarters in
124
+ Crystal Springs, Florida. During the relevant period, CES’s common stock was registered with
125
+ the Commission pursuant to Section 12(g) of the Exchange Act, and the company filed periodic
126
+ reports with the Commission pursuant to Section 13(a) of the Exchange Act. On July 17, 2017,
127
+ CES filed a Form 15-12G with the Commission terminating its registration under the Exchange
128
+ Act, and the company is now a voluntary filer with the Commission. CES’s common stock is
129
+ quoted on OTC Link operated by OTC Markets Group Inc. (formerly the “Pink Sheets”) (“OTC
130
+ Link”).
131
+
132
+ 5. Kibush Capital Corp. (“Kibush”), is a Nevada corporation with headquarters in
133
+ Scottsdale, Arizona. Kibush’s common stock is registered with the Commission pursuant to
134
+ Section 12(g) of the Exchange Act, and the company files periodic reports with the Commission
135
+ pursuant to Section 13(a) of the Exchange Act. Kibush’s common stock is quoted on OTC Link.
136
+
137
+ 6. Leo Motors, Inc., (“Leo Motors”), is a Nevada corporation with headquarters in
138
+ Seoul, South Korea. Leo Motors’ common stock is registered with the Commission pursuant to
139
+ Section 12(g) of the Exchange Act, and the company files periodic reports with the Commission
140
+ pursuant to Section 13(a) of the Exchange Act. Leo Motors’ common stock is quoted on OTC
141
+ Link.
142
+
143
+ 7. American International Ventures, Inc. (“American International”), is a
144
+ Delaware corporation with headquarters in Lithia, Florida. During the relevant period, American
145
+ International’s common stock was registered with the Commission pursuant to Section 12(g) of
146
+ the Exchange Act during the relevant time, and the company filed periodic reports with the
147
+ Commission pursuant to Section 13(a) of the Exchange Act. On December 27, 2017, American
148
+
149
+ 4
150
+
151
+ International filed a Form 15-12G with the Commission terminating its registration under the
152
+ Exchange Act, and the company is now a voluntary filer with the Commission. American
153
+ International’s common stock is quoted on OTC Link.
154
+
155
+ 8. Omni Shrimp, Inc. f/k/a NaturalNano, Inc. (“Omni Shrimp”), is a Nevada
156
+ corporation with headquarters in Rochester, New York. Omni Shrimp’s common stock is
157
+ registered with the Commission pursuant to Section 12(b) of the Exchange Act, and the company
158
+ files periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act. Omni
159
+ Shrimp’s common stock is quoted on OTC Link.
160
+
161
+ FACTS
162
+
163
+ Background
164
+
165
+ 9. On June 2, 2016, Lindaman created DLL, and she registered DLL with the
166
+ PCAOB on June 17, 2016. Lindaman was a sole practitioner who had no prior experience in
167
+ serving as an auditor for Commission registrants. From December 2016 through February 2017,
168
+ Lindaman acquired CES, Kibush, Leo Motors, American International and Omni Shrimp
169
+ (collectively, the “Five Issuers”) as audit clients. The Five Issuers were previously audited by
170
+ another auditor who, in December 2016, was censured and barred by the PCAOB from being an
171
+ associated person of a registered public accounting firm. The PCAOB also had revoked the
172
+ registration of that auditor’s public accounting firm.
173
+
174
+ 10. Lindaman’s audits and reviews for the 2015 and 2016 fiscal year-end financial
175
+ statements for CES, Kibush, Leo Motors, and Omni Shrimp and quarterly reviews of American
176
+ International were deficient, evidencing numerous and repeated violations of auditing standards
177
+ concerning audit documentation, reconciliation of underlying accounting records to the issuers’
178
+ financial statements or footnotes, audit evidence, and interim reviews.
179
+
180
+ Failure to Obtain Audit Documentation
181
+
182
+ 11. PCAOB Auditing Standard (“AS”) No. 1215, Audit Documentation, requires that
183
+ the auditor must document the procedures performed, evidence obtained, and conclusions
184
+ reached with respect to relevant financial statement assertions. Audit documentation must
185
+ contain sufficient information to enable an experienced auditor, having no previous connection
186
+ with the engagement: (a) to understand the nature, timing, extent, and results of the procedures
187
+ performed, evidence obtained, and conclusions reached, and (b) to determine who performed the
188
+ work and the date such work was completed as well as the person who reviewed the work and
189
+ the date of such review. AS No. 1215, ¶ 6, Audit Documentation.
190
+
191
+ 12. Lindaman produced deficient audit workpapers related to the audits of Leo
192
+ Motors, Kibush, CES and Omni Shrimp. The audits consistently did not include evidence of the
193
+ procedures performed, evidence obtained, and conclusions reached with respect to relevant
194
+ financial statement assertions.
195
+
196
+
197
+ 5
198
+
199
+ 13. In particular, Lindaman’s audits of Leo Motors’ financial statements for the years
200
+ ended December 31, 2015, and 2016, and Kibush’s financial statements for the years ended
201
+ September 30, 2015, and September 30, 2016, were so deficient that they could not be relied
202
+ upon to verify the accuracy of the financial statements she audited. For these audits, the vast
203
+ majority of the balance sheet and income statement line items in the financial statements either
204
+ completely lacked any associated workpapers in the audit files, or there was not appropriate
205
+ documentation included in the workpapers that existed such as the procedures performed,
206
+ evidence obtained, or conclusions reached.
207
+
208
+ 14. Lindaman’s workpapers for the Leo Motor’s audits also contained no testing of
209
+ several acquisitions, including a March 31, 2015 acquisition of Leo Motors Factory 1 &2 and
210
+ Leo Trading and a June 3, 2016 acquisition of LEO AIC, even though these acquisitions were
211
+ identified as “significant transactions” in an audit planning workpaper. Lindaman also did not
212
+ confirm or agree the Leo Motors’ largest single cash account to any bank statement or test any of
213
+ the inventory balances.
214
+
215
+ 15. In several of the audits, Lindaman’s workpapers lack documentation as to
216
+ confirmations relating to significant accounts receivable and accounts payable, as detailed by the
217
+ following:
218
+
219
+ a. CES 2015 and 2016 year-end audits: Lindaman identified accounts receivable as a
220
+ significant and fraud risk area for both audit years. Although she selected 22 and 27
221
+ receivable balances to confirm, respectively, for the 2015 and 2016 audits, the
222
+ workpapers reflect that she obtained merely three receivable confirmations back for each
223
+ audit year, did not include any documentation on the actual receivable confirmations
224
+ received from customers or conduct any follow-up as to confirmations that remained
225
+ unaddressed by customers.
226
+
227
+ b. Omni Shrimp 2016 year-end audit: Although Lindaman identified accounts receivable as
228
+ a significant and fraud risk area, the workpapers contained no copies of confirmations
229
+ that were either sent or received relating to 6 account receivable balances (comprising of
230
+ 85% of the total account receivable balance) that she selected for testing.
231
+
232
+ c. Kibush 2015 and 2016 year-end audits: The workpapers lacked documentation of
233
+ confirmations received in connection with the testing of “Notes Payables” and “Related
234
+ Party Payables.”
235
+
236
+ Failure to Reconcile Financial Statements and Underlying Accounting Records
237
+
238
+ 16. AS No. 2301, ¶ 41, The Auditor's Responses to the Risks of Material
239
+ Misstatement, requires that the auditor reconcile the financial statements with the underlying
240
+ accounting records. For the 2015 and 2016 audits of CES, Leo Motors, Omni Shrimp and
241
+ Kibush, Lindaman did not include in her workpapers documents demonstrating that she
242
+ reconciled underlying accounting records to the issuers’ financial statements or footnotes.
243
+ Lindaman included limited audit evidence in the workpapers evidencing that she tested any of
244
+ the financial statement footnotes or reconciled the footnotes to supporting documentation. Also,
245
+
246
+ 6
247
+
248
+ the audit files contained no documentation evidencing that she had reviewed any of the
249
+ company’s public filings before they were filed with the Commission. In this regard, none of the
250
+ audit workpapers contained a Form 10-K or a complete set of notes to the financial statements.
251
+
252
+ 17. In conducting the Kibush audit, Lindaman did not address several significant
253
+ inconsistencies contained in the company’s 2016 Form 10-K issued on February 10, 2017,
254
+ including that: (1) certain information in the “Derivative Financial Instruments” section of
255
+ footnote No. 2 did not agree to the financial statements (September 30, 2016 derivative liability
256
+ balance and September 30, 2015 change in fair value); (2) the shares of common stock issued to
257
+ convertible note holders, as discussed in footnote No. 7, did not agree to the Statement of
258
+ Stockholders’ Equity; (3) the amounts of $100,000 and $250,000 included in footnote No. 11
259
+ were denoted in U.S. Dollars, while in Part 1, Item 2 of the Form 10-K those same amounts were
260
+ denoted in Australian Dollars; (4) Kibush’s income statement contained two incorrect line items
261
+ for “discontinued operations,” which were not corrected until Kibush filed a subsequent Form
262
+ 10-K/A on February 21, 2017; and (5) Kibush reached a legal settlement concerning an
263
+ ownership dispute over “Angel Jade” on February 10, 2017, the same day Kibush filed its Form
264
+ 10-K, but the Form 10-K made no mention of this legal settlement. Moreover, even though
265
+ Kibush filed an amended Form 10-K/A on February 21, 2017 (to correct an income statement
266
+ line item), Lindaman did not make sure the company disclosed the outcome of the “Angel Jade”
267
+ legal settlement as a subsequent event in the Company’s footnotes. Lindaman’s failure to
268
+ identify this issue did not rise to the standards as expected given that Kibush disclosed the
269
+ settlement in a Form 8-K filed on February 15, 2017.
270
+
271
+ Failure to Obtain Audit Evidence
272
+
273
+ 18. AS No. 1105, ¶ 4, Audit Evidence, requires that the auditor plan and perform audit
274
+ procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or
275
+ her opinion. Sufficiency is the measure of the quantity of audit evidence. Appropriateness is the
276
+ measure of the quality of audit evidence, that is, its relevance and reliability. To be appropriate,
277
+ audit evidence must be both relevant and reliable in providing support for the conclusions on
278
+ which the auditor's opinion is based. AS No. 1105, ¶ 5-6, Audit Evidence.
279
+
280
+ 19. For the audits of CES, Leo Motors, Omni Shrimp, and Kibush, Lindaman did not
281
+ obtain appropriate audit evidence that was sufficient to support the opinion expressed in her audit
282
+ reports. For example, for the 2015 and 2016 audits, Lindaman did not obtain appropriate audit
283
+ evidence for her audit of CES’ accounts receivable, inventory, deferred tax asset, revenue, cost
284
+ of sales, general and administrative expenses, and going concern. Lindaman did not obtain
285
+ appropriate audit evidence for Leo Motor’s cash, inventory, and accounts receivable. For the
286
+ 2016 audit of Omni Shrimp, she did not obtain appropriate audit evidence for inventory,
287
+ derivative liability, revenue, and cost of sales; and she did not obtain appropriate audit evidence
288
+ for Kibush’s derivative liability.
289
+
290
+ Deficient Interim Reviews and Procedures
291
+
292
+ 20. AS No. 4105, Reviews of Interim Financial Information, provides that the
293
+ procedures for conducting a review of interim financial information generally are limited to
294
+
295
+ 7
296
+
297
+ analytical procedures, inquiries, and other procedures that address significant accounting and
298
+ disclosure matters relating to the interim financial information to be reported. Analytical
299
+ procedures should include, among other things, comparing the quarterly interim financial
300
+ information with comparable information for the immediately preceding interim period and the
301
+ quarterly and year-to-date interim financial information with the corresponding period(s) in the
302
+ previous year, giving consideration to knowledge about changes in the entity's business and
303
+ specific transactions. The accountant performs these procedures to obtain a basis for
304
+ communicating whether he or she is aware of any material modifications that should be made to
305
+ the interim financial information for it to conform with generally accepted accounting principles.
306
+ AS No. 4105, ¶ 15-16, Reviews of Interim Financial Information. The auditor should also obtain
307
+ evidence that the interim financial information agrees or reconciles with the accounting records.
308
+ AS No. 4105, ¶ 18. Reviews of Interim Financial Information. Further, during an initial review
309
+ of interim financial information, an accountant should perform procedures that will enable him
310
+ or her to obtain sufficient knowledge of the entity's business and its internal control. If the
311
+ accountant has not audited the most recent annual financial statements, the accountant should
312
+ perform procedures to obtain such knowledge. AS No. 4105, ¶ 12-13, Reviews of Interim
313
+ Financial Information.
314
+
315
+ 21. Lindaman’s interim reviews of the Five Issuers were often perfunctory and
316
+ contained no meaningful analysis of variances in account balances from one period to another.
317
+ There was no documented rationale for which variances were investigated or, in many instances,
318
+ material variances were not investigated at all. For example, for the March 31, 2017 Omni
319
+ Shrimp review, Lindaman’s workpapers did not address a $66,573 decrease related to cash (a
320
+ 33% variance). Further, the analytical procedures pertaining to the balance sheet and income
321
+ statement accounts did not contain comparisons of the current interim financial information to
322
+ the immediately preceding interim period or the quarterly and year-to-date interim financial
323
+ information with the corresponding period(s) in the previous year. For all interim reviews she
324
+ conducted there is no evidence that the financial information was agreed or reconciled to the
325
+ issuer’s accounting records and no interim review workpaper file included a copy of the issuer’s
326
+ Form 10-Q.
327
+
328
+ 22. In addition, some of Lindaman’s interim reviews contained other substantial flaws.
329
+ For example, no interim review workpapers were produced by Lindaman for the June 30, 2017,
330
+ interim review of Kibush’s financial statements. In the case of the November 30, 2016 interim
331
+ review of American International’s financial statements, Lindaman did not include any
332
+ documents in the workpapers demonstrating that she obtained sufficient knowledge of the
333
+ company’s business and its internal controls. Further, there is no evidence that an EQR was
334
+ completed for the November 30, 2016 interim review of American International.
335
+
336
+ Failure to Issue Accurate Audit Reports
337
+
338
+ 23. AS No. 3101, Report on Audited Financial Statements, requires that the auditor’s
339
+ report contain an opinion on the financial statements taken as a whole and contain a clear
340
+ indication of the character of the auditor’s work. The auditor is in a position to express an
341
+ unqualified opinion on the financial statements when the auditor conducted an audit in
342
+ accordance with the standards of the PCAOB and concludes that the financial statements, taken
343
+
344
+ 8
345
+
346
+ as a whole, are presented fairly, in all material respects, in conformity with the applicable
347
+ financial reporting framework. Additionally, Regulation S-X, 17 CFR § 210 et seq., prescribes
348
+ the qualifications of accountants and the contents of the accountants’ reports that must be
349
+ submitted with corporate financial statements.
350
+
351
+ 24. The culmination of Lindaman’s numerous audit deficiencies rendered any
352
+ representations that the audits were conducted in accordance with PCAOB standards materially
353
+ false and misleading because the audits were out of compliance. Lindaman made such
354
+ representations in each of her audit reports for CES, Kibush, Leo Motors, and Omni Shrimp,
355
+ falsely certifying that her audits of the issuers’ financial statements were conducted in
356
+ accordance with the standards of the PCAOB.
357
+
358
+ Applicable Securities Laws
359
+
360
+
361
+ 25. Rule 2-02(b)(1) of Regulation S-X requires an accountant to state “whether the
362
+ audit was made in accordance with generally accepted auditing standards.” As used with respect
363
+ to Regulation S-X in relation to audits of issuers, the phrase “generally accepted auditing
364
+ standards” means the “the standards of the PCAOB plus any applicable rules of the Commission.”
365
+ SEC Release No. 34-49708 (May 14, 2004).
366
+
367
+ 26. In administrative proceedings, the Commission may impose sanctions upon any
368
+ person who is, was, or would be a cause of a violation, due to an act or omission the person knew
369
+ or should have known would contribute to such violation. In order to establish that a person
370
+ caused a violation, the Commission has specifically ruled that a showing of negligence will
371
+ suffice.
372
+
373
+ 27. An issuer violates Section 13(a) of the Exchange Act, and Exchange Act Rules
374
+ 13a-1 and 13a-13, when such issuer of registered securities files with the Commission factually
375
+ inaccurate annual and quarterly reports.
376
+ 28. Exchange Act Section 4C(a) and Rule 102(e)(1) of the Commission’s Rules of
377
+ Practice authorize the Commission to institute administrative proceedings to determine whether a
378
+ person has engaged in “improper professional conduct, and censure or temporarily or
379
+ permanently deny that person of the privilege of appearing or practicing before the Commission.
380
+ In administrative proceedings, the Commission may impose sanctions upon any person who is,
381
+ was, or would be a cause of a violation, due to an act or omission the person knew or should
382
+ have known would contribute to such violation. In order to establish that a person caused a
383
+ violation, negligence will suffice.
384
+
385
+ FINDINGS
386
+
387
+ 29. Based on the foregoing, the Commission finds that DLL violated Regulation S-X
388
+ Rule 2-02(b)(1); and that DLL caused violations of Exchange Act Section 13(a), and Exchange
389
+ Act Rules 13a-1 and 13a-13 thereunder.
390
+
391
+ 30. Based on the foregoing, the Commission finds that Lindaman caused violations of
392
+
393
+ 9
394
+
395
+ Regulation S-X Rule 2-02(b)(1), Exchange Act Section 13(a), and Exchange Act Rules 13a-1
396
+ and 13a-13 thereunder.
397
+
398
+ 31. Based on the foregoing, the Commission finds that DLL and Lindaman engaged
399
+ in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule
400
+ 102(e)(1)(ii) of the Commission’s Rules of Practice.
401
+
402
+
403
+ IV.
404
+
405
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
406
+ agreed to in the Respondents’ Offers.
407
+
408
+ Accordingly, it is hereby ORDERED, effective immediately, that:
409
+
410
+ A. Respondents DLL and Lindaman shall cease and desist from committing or
411
+ causing any violations and any future violations of Exchange Act Section and 13(a), and
412
+ Exchange Act Rules 13a-1, and 13a-13 promulgated thereunder, and Regulation S-X Rule 2-
413
+ 02(b)(1).
414
+
415
+ B. Respondents DLL and Lindaman are denied the privilege of appearing or
416
+ practicing before the Commission as accountants.
417
+
418
+ C. Respondents DLL and Lindaman shall be held jointly and severally liable for, and
419
+ shall within 10 days of the entry of this Order, pay disgorgement of $25,000 and prejudgment
420
+ interest of $1,387.27 to the Securities and Exchange Commission for transfer to the general fund of
421
+ the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not
422
+ made, additional interest shall accrue pursuant to SEC Rule of Practice 600.
423
+
424
+ D. Respondents DLL and Lindaman shall be held jointly and severally liable for, and
425
+ shall, within 10 days of the entry of this Order, pay a civil money penalty in the amount of
426
+ $25,000 to the Securities and Exchange Commission for transfer to the general fund of the United
427
+ States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made,
428
+ additional interest shall accrue pursuant to 31 U.S.C. §3717.
429
+
430
+ E. Payment must be made in one of the following ways:
431
+
432
+ (1) Respondent may transmit payment electronically to the Commission,
433
+ which will provide detailed ACH transfer/Fedwire instructions upon
434
+ request;
435
+
436
+ (2) Respondent may make direct payment from a bank account via
437
+ Pay.gov through the SEC website at
438
+ http://www.sec.gov/about/offices/ofm.htm; or
439
+
440
+ (3) Respondent may pay by certified check, bank cashier’s check, or
441
+
442
+ 10
443
+
444
+ United States postal money order, made payable to the Securities
445
+ and Exchange Commission and hand-delivered or mailed to:
446
+
447
+ Enterprise Services Center
448
+ Accounts Receivable Branch
449
+ HQ Bldg., Room 181, AMZ-341
450
+ 6500 South MacArthur Boulevard
451
+ Oklahoma City, OK 73169
452
+
453
+ F. Payments by check or money order must be accompanied by a cover letter
454
+ identifying each Respondent in these proceedings, and the file number of these proceedings.
455
+ A copy of the cover letter and check or money order must be simultaneously sent to Anita
456
+ Bandy, Associate Director, Division of Enforcement, Securities and Exchange Commission,
457
+ 100 F St., N.E., Washington, DC 20549.
458
+
459
+ G. Amounts ordered to be paid as civil money penalties pursuant to this Order
460
+ shall be treated as penalties paid to the government for all purposes, including all tax
461
+ purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees that in any
462
+ Related Investor Action, he shall not argue that he is entitled to, nor shall he benefit by, offset
463
+ or reduction of any award of compensatory damages by the amount of any part of
464
+ Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in any
465
+ Related Investor Action grants such a Penalty Offset, Respondent agrees that he shall, within
466
+ 30 days after entry of a final order granting the Penalty Offset, notify the Commission’s
467
+ counsel in this action and pay the amount of the Penalty Offset to the Securities and
468
+ Exchange Commission. Such a payment shall not be deemed an additional civil penalty and
469
+ shall not be deemed to change the amount of the civil penalty imposed in this proceeding. For
470
+ purposes of this paragraph, a “Related Investor Action” means a private damages action
471
+ brought against Respondent by or on behalf of one or more investors based on substantially the
472
+ same facts as alleged in the Order instituted by the Commission in this proceeding.
473
+
474
+
475
+ 11
476
+
477
+ V.
478
+ It is further Ordered that, solely for purposes of exceptions to discharge set forth in
479
+ Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and
480
+ admitted by Respondent, Lindaman, and further, any debt for disgorgement, prejudgment
481
+ interest, civil penalty or other amounts due by Respondents under this Order or any other
482
+ judgment, order, consent order, decree or settlement agreement entered in connection with this
483
+ proceeding, is a debt for the violation by Respondents of the federal securities laws or any
484
+ regulation or order issued under such laws, as set forth in Section 523(a)(19) of the
485
+ Bankruptcy Code, 11 U.S.C. §523(a)(19).
486
+
487
+
488
+ By the Commission.
489
+
490
+
491
+
492
+ Brent J. Fields
493
+ Secretary
raw/aaer/2019/AAER-4025.txt ADDED
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1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES EXCHANGE ACT OF 1934
6
+ Release No. 85234 / March 1, 2019
7
+
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4025 / March 1, 2019
10
+
11
+ ADMINISTRATIVE PROCEEDING
12
+ File No. 3-19011
13
+
14
+
15
+ In the Matter of
16
+
17
+
18
+ ARTHUR VIOLA,
19
+
20
+
21
+ Respondent.
22
+
23
+
24
+
25
+ ORDER INSTITUTING PUBLIC
26
+ ADMINISTRATIVE AND CEASE-AND-
27
+ DESIST PROCEEDINGS PURSUANT TO
28
+ SECTIONS 4C AND SECTION 21C OF
29
+ THE SECURITIES EXCHANGE ACT OF
30
+ 1934, AND RULE 102(e) OF THE
31
+ COMMISSION’S RULES OF PRACTICE,
32
+ MAKING FINDINGS, AND IMPOSING
33
+ REMEDIAL SANCTIONS AND A CEASE-
34
+ AND-DESIST ORDER
35
+
36
+ I.
37
+
38
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that
39
+ public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to
40
+ Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule
41
+ 102(e)(1)(ii) of the Commission’s Rules of Practice against Arthur Viola (“Viola” or
42
+ “Respondent”).2
43
+
44
+ 1 Section 4C provides, in relevant part, that:
45
+
46
+ The Commission may censure any person, or deny, temporarily or permanently, to any
47
+ person the privilege of appearing or practicing before the Commission in any way, if that
48
+ person is found . . .(1) not to possess the requisite qualifications to represent others ; (2) to be
49
+ lacking in character or integrity, or to have engaged in unethical or improper professional
50
+ conduct; or (3) to have willfully violated, or willfully aided and abetted the violation of, any
51
+ provision of the securities laws or the rules and regulations thereunder.
52
+
53
+ 2 Rule 102(e)(1)(ii) provides, in pertinent part, that:
54
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or
55
+ practicing before it . . . to any person who is found . . . to have engaged in unethical or
56
+ improper professional conduct.
57
+
58
+
59
+ 2
60
+
61
+
62
+ II.
63
+
64
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
65
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
66
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
67
+ Commission, or to which the Commission is a party, and without admitting or denying the
68
+ findings herein, except as to the Commission’s jurisdiction over him and the subject matter of
69
+ these proceedings, which are admitted, and except as provided herein in Section V., Respondent
70
+ consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist
71
+ Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule
72
+ 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
73
+ Sanctions and a Cease-and-Desist Order (“Order”), as set forth below.
74
+
75
+ III.
76
+
77
+ On the basis of this Order and Respondent’s Offer, the Commission finds3 that:
78
+
79
+ SUMMARY
80
+
81
+ 1. This matter concerns deficient Engagement Quality Reviews (“EQRs”) Viola
82
+ conducted of five public company clients of DLL CPAS LLC (“DLL”), a Florida limited liability
83
+ corporation, and Debra Lee Lindaman (“Lindaman”), DLL’s sole owner and proprietor, in
84
+ violation of the Public Company Accounting Oversight Board’s (“PCAOB”) Auditing Standards
85
+ and Regulation S-X. Lindaman’s audits and reviews for the five issuer clients involved
86
+ numerous audit deficiencies including, among other things, the failure to obtain sufficient
87
+ appropriate audit evidence, maintain audit documentation, reconcile underlying accounting
88
+ records to the issuers’ financial statements or footnotes, and perform adequate reviews of interim
89
+ financial information. In addition, with regard to two of the issuer clients, Lindaman’s audits
90
+ were so deficient that they could not be relied upon to verify the accuracy of the financial
91
+ statements she audited. Viola, who conducted the EQRs on these audits, did not conduct his
92
+ reviews pursuant to PCAOB standards. As a result, Viola’s EQRs of Lindaman’s audits and
93
+ reviews were deficient.
94
+
95
+
96
+
97
+ 3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any
98
+ other person or entity in this or any other proceeding.
99
+
100
+ 3
101
+
102
+ RESPONDENT AND RELEVANT ENTITIES
103
+
104
+ Respondent
105
+
106
+ 2. Arthur Viola resides in New York City, New York. Viola served as the
107
+ engagement quality reviewer for eleven of the deficient audits and reviews Lindaman conducted
108
+ of the five issuers. Viola is not a CPA and has never been a licensed CPA.
109
+
110
+ Relevant Persons and Entities
111
+
112
+ 3. DLL, a Florida limited liability corporation, is a public accounting firm based in
113
+ Savannah, Georgia. Lindaman is DLL’s sole owner and proprietor. DLL, which registered with
114
+ the PCAOB on June 17, 2016, performed audits and interim reviews of the financial statements
115
+ for five issuers that are the subject of this recommendation, all of which file periodic reports with
116
+ the Commission pursuant to Section 13(a) and 15 (d) of the Securities Exchange Act of 1934
117
+ (“Exchange Act”). On July 16, 2018, after the staff put Lindaman on notice regarding potential
118
+ securities law violations by her in connection with the audits at issue, DLL applied to the
119
+ PCAOB to have its registration withdrawn, and effective August 29, 2018, DLL’s registration
120
+ was withdrawn.
121
+
122
+ 4. Debra Lee Lindaman, age 57, who resides in Savannah, Georgia, is a licensed
123
+ certified public accountant (“CPA”) in Florida, New Jersey and Georgia. Prior to forming DLL,
124
+ Lindaman had no prior experience in serving as an auditor for SEC registrants. Lindaman has no
125
+ disciplinary history, and she is no longer auditing public companies.
126
+
127
+ 5. CES Synergies, Inc. (“CES”), is a Nevada corporation with headquarters in Crystal
128
+ Springs, Florida. During the relevant period, CES’s common stock was registered with the
129
+ Commission pursuant to Section 12(g) of the Exchange Act, and the company filed periodic
130
+ reports with the Commission pursuant to Section 13(a) of the Exchange Act. On July 17, 2017,
131
+ CES filed a Form 15-12G with the Commission terminating its registration under the Exchange
132
+ Act, and the company is now a voluntary filer with the Commission. CES’s common stock is
133
+ quoted on OTC Link operated by OTC Markets Group Inc. (formerly the “Pink Sheets”) (“OTC
134
+ Link”).
135
+
136
+ 6. Kibush Capital Corp. (“Kibush”), is a Nevada corporation with headquarters in
137
+ Scottsdale, Arizona. Kibush’s common stock is registered with the Commission pursuant to
138
+ Section 12(g) of the Exchange Act, and the company files periodic reports with the Commission
139
+ pursuant to Section 13(a) of the Exchange Act. Kibush’s common stock is quoted on OTC Link.
140
+
141
+ 7. Leo Motors, Inc., (“Leo Motors”), is a Nevada corporation with headquarters in
142
+ Seoul, South Korea. Leo Motors’ common stock is registered with the Commission pursuant to
143
+ Section 12(g) of the Exchange Act, and the company files periodic reports with the Commission
144
+ pursuant to Section 13(a) of the Exchange Act. Leo Motors’ common stock is quoted on OTC
145
+ Link.
146
+
147
+
148
+
149
+ 4
150
+
151
+ 8. American International Ventures, Inc. (“American International”), is a
152
+ Delaware corporation with headquarters in Lithia, Florida. During the relevant period, American
153
+ International’s common stock was registered with the Commission pursuant to Section 12(g) of
154
+ the Exchange Act during the relevant time, and the company filed periodic reports with the
155
+ Commission pursuant to Section 13(a) of the Exchange Act. On December 27, 2017, American
156
+ International filed a Form 15-12G with the Commission terminating its registration under the
157
+ Exchange Act, and the company is now a voluntary filer with the Commission. American
158
+ International’s common stock is quoted on OTC Link.
159
+
160
+ 9. Omni Shrimp, Inc. f/k/a NaturalNano, Inc. (“Omni Shrimp”), is a Nevada
161
+ corporation with headquarters in Rochester, New York. Omni Shrimp’s common stock is
162
+ registered with the Commission pursuant to Section 12(b) of the Exchange Act, and the company
163
+ files periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act. Omni
164
+ Shrimp’s common stock is quoted on OTC Link.
165
+
166
+
167
+ FACTS
168
+
169
+ Viola’s Deficient EQRs
170
+
171
+ 10. Viola performed EQRs for Lindaman’s audits of the 2015 and 2016 fiscal years for
172
+ Leo Motors, Omni Shrimp, and Kibush. Viola also performed EQRs for Lindaman’s interim
173
+ reviews of the first quarters-ended March 31, 2017, for CES, Leo Motors, and Omni Shrimp.
174
+ Viola also performed EQRs for Lindaman’s review of Kibush’s quarter-ended December 31,
175
+ 2016, and for American International’s quarter-ended February 28, 2017.
176
+
177
+ 11. The EQR must possess the level of knowledge and competence related to
178
+ accounting, auditing, and financial reporting required to serve as the engagement partner on the
179
+ engagement under review. AS No. 1220, ¶ 5 Engagement Quality Review. As the EQR, Viola
180
+ was subject to several additional requirements, including:
181
+
182
+ a. AS No. 1220, ¶ 12, Engagement Quality Review, which requires that an EQR perform her
183
+ review with due professional care;
184
+
185
+ b. AS No. 1015, ¶ 4-5, Due Professional Care in the Performance of Work, which sets forth
186
+ that due professional care concerns what the independent auditor does and how well he or
187
+ she does it. An auditor should possess “the degree of skill commonly possessed” by
188
+ other auditors and should exercise it with “reasonable care and diligence” (that is, with
189
+ due professional care); and
190
+
191
+ c. AS No. 1220, ¶ 10-11, Engagement Quality Review, which requires an EQR to evaluate
192
+ the engagement team’s assessment of, and audit responses to significant risks identified
193
+ by the engagement team, including fraud risks and failing to evaluate whether the
194
+ engagement documentation reviewed indicates the engagement team responded
195
+ appropriately to significant risks and supports the conclusions reached by the engagement
196
+ team.
197
+
198
+ 5
199
+
200
+
201
+ 12. Viola did not possess the necessary qualifications to be an EQR. Viola has never
202
+ been a licensed CPA, and he has not taken any auditing or accounting academic courses (other
203
+ than in college) or continuing professional education courses as it relates to accounting or
204
+ auditing matters. Further, he had no prior auditing experience and never previously served as an
205
+ EQR.
206
+
207
+ 13. Viola repeatedly did not perform adequate EQRs for Lindaman’s audits and
208
+ interim reviews. For example, in connection with his EQRs of Kibush’s 2015 and 2016 audits,
209
+ Viola did not properly identify discrepancies relating to the accounting and disclosure of
210
+ Kibush’s acquisition and subsequent deconsolidation of an entity called “Angel Jade,” which
211
+ was described in detail in Kibush’s 2016 Form 10-K. Kibush’s Form 10-K was also restated
212
+ twice for issues related to Angel Jade. Viola, however, did not identify Angel Jade as an area of
213
+ significant judgment in the audit engagement planning. Further, the lack of documentation in the
214
+ audit file concerning Angel Jade should have raised a red flag for Viola given the unusual
215
+ circumstances relating to Angel Jade, including the change in control and litigation matters that
216
+ were discussed in the Form 10-K filed September 30, 2016. Moreover, the audit workpapers
217
+ contained no audit testing of the Angel Jade acquisition or of the subsequent accounting for the
218
+ deconsolidation and recording of a “discontinued operations” line item on the company’s income
219
+ statement. Viola, however, held no discussions with Lindaman about Angel Jade nor raised any
220
+ questions as to why there was no documentation concerning these transactions.
221
+
222
+ 14. Viola’s EQRs of Lindaman’s audits of Leo Motors and Omni Shrimp were also
223
+ deficient. In assessing significant and fraud risks, Viola reviewed a “risk assessment summary
224
+ form” in the workpapers for Leo Motors and Omni Shrimp, highlighting that sales and accounts
225
+ receivable were identified as significant and fraud risks. These workpapers, however, did not
226
+ document how the risks would be addressed other than a generic description that sales and
227
+ accounts receivable should be subject to “Extended Procedures.” Lindaman’s audit programs for
228
+ sales and accounts receivable contained no procedures specifically responsive to the assessed
229
+ risks, the substantive testing audit workpapers for sales and accounts receivable lacked
230
+ appropriate audit documentation and did not contain sufficient appropriate evidence supporting
231
+ the conclusions reached. However, there is no evidence in the workpapers that Viola discussed
232
+ the fraud risks with Lindaman or reviewed these areas at all.
233
+
234
+ 15. Viola did not evaluate the identified areas of risks or determine whether
235
+ Lindaman appropriately responded to the risks or whether her conclusions were supported given
236
+ that the underlying audit workpapers lacked documentation concerning the responses to and
237
+ disposition of the risks.
238
+
239
+ a. Viola did not exercise due professional care in his review of the audit planning
240
+ workpapers or engagement completion document. He represented on the EQR
241
+ checklists for these audits that he reviewed the audit “engagement completion
242
+ document” (as required by AS No. 1220, ¶ 10, Engagement Quality Review).
243
+ The engagement completion workpaper in the Leo Motors and Omni Shrimp
244
+ audit files contained no documentation except the notation “none” placed next to
245
+ each of eleven checklist items that required a response. These included items
246
+
247
+ 6
248
+
249
+ such as “Other significant findings or issues, including any significant unusual
250
+ transactions” and “Risks of material misstatement determined to be significant
251
+ risks and the results of auditing procedures in response to such risks.” However,
252
+ other planning workpaper reflected the existence of several “unusual
253
+ transactions” and “significant risks” including: (1) Leo Motors workpapers
254
+ reflecting that “Purchase of 50% of Subsidiaries” was a “significant unusual
255
+ transaction;” (2) Omni Shrimp planning workpapers reflecting that “Assuming
256
+ derivative liability from “shell” company” was a “significant unusual
257
+ transaction;” and (3) the risk assessment forms for Leo Motors and Omni Shrimp
258
+ reflecting that sales and accounts receivable were significant and fraud risk areas.
259
+ Viola, however, did not question that the engagement completion documents
260
+ directly contradicted other planning audit workpapers that he purportedly
261
+ reviewed, nor did he review further audit documentation concerning the
262
+ “significant unusual transactions.”
263
+
264
+ b. For the EQRs of Leo Motors, Viola did not exercise due professional care in
265
+ evaluating significant judgements relating to engagement planning – an area that
266
+ he indicated that he reviewed on the EQR checklist. In planning the audit,
267
+ Lindaman made a significant judgement in deciding not to observe the
268
+ company’s inventory, its second largest asset (representing 19% of the total
269
+ assets at December 31, 2016). Viola did not ask Lindaman why she did not
270
+ observe the inventory because he did not know that observing inventory was a
271
+ standard auditing practice.
272
+
273
+ 16. For the American International reviews, Viola did not identify that Lindaman had
274
+ not obtained a sufficient understanding of American International’s business and internal
275
+ controls, and that she had not appropriately considered risks of material misstatement due to
276
+ fraud. Neither the November 30, 2016 nor the February 28, 2017 interim review workpapers
277
+ contained evidence that Lindaman considered misstatement risk, despite the company reporting
278
+ in its first and second quarter Forms 10-Q that its disclosure controls and procedures were not
279
+ effective.
280
+
281
+ 17. For all Five Issuers, Viola did not conduct an adequate EQR and identify
282
+ significant engagement deficiencies in the interim reviews. Specifically, Viola did not identify
283
+ that Lindaman’s interim financial statement analytical procedures did not comply with the
284
+ relevant auditing standards, were perfunctory and void of any meaningful analysis of variances
285
+ in account balances from one period to another. Further, the analytical procedures pertaining to
286
+ the balance sheet and income statement accounts did not contain comparisons of the current
287
+ interim financial information to the immediately preceding interim period or the quarterly and
288
+ year-to-date interim financial information with the corresponding period(s) in the previous year.
289
+
290
+ Applicable Securities Laws
291
+
292
+ 18. Rule 2-02(b)(1) of Regulation S-X requires an accountant to state “whether the
293
+ audit was made in accordance with generally accepted auditing standards.” As used with respect
294
+ to Regulation S-X in relation to audits of issuers, the phrase “generally accepted auditing
295
+
296
+ 7
297
+
298
+ standards” means the “the standards of the PCAOB plus any applicable rules of the Commission.”
299
+ SEC Release No. 34-49708 (May 14, 2004).
300
+
301
+ 19. In administrative proceedings, the Commission may impose sanctions upon any
302
+ person who is, was, or would be a cause of a violation, due to an act or omission the person knew
303
+ or should have known would contribute to such violation. In order to establish that a person
304
+ caused a violation, the Commission has specifically ruled that a showing of negligence will
305
+ suffice.
306
+
307
+ 20. An issuer violates Section 13(a) of the Exchange Act, and Exchange Act Rules
308
+ 13a-1 and 13a-13, when such issuer of registered securities files with the Commission factually
309
+ inaccurate annual and quarterly reports.
310
+ 21. Exchange Act Section 4C(a) and Rule 102(e)(1) of the Commission’s Rules of
311
+ Practice authorize the Commission to institute administrative proceedings to determine whether a
312
+ person has engaged in “improper professional conduct, and censure or temporarily or
313
+ permanently deny that person of the privilege of appearing or practicing before the Commission.
314
+ In administrative proceedings, the Commission may impose sanctions upon any person who is,
315
+ was, or would be a cause of a violation, due to an act or omission the person knew or should
316
+ have known would contribute to such violation. In order to establish that a person caused a
317
+ violation, negligence will suffice.
318
+
319
+ FINDINGS
320
+
321
+ 22. Based on the foregoing, the Commission finds that Viola caused violations of
322
+ Regulation S-X Rule 2-02(b)(1), Exchange Act Section 13(a), and Exchange Act Rules 13a-1
323
+ and 13a-13 thereunder.
324
+
325
+ 23. Based on the foregoing, the Commission finds that Viola engaged in improper
326
+ professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of
327
+ the Commission’s Rules of Practice.
328
+
329
+
330
+ IV.
331
+
332
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
333
+ agreed to in the Respondent’s Offer.
334
+
335
+ Accordingly, it is hereby ORDERED, effective immediately, that:
336
+
337
+ A. Respondent Viola shall cease and desist from committing or causing any
338
+ violations and any future violations of Exchange Act Section 13(a), and Exchange Act Rules
339
+ 13a-1 and 13a-13 promulgated thereunder, and Regulation S-X Rule 2-02(b)(1).
340
+
341
+ B. Respondent Viola is denied the privilege of appearing or practicing before the
342
+ Commission as an accountant.
343
+
344
+
345
+ 8
346
+
347
+ C. After five years from the date of this order, Respondent Viola may request
348
+ that the Commission consider his reinstatement by submitting an application (attention: Office
349
+ of the Chief Accountant) to resume appearing or practicing before the Commission as:
350
+
351
+ 1. a preparer or reviewer, or a person responsible for the preparation or
352
+ review, of any public company’s financial statements that are filed with the Commission (other
353
+ than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the
354
+ Securities Exchange Act of 1934). Such an application must satisfy the Commission that
355
+ Respondent Viola’s work in his practice before the Commission as an accountant will be
356
+ reviewed either by the independent audit committee of the public company for which he works
357
+ or in some other acceptable manner, as long as he practices before the Commission in this
358
+ capacity; and/or
359
+
360
+ 2. a preparer or reviewer, or a person responsible for the preparation or
361
+ review, of any public company’s financial statements that are filed with the Commission as a
362
+ member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act
363
+ of 1934. Such an application will be considered on a facts and circumstances basis with
364
+ respect to such membership, and the applicant’s burden of demonstrating good cause for
365
+ reinstatement will be particularly high given the role of the audit committee in financial and
366
+ accounting matters; and/or
367
+
368
+ 3. an independent accountant.
369
+
370
+ Such an application must satisfy the Commission that:
371
+
372
+ (a) Respondent Viola, or the public accounting firm with which he is
373
+ associated, is registered with the Public Company Accounting Oversight Board (“Board”) in
374
+ accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective;
375
+
376
+ (b) Respondent Viola, or the registered public accounting firm with
377
+ which he is associated, has been inspected by the Board and that inspection did not identify any
378
+ criticisms of or potential defects in the Respondent’s or the firm’s quality control system that
379
+ would indicate that the respondent will not receive appropriate supervision;
380
+ (c) Respondent Viola has resolved all disciplinary issues with the
381
+ Board, and has complied with all terms and conditions of any sanctions imposed by the Board
382
+ (other than reinstatement by the Commission); and
383
+
384
+ (d) Respondent Viola acknowledges his responsibility, as long as he
385
+ appears or practices before the Commission as an independent accountant, to comply with all
386
+ requirements of the Commission and the Board, including, but not limited to, all requirements
387
+ relating to registration, inspections, concurring partner reviews and quality control standards.
388
+
389
+ D. The Commission will consider an application by Respondent Viola to
390
+ resume appearing or practicing before the Commission provided that his state CPA license
391
+ is current and he has resolved all other disciplinary issues with the applicable state boards
392
+ of accountancy. However, if state licensure is dependent on reinstatement by the
393
+
394
+ 9
395
+
396
+ Commission, the Commission will consider an application on its other merits. The
397
+ Commission’s review may include consideration of, in addition to the matters referenced
398
+ above, any other matters relating to Respondent Viola’s character, integrity, professional
399
+ conduct, or qualifications to appear or practice before the Commission as an accountant.
400
+ Whether an application demonstrates good cause will be considered on a facts and
401
+ circumstances basis with due regard for protecting the integrity of the Commission’s
402
+ processes.
403
+
404
+ E. Respondent Viola shall pay disgorgement of $4,800 and prejudgment interest
405
+ of $228.48, but the payment of such amounts is waived based upon Respondent's sworn
406
+ representations in his Statement of Financial Condition dated September 10, 2018
407
+ ("Financial Statement"), and other documents submitted to the Commission. Based upon
408
+ Respondent's sworn representations in his Financial Statement and other documents
409
+ submitted to the Commission, the Commission is not imposing a civil money penalty
410
+ against Respondent Viola.
411
+
412
+ F. The Division of Enforcement ("Division") may, at any time following the
413
+ entry of this Order, petition the Commission to: (1) reopen this matter to consider whether
414
+ Respondent Viola provided accurate and complete financial information at the time such
415
+ representations were made; and (2) seek an order directing payment of disgorgement, pre-
416
+ judgment interest and a maximum civil penalty allowable under the law. No other issue
417
+ shall be considered in connection with this petition other than whether the financial
418
+ information provided by Respondent Viola was fraudulent, misleading, inaccurate, or
419
+ incomplete in any material respect. Respondent Viola may not, by way of defense to any
420
+ such petition: (1) contest the findings in this Order; (2) assert that payment of
421
+ disgorgement, interest or a penalty should not be ordered; (3) contest the amount of
422
+ disgorgement and interest to be ordered; (4) contest the imposition of the maximum penalty
423
+ allowable under the law; or (5) assert any defense to liability or remedy, including, but not
424
+ limited to, any statute of limitations defense.
425
+
426
+ V.
427
+ It is further Ordered that, solely for purposes of exceptions to discharge set forth in
428
+ Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and
429
+ admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil
430
+ penalty or other amounts due by Respondent under this Order or any other judgment, order,
431
+ consent order, decree or settlement agreement entered in connection with this proceeding, is a
432
+ debt for the violation by Respondent of the federal securities laws or any regulation or order
433
+ issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C.
434
+ §523(a)(19).
435
+
436
+ By the Commission.
437
+
438
+
439
+
440
+ Brent J. Fields
441
+ Secretary
raw/aaer/2019/AAER-4026.pdf ADDED
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1
+ UNITED STATES OF AMERICA
2
+ before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 85237 / March 1, 2019
8
+
9
+ ACCOUNTING AND AUDITING ENFORCEMENT
10
+ Release No. 4026 / March 1, 2019
11
+
12
+ Admin. Proc. File No. 3-18994
13
+
14
+
15
+ In the Matter of
16
+
17
+ JOSEPH S. AMUNDSEN, CPA,
18
+ MICHAEL T. REMUS, CPA, AND
19
+ MICHAEL REMUS CPA.
20
+
21
+
22
+
23
+ ORDER
24
+ On February 8, 2019, the Commission issued an order (the “OIP”) instituting
25
+ administrative and cease-and-desist proceedings pursuant to Sections 4C(a)(2) and (a)(3) and
26
+ 21C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) and (iii) of the Commission’s
27
+ Rules of Practice against Joseph S. Amundsen, CPA, Michael T. Remus, CPA, and Michael
28
+ Remus CPA (collectively, Respondents).1 In compliance with the statutory provision governing
29
+ cease-and-desist proceedings, the OIP specified that a “public hearing before the Commission for
30
+ the purposes of taking evidence . . . shall be convened not earlier than 30 days and not later than
31
+ 60 days” from service of the OIP.2 The statute also provides that “an earlier or later date” for the
32
+ hearing may be “set by the Commission with the consent of any respondent so served.”3
33
+ Respondents were served with the OIP by February 11, 2019. As a consequence, in the
34
+ absence of consent by all respondents regarding a later hearing date, a public hearing will be set
35
+ for a date on or before April 12, 2019. To facilitate the orderly and expeditious resolution of this
36
+ matter, it is ORDERED that the parties shall file a statement advising the Commission of any
37
+ agreement to a later hearing date (or a statement that no agreement could be reached) as soon as
38
+ practicable, and not later than the day after the prehearing conference contemplated by the OIP.
39
+ The Commission will specify further procedures by subsequent order.
40
+
41
+
42
+ 1 Exchange Act Release No. 85081, 2019 WL 497277 (Feb. 8, 2018).
43
+ 2 Id. at *8.
44
+ 3 15 U.S.C. § 78u-3(b).
45
+ 2
46
+
47
+ For the Commission, by the Office of the General Counsel, pursuant to delegated
48
+ authority.
49
+
50
+
51
+
52
+ Brent J. Fields
53
+ Secretary
raw/aaer/2019/AAER-4028.txt ADDED
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1
+
2
+
3
+
4
+ UNITED STATES OF AMERICA
5
+ Before the
6
+ SECURITIES AND EXCHANGE COMMISSION
7
+
8
+ SECURITIES EXCHANGE ACT OF 1934
9
+ Release No. 85261 / March 6, 2019
10
+
11
+ ACCOUNTING AND AUDITING ENFORCEMENT
12
+ Release No. 4028 / March 6, 2019
13
+
14
+ ADMINISTRATIVE PROCEEDING
15
+ File No. 3-19022
16
+
17
+
18
+ In the Matter of
19
+
20
+ Mobile TeleSystems PJSC,
21
+
22
+ Respondent.
23
+
24
+ ORDER INSTITUTING CEASE-AND-DESIST
25
+ PROCEEDINGS, PURSUANT TO SECTION
26
+ 21C OF THE SECURITIES EXCHANGE ACT
27
+ OF 1934, MAKING FINDINGS, AND
28
+ IMPOSING REMEDIAL SANCTIONS AND A
29
+ CEASE-AND-DESIST ORDER
30
+
31
+
32
+ I
33
+
34
+ The Securities and Exchange Commission (“Commission”) deems it appropriate and in the
35
+ public interest that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section
36
+ 21C of the Securities Exchange Act of 1934 (“Exchange Act”), against Mobile TeleSystems PJSC
37
+ (“MTS” or “Respondent”).
38
+
39
+ II
40
+
41
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
42
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
43
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
44
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
45
+ herein, except as to the Commission’s jurisdiction over it and the subject matter of these
46
+ proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-
47
+ and-Desist Proceedings, Pursuant to 21C of the Securities Exchange Act of 1934, Making
48
+ Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth
49
+ below.
50
+
51
+
52
+
53
+ 2
54
+ III
55
+
56
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that
57
+
58
+ Summary
59
+
60
+ A. These proceedings arise out of violations of the anti-bribery, books and records, and
61
+ internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) [15 U.S.C.
62
+ §§ 78dd-1, 78m(b)(2)(A), and 78m(b)(2)(B)] by MTS.
63
+
64
+ B. From 2004 to at least 2012, MTS offered and paid bribes in violation of Section
65
+ 30A of the Exchange Act, to a government official in Uzbekistan in connection with its Uzbek
66
+ operations. The improper payments enabled MTS to enter the Uzbek market, to operate as a
67
+ telecommunications provider, and to receive commercial benefits to its operations. Those benefits
68
+ continued until 2012, when the Uzbek government expropriated MTS’s Uzbek operations. During
69
+ the course of the scheme, MTS made at least $420 million in illicit payments for the purpose of
70
+ obtaining and retaining business, and those payments generated more than $2.4 billion in revenues.
71
+ These illicit payments were made through a variety of means, including equity transactions with
72
+ the government official, sham contracts, and in the form of charitable contributions or sponsorships
73
+ at the direction of the government official. These payments were improperly characterized as
74
+ legitimate expenses in MTS’s books and records. MTS filed its financial statements, incorporating
75
+ the falsely recorded payments, with the Commission throughout the relevant period.
76
+
77
+ C. As a result of the scheme, MTS violated Exchange Act Section 30A by agreeing to
78
+ make corrupt payments to a government official in Uzbekistan for the purpose of obtaining or
79
+ retaining business. MTS also violated Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) by
80
+ improperly recording the payments as legitimate expenses in its books and records and by failing
81
+ to devise and maintain a reasonable system of internal accounting controls.
82
+
83
+ Respondent
84
+
85
+ D. Mobile TeleSystems PJSC is a provider of telecommunications services organized
86
+ under the laws of Russia and headquartered in Moscow, Russia. It issues and maintains a class of
87
+ publicly traded securities registered pursuant to Exchange Act Section 12(b) that traded on the
88
+ New York Stock Exchange throughout the relevant period.
89
+
90
+ Other Relevant Entities
91
+
92
+ E. JV Uzdunrobita (“Uzdunrobita”) was a telecommunications operator in Uzbekistan
93
+ from the 1990s until 2012. Uzdunrobita became a subsidiary of MTS in 2004 and operated as such
94
+ until 2012. Uzdunrobita was managed by local managers and had a supervisory board that included
95
+ MTS senior managers.
96
+
97
+ 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not
98
+ binding on any other person or entity in this or any other proceeding.
99
+
100
+
101
+ 3
102
+
103
+ F. Government Official A is a family member of the former President of Uzbekistan
104
+ and was herself an Uzbek government official. She had influence over decisions made by UzACI,
105
+ the regulatory authority governing telecommunications in Uzbekistan and held an ownership
106
+ interest in Uzdunrobita through Swisdorn Ltd.
107
+
108
+ G. Swisdorn Ltd is a company beneficially owned and operated by Government
109
+ Official A. Swisdorn was formed in Gibraltar and was the entity through which MTS made most
110
+ of its payments for the benefit of Government Official A.
111
+
112
+ H. Takilant Ltd is a company beneficially owned and operated by Government
113
+ Official A. Takilant was formed in Gibraltar and was the entity through which MTS made some
114
+ payments for the benefit of Government Official A.
115
+
116
+ Facts
117
+
118
+ Entry Into Uzbekistan
119
+
120
+ I. In July 2004 MTS entered the Uzbek telecommunications market by purchasing a
121
+ majority interest in Uzdunrobita, a company with existing operations in Uzbekistan. At the time,
122
+ Government Official A beneficially owned 59% of Uzdunrobita’s shares through Swisdorn and
123
+ chaired Uzdunrobita’s supervisory board.
124
+
125
+ J. In July 2004, MTS purchased 74% of the shares of Uzdunrobita for $121 million.
126
+ MTS paid $100 million to Swisdorn for 33% of the shares of Uzdunrobita, which represented a
127
+ significantly higher value per share than the amount paid to the other seller, which sold MTS 41%
128
+ of the shares of Uzdunrobita. A majority of the payment to Swisdorn represented an illicit
129
+ payment to Government Official A for the purpose of allowing MTS’s entry into the Uzbek
130
+ telecommunications market.
131
+
132
+ K. MTS’s Board of Directors approved the acquisition of 74% of Swisdorn on July
133
+ 26, 2004, and the members of Uzdunrobita approved the transaction on August 2, 2004. From
134
+ that point forward until 2012, Uzdunrobita was managed by a local manager who had a personal
135
+ relationship with Government Official A.
136
+
137
+ L. From 2004 to 2012, Uzdunrobita entered into a number of transactions that
138
+ benefitted Government Official A.
139
+ Expansion of Uzbek Operations
140
+ M. In 2005, MTS began investing in an expansion of its telecommunications network
141
+ in Uzbekistan. As part of its expansion strategy, MTS sought to acquire a block of new
142
+ telecommunications frequencies in the 900 MHz range, which would complement the emerging
143
+ 3G technology. Under Uzbek law, however, private parties were prohibited from purchasing and
144
+ selling regulatory assets such as frequencies.
145
+
146
+
147
+ 4
148
+ N. In order to circumvent this prohibition, MTS entered into an agreement with a
149
+ small telecommunications operator named Buztel that was partially owned by Government
150
+ Official A. Buztel held a block of frequencies in the 900 MHz range. Under the agreement,
151
+ Uzdunrobita agreed to pay Buztel $12 million, of which $4 million would go to Government
152
+ Official A. In return, Buztel agreed to repudiate its rights to the frequencies and allow them to
153
+ be reallocated to Uzdunrobita. Government Official A, who also exercised control over the
154
+ Uzbek telecommunications regulatory authority, ensured that the regulator approved the intended
155
+ reallocation.
156
+
157
+ Option Amendment
158
+
159
+ O. At the time MTS purchased 33% of the shares of Uzdunrobita from Swisdorn, it
160
+ entered into a three-year put and call option agreement with Swisdorn pertaining to Swisdorn’s
161
+ remaining 26% interest in Uzdunrobita. Pursuant to the agreement, Swisdorn received a 3-year
162
+ put option to sell its remaining 26% interest in the company to MTS. MTS received a
163
+ corresponding 3-year call option to purchase the 26% block from Swisdorn. The exercise price
164
+ of the put and call options was set at 26% of $145,000,000, or $37.7 million, plus five percent
165
+ interest per annum for each year after the signing of the agreement until the put or call option
166
+ was exercised.
167
+
168
+ P. On August 17, 2006, as requested by Government Official A, MTS and Swisdorn
169
+ entered into an amendment to the 2004 put and call option agreement that (1) eliminated MTS’s
170
+ call option; (2) extended the expiration date of Swisdorn’s put option to July 14, 2008; and
171
+ (3) amended the purchase price to a valuation to be determined by a mutually-agreeable
172
+ investment bank. Each of these changes provided a unilateral benefit to Swisdorn and, through
173
+ it, to Government Official A.
174
+
175
+ Q. According to an estimate prepared for MTS’s investment committee, the value of
176
+ Swisdorn’s put option increased from $44,000,000 to a fair market valuation of at least
177
+ $150,000,000, while MTS lost its opportunity to exercise the call option at a fixed price. The
178
+ benefit transferred to Government Official A was one of the series of payments that MTS, through
179
+ Uzdunrobita, made to the official to ensure Uzdunrobita’s continued operation in Uzbekistan.
180
+
181
+ Option Exercise Package
182
+
183
+ R. On April 2, 2007, Uzdunrobita received 3G and WiMax frequencies from the
184
+ Uzbek telecommunications regulator that had the effect of increasing Uzdunrobita’s fair market
185
+ value by approximately $126 million to $140 million, and proportionally increased the value of
186
+ Swisdorn’s 26% share of Uzdunrobita.
187
+
188
+ S. Following the acquisition of the 3G and WiMax licenses, Swisdorn on April 12,
189
+ 2007, gave MTS notice of its intent to exercise the put option. On April 27, 2007, consistent
190
+ with the option amendment, Swisdorn and MTS engaged an international investment bank to
191
+ prepare a valuation of Uzdunrobita. In its report the investment bank valued the 26% minority
192
+ interest in Uzdunrobita, including the 3G and WiMax frequencies, at between $235 and $256. In
193
+ June 2007, MTS paid Swisdorn $250 million for its remaining 26% interest in Uzdunrobita.
194
+
195
+ 5
196
+ 4G/LTE Transaction
197
+
198
+ T. In August 2008, an MTS subsidiary incorporated in Bermuda entered into a
199
+ transaction in which Uzdunrobita would receive the rights to certain frequencies in the 800 MHz
200
+ range in return for a $30 million payment to Takilant Ltd, which was beneficially owned by
201
+ Government Official A.
202
+
203
+ U. On August 21, 2008, Takilant and an MTS subsidiary executed an agreement
204
+ under which Takilant’s subsidiary would waive its rights to the 800 MHz frequencies and return
205
+ them to the Uzbek telecommunications regulator. On August 25, Government Official A
206
+ exercised her control over the Uzbek telecommunications regulator to ensure that the 800 MHz
207
+ frequency rights were assigned to Uzdunrobita.
208
+
209
+ V. MTS made its $30 million payment to Takilant in six installments of $5 million
210
+ each, beginning in October 2008 and ending in July 2009.
211
+
212
+ W. In connection with the transaction, MTS retained an investigative firm to conduct
213
+ due diligence on Takilant. When the investigator reported back that Takilant's nominal owner
214
+ had no telecommunications background and was a known proxy for Government Official A,
215
+ MTS ignored the information.
216
+
217
+ X. MTS provided its due diligence investigator with Takilant's certificates of
218
+ incorporation and corporate registration, both of which identified a proxy of Government
219
+ Official A as Takilant's director and shareholder. MTS did not provide the investigator with any
220
+ information referring to Government Official A, including whether Government Official A held
221
+ a beneficial interest in Takilant.
222
+
223
+ Y. On August 29, 2008, the investigative firm reported to MTS that "Uzbek sources
224
+ regard Takilant Ltd as being beneficially owned by the family of the Uzbek president. . . .
225
+ Confidential sources close to, and knowledgeable about, Uzbek business and political circles,
226
+ regard [the director of Takilant] as being a trustee of [Government Official A], a [relative] of the
227
+ Uzbek president. Sources believe that [the director of Takilant] works for [Government Official
228
+ A], being in charge of the latter's fashion business and PR matters."
229
+
230
+ Z. After receiving the firm's findings, MTS conducted no further investigation and
231
+ proceeded with the transaction.
232
+
233
+ AA. In the months leading up to the 800 MHz transaction, senior managers at MTS
234
+ discussed additional demands for payment from Government Official A. One senior MTS
235
+ manager stated that the consequences for refusing payment included the possible suspension of
236
+ Uzdunrobita's operations and Uzdunrobita's forced sale.
237
+
238
+ BB. The same senior MTS manager sent a document to an MTS senior executive
239
+ listing the status of MTS's payment commitments to Government Official A, as well as the status
240
+ of the benefits the company had requested from the official.
241
+
242
+
243
+ 6
244
+ Status of our commitments
245
+
246
+ 1. Payment of the total amount of $50 million, with the
247
+ following breakdown:
248
+  $30 million through the purchase of CDMA frequencies,
249
+ prior to 01/11/08.
250
+ MTS is ready to make the payment immediately.
251
+  $20 million in an agreed form, prior to 01/01/09, tied to
252
+ the growth of the subscriber base.
253
+ The basis for payment and the draft agreement are being
254
+ worked out, but no scheme exists other than making the
255
+ payment as a fee for services. Proposing to increase the
256
+ amount of the contract pertaining to CDMA, with delayed
257
+ payments.
258
+ 2. Beginning in 2009, for the assistance in creating favorable
259
+ conditions for the growth of the Company and its
260
+ subscriber base, guarantee the payment of an average of
261
+ $20 million/year.
262
+ The basis for payment and the draft agreement are being
263
+ worked out.
264
+
265
+ KolorIt Design Transaction
266
+
267
+ CC. In September 2009, MTS agreed to have Uzdunrobita enter into an acquisition
268
+ that would satisfy a portion of MTS’s obligation to confer a $20 million benefit on Government
269
+ Official A. Uzdunrobita and MTS acquired 100% of an Uzbek advertising company named
270
+ KolorIt Design ("KolorIt") that Government Official A indirectly controlled. The acquisition
271
+ was a non-core transaction for MTS because KolorIt had no telecommunications operations and
272
+ MTS was not in the advertising business.
273
+
274
+ DD. MTS engaged the same investigative firm to conduct due diligence on KolorIt that
275
+ it had with Takilant. The firm reported that one of KolorIt's two listed shareholders was the
276
+ same proxy of Government Official A who had appeared in the records of Takilant.
277
+
278
+ EE. When MTS received the investigator's findings in August 2009 it conducted no
279
+ further investigation and proceeded with the transaction. MTS paid the equivalent of
280
+ approximately $40 million for KolorIt, substantially more than the $23 million valuation of the
281
+ company that JPMorgan had prepared at MTS's request.
282
+
283
+ FF. Following the KolorIt transaction, the senior MTS manager who had earlier
284
+ prepared the document listing the status of MTS's payment commitments to Government Official
285
+ A updated the document. The updated document, which now referred to Government Official A
286
+
287
+ 7
288
+ as “the local partner,” stated that an obligation to pay $20 million by January 1, 2009 was
289
+ satisfied in part by the KolorIt acquisition.
290
+
291
+ July 2008' Agreements with the local partner
292
+ status on their fulfilment (on 02.11.2009 r.)
293
+
294
+ Our obligations
295
+
296
+ 1. To pay $50 [million] by
297
+  CDMA frequencies acquisition for $30 [million] by
298
+ 01.11.08
299
+ Paid in full in July 2009
300
+  a way to agree additionally $20 [million] by 01.01.09
301
+ (linked to the customers number growth)
302
+ Paid in full in September 2009 through ColorIT acquisition
303
+ ($10 [million]) and out of the vendor's additional discount
304
+ ($10 [million])
305
+ 2. Starting year 2009 to pay up to $20 [million] annually for
306
+ the assistance in creating favorable conditions for the
307
+ operations linked to the customers number growth
308
+
309
+ Contributions to Charities Supported by Government Official A
310
+
311
+ GG. Acting through Uzdunrobita, MTS also made payments to charities supported by,
312
+ and a sponsorship payment to a company connected to, Government Official A. The payments
313
+ were made in the expectation that they were necessary to ensure Government Official A’s
314
+ continued support for Uzdunrobita’s business. The payments were falsely recorded in
315
+ Uzdunrobita’s books and records as advertising and non-operating expenses, rather than as
316
+ charitable expenses. The payments also failed to comply with appropriate internal controls. The
317
+ payments were not approved until after payment was made and were not memorialized in
318
+ agreements with anti-corruption representations. Below is a table of the payments made by
319
+ Uzdunrobita in 2012:
320
+
321
+
322
+ Date Payment
323
+ Amount
324
+ Charity Name
325
+ 3/27/2012 $135,612 Center for Youth Initiatives
326
+ “Kelajak ovozi”
327
+ 3/27/2012 $135,612 Fund for Support of Social
328
+ Initiatives
329
+ 3/27/2012 $135,612 Republic Social Association
330
+ “Zhenskoye Sobraniye”
331
+ 3/27/2012 $135,611 Public Fund “Mehr Nuri”
332
+
333
+ 8
334
+ 3/27/2012 $189,856 Fund Forum
335
+ 3/27/2012 $162,734 Fund Forum
336
+ 3/27/2012 $189,856 Fund Forum
337
+ 4/24/2012 $54,244 Terra Group
338
+ Total $1,139,137
339
+
340
+
341
+ Currency Conversion Transactions
342
+
343
+ HH. Between 2005 and 2012, Uzdunrobita entered into equipment purchase contracts
344
+ denominated in U.S. dollars. Due to restrictions on the conversion of Uzbek soums into U.S.
345
+ dollars, Uzdunrobita was unable to convert enough currency to pay its equipment vendors. In
346
+ order to make its payments under the contracts, Uzdunrobita entered into debt reassignment and
347
+ equipment purchase agreements with third party companies who agreed to pay the required
348
+ amounts of U.S. dollars to pay Uzdunrobita’s vendors.
349
+
350
+ II. During the 2009-11 period, Uzdunrobita paid approximately $461.5 million to
351
+ third party companies to effectuate purchases of network equipment in Uzbekistan. Of this total,
352
+ approximately $142.7 million represented the difference between the Uzbek Central Bank
353
+ exchange rate and the exchange rate agreed to by the parties and other markups. Approximately
354
+ $92.6 million represented taxes and customs costs.
355
+
356
+ JJ. Uzdunrobita’s books and records, which were consolidated into MTS's books and
357
+ records, did not reflect, in an appropriate level of detail and support, the $142.7 million in
358
+ currency rate differentials and markups. These transactions had a material effect on the financial
359
+ statements of Uzdunrobita. In addition, Uzdunrobita failed to conduct appropriate due diligence
360
+ on the third party intermediaries to determine whether they were under the ownership or control
361
+ of Government Official A or other Uzbek government officials.
362
+
363
+ KK. As a result of the conduct described above, MTS violated Exchange Act Sections
364
+ 30A, 13(b)(2)(A), and 13(b)(2)(B).
365
+
366
+ Undertakings
367
+
368
+ Cooperation
369
+
370
+ LL. Respondent undertakes to cooperate fully with the Commission in any and all
371
+ investigations, litigation, or other proceedings relating to or arising from the matters described in
372
+ this Order. In connection with such cooperation, Respondent shall:
373
+
374
+ (1) produce, without service of a notice or subpoena, any and all non-
375
+ privileged documents and other information requested by the Commission
376
+ staff subject to any restrictions under the laws and regulations of any
377
+ foreign jurisdiction;
378
+
379
+
380
+ 9
381
+ (2) use its best efforts to cause its current or former officers, employees,
382
+ agents, and directors to be interviewed by Commission staff at such times
383
+ and places as the staff reasonably may direct; and
384
+
385
+ (3) use its best efforts to cause its current or former officers, employees,
386
+ agents, and directors to appear and testify without service of a notice or
387
+ subpoena in such investigations, depositions, hearings, or trials as may be
388
+ requested by the Commission staff.
389
+
390
+ MM. Should Respondent during the period which the Monitor is retained discover
391
+ credible evidence, not previously reported to the Commission staff, that questionable or corrupt
392
+ payments or questionable or corrupt transfers of property or interests may have been offered,
393
+ promised, paid, or authorized by Respondent or by any entity or person while working directly
394
+ for Respondent; that related false books and records have been maintained; or that Respondent
395
+ has failed to implement adequate internal accounting controls, Respondent shall undertake to
396
+ promptly report such conduct to the Commission staff.
397
+
398
+ NN. During the period which the Monitor is retained, Respondent shall provide its
399
+ external auditors with its annual internal audit plan and reports of the results of internal audit
400
+ procedures and its assessment of its FCPA compliance policies and procedures.
401
+
402
+ OO. During the period which the Monitor is retained, Respondent shall provide the
403
+ Commission staff with any written reports or recommendations provided by Respondent’s
404
+ external auditors in response to Respondent’s annual internal audit plan, reports of the results of
405
+ internal audit procedures, and its assessment of its FCPA compliance policies and procedures.
406
+
407
+ Retention of Monitor and Term of Engagement
408
+
409
+ PP. Respondent shall engage an independent compliance monitor (the "Monitor") not
410
+ unacceptable to the staff of the Commission within sixty (60) calendar days of the entry of the
411
+ Order. The Monitor shall have, at a minimum, the following qualifications: (i) demonstrated
412
+ expertise with respect to the FCPA and other applicable anti-corruption laws, including
413
+ experience counseling on FCPA issues; (ii) experience designing or reviewing corporate
414
+ compliance policies, procedures, and internal accounting controls, including FCPA and anti-
415
+ corruption policies and procedures; (iii) the ability to access and deploy resources as necessary to
416
+ discharge the Monitor's duties as described in the Offer; and (iv) sufficient independence from
417
+ Respondent to ensure effective and impartial performance of the Monitor's duties as described in
418
+ the Offer. The Commission staff may extend Respondent's time period to retain the Monitor, in
419
+ its sole discretion. If the Monitor resigns or is otherwise unable to fulfill the obligations
420
+ described in the Offer, Respondent shall within forty-five (45) days retain a successor Monitor
421
+ that has the same minimum qualifications as the original Monitor and that is not unacceptable to
422
+ the Commission staff.
423
+
424
+ QQ. Respondent shall retain the Monitor for a period of not less than thirty-six (36)
425
+ months, unless the Commission staff finds, in its sole discretion, that there exists a change in
426
+ circumstances sufficient to eliminate the need for the Monitor, in which case the Monitorship
427
+
428
+ 10
429
+ may be terminated early. The term of the Monitorship can be extended as set forth in Paragraph
430
+ FF, below. Respondent shall provide the Commission staff with a copy of the agreement
431
+ detailing the scope of the Monitor's responsibilities within thirty (30) days after the Monitor is
432
+ engaged.
433
+
434
+ RR. During the Term of the Monitorship and for a period of one year from the
435
+ conclusion of the Monitorship, neither the Respondent nor any of its then-current or former
436
+ affiliates, subsidiaries, directors, officers, employees, or agents acting in their capacity as such
437
+ shall enter into, or discuss the possibility of, any employment, consultant, attorney-client,
438
+ auditing, or other professional relationship with the Monitor.
439
+
440
+ Respondent's Obligations
441
+
442
+ SS. Respondent shall cooperate fully with the Monitor and provide the Monitor with
443
+ access to all non-privileged information, documents, books, records, facilities, and personnel as
444
+ reasonably requested by the Monitor; such access shall be provided consistent with Respondent's
445
+ and the Monitor's obligations under applicable local laws and regulations, including applicable
446
+ data privacy and national security laws and regulations. Respondent shall use its best efforts, to
447
+ the extent reasonably requested, to provide the Monitor with access to Respondent's former
448
+ employees, third party vendors, agents, and consultants. Respondent does not intend to waive
449
+ the protection of the attorney work product doctrine, attorney-client privilege, or any other
450
+ privilege applicable as to third parties.
451
+
452
+ TT. The parties agree that no attorney-client relationship shall be formed between the
453
+ Respondent and the Monitor. In the event that Respondent seeks to withhold from the Monitor
454
+ access to information, documents, books, records, facilities, current or former personnel of the
455
+ Respondent, its third-party vendors, agents, or consultants that may be subject to a claim of
456
+ attorney-client privilege or to the attorney work-product doctrine, or where Respondent
457
+ reasonably believes production would otherwise be inconsistent with the applicable laws and
458
+ regulations, Respondent shall work cooperatively with the Monitor to resolve the matter to the
459
+ satisfaction of the Monitor. If, during the Term of the Monitorship, the Monitor believes that
460
+ Respondent is unreasonably withholding access on the basis of a claim of attorney-client
461
+ privilege, attorney work-product doctrine, or other asserted applicable law, the Monitor shall
462
+ notify the Commission staff.
463
+
464
+ UU. Any disclosure by Respondent to the Monitor concerning potential corrupt
465
+ payments, false books and records, or internal accounting control issues shall not relieve
466
+ Respondent of any otherwise applicable obligation to truthfully disclose such matters to the
467
+ Commission staff.
468
+
469
+ Monitor's Mandate
470
+
471
+ VV. The Monitor shall review and evaluate the effectiveness of the Respondent's
472
+ policies, procedures, practices, internal accounting controls, recordkeeping, and financial
473
+ reporting as they relate to Respondent's current and ongoing compliance with the anti-bribery,
474
+ books and records, and internal accounting controls provisions of the FCPA and other applicable
475
+
476
+ 11
477
+ anti-corruption laws, and make recommendations reasonably designed to improve the
478
+ effectiveness of Respondent's internal accounting controls and FCPA corporate compliance
479
+ program (the "Mandate"). This Mandate shall include an assessment of the board of directors'
480
+ and senior management's commitment to, and effective implementation of, the FCPA corporate
481
+ compliance program. In carrying out the Mandate, to the extent appropriate under the
482
+ circumstances, the Monitor may coordinate with Respondent personnel, including in-house
483
+ counsel, compliance personnel, and internal auditors. To the extent the Monitor deems
484
+ appropriate, it may rely on Respondent's processes, and on sampling and testing methodologies.
485
+ The Monitor is not expected to conduct a comprehensive review of all business lines, all business
486
+ activities, and all markets. Any disputes between Respondent and the Monitor with respect to the
487
+ work plan shall be decided by the Commission staff in its sole discretion.
488
+
489
+ WW. During the term of the Monitorship, the Monitor shall conduct three reviews,
490
+ issue a report following each review, and issue a final certification report, as described below.
491
+ The Monitor's work plan for the first review shall include such steps as are reasonably necessary
492
+ to conduct an effective first review. It is not intended that the Monitor will conduct its own
493
+ inquiry into historical events. In developing each work plan and in carrying out the reviews
494
+ pursuant to such plans, the Monitor is encouraged to coordinate with Respondent's personnel,
495
+ including auditors and compliance personnel.
496
+ First Review and Report
497
+
498
+ XX. The Monitor shall commence the first review no later than one hundred twenty
499
+ (120) calendar days from the date of the engagement of the Monitor (unless otherwise agreed by
500
+ Respondent, the Monitor, and the Commission staff). Promptly upon being retained, the Monitor
501
+ shall prepare a written work plan, which shall be submitted to Respondent and the Commission
502
+ staff for comment no later than sixty (60) days after being retained.
503
+
504
+ YY. In order to conduct an effective first review and to understand fully any existing
505
+ deficiencies in Respondent's internal accounting controls and FCPA corporate compliance
506
+ program, the Monitor's work plan shall include such steps as are reasonably necessary to
507
+ understand Respondent's business and its global anti-corruption risks. The steps shall include:
508
+
509
+ (1) inspection of relevant documents, including the internal accounting
510
+ controls, recordkeeping, and financial reporting policies and procedures as
511
+ they relate to Respondent's compliance with the books and records,
512
+ internal accounting controls, and anti-bribery provisions of the FCPA and
513
+ other applicable anti-corruption laws;
514
+
515
+ (2) onsite observation of selected systems and procedures comprising
516
+ Respondent's FCPA corporate compliance program, including
517
+ anticorruption compliance procedures, internal accounting controls,
518
+ recordkeeping, due diligence, and internal audit procedures, including at
519
+ sample sites;
520
+
521
+ (3) meetings with, and interviews of, as relevant, Respondent’s employees,
522
+ officers, directors, and, where appropriate and feasible, its third-party
523
+
524
+ 12
525
+ vendors, agents, or consultants and other persons at mutually convenient
526
+ times and places; and
527
+
528
+ (4) risk-based analyses, studies, and testing of Respondent's FCPA corporate
529
+ compliance program.
530
+
531
+ ZZ. The Monitor may take steps as reasonably necessary to develop an understanding
532
+ of the facts and circumstances surrounding prior FCPA violations that gave rise to this action or
533
+ violations of other applicable anti-corruption laws, but shall not conduct his or her own inquiry
534
+ into those historical events.
535
+
536
+ AAA. After receiving the first review work plan, Respondent and Commission staff
537
+ shall provide any comments concerning the first review work plan within thirty (30) days to the
538
+ Monitor. Any disputes between Respondent and the Monitor with respect to the first review
539
+ work plan shall be decided by the Commission staff in its sole discretion. Following comments
540
+ by Respondent and Commission staff, the Monitor will have fifteen (15) days to submit a final
541
+ first review work plan.
542
+
543
+ BBB. The first review shall commence no later than one hundred twenty (120) days
544
+ from the date of the engagement of the Monitor (unless otherwise agreed by Respondent, the
545
+ Monitor, and the Commission staff). The Monitor shall issue a written report within one hundred
546
+ eighty (180) days of commencing the first review, setting forth the Monitor's assessment and, if
547
+ necessary, making recommendations reasonably designed to improve the effectiveness of
548
+ Respondent's internal accounting controls and FCPA corporate compliance program as they
549
+ relate to Respondent's compliance with the FCPA and other applicable anti-corruption laws. The
550
+ Monitor should consult with Respondent concerning his or her findings and recommendations on
551
+ an ongoing basis and should consider Respondent's comments and input to the extent the
552
+ Monitor deems appropriate. The Monitor may also choose to share a draft of his or her report
553
+ with Respondent and Commission staff prior to finalizing it. The Monitor shall provide the
554
+ report to the Board of Directors of Respondent and contemporaneously transmit a copy to
555
+ Commission staff.
556
+
557
+ CCC. Within one hundred eighty (180) days after receiving the Monitor's first review
558
+ report, Respondent shall adopt and implement all recommendations in the Review, provided,
559
+ however, that as to any recommendation that Respondent considers unduly burdensome,
560
+ impractical, costly, or inconsistent with applicable law or regulation, Respondent need not adopt
561
+ that recommendation at that time, but may submit in writing to the Monitor and the Commission
562
+ staff within thirty (30) days of receiving the report an alternative policy, procedure, or system
563
+ designed to achieve the same objective.
564
+
565
+ DDD. In the event Respondent and the Monitor are unable to agree on an acceptable
566
+ alternative proposal, Respondent shall promptly consult with the Commission staff. Any
567
+ disputes between Respondent and the Monitor with respect to the recommendations shall be
568
+ decided by the Commission staff in its sole discretion. The Commission staff shall consider the
569
+ Monitor's recommendation and Respondent's reasons for not adopting the recommendation in
570
+
571
+ 13
572
+ determining whether Respondent has fully complied with its obligations. Pending such
573
+ determination, Respondent shall not be required to implement any contested recommendation(s).
574
+
575
+ EEE. With respect to any recommendation that the Monitor determines cannot
576
+ reasonably be implemented within one hundred and eighty (180) days after receiving the report,
577
+ the Monitor may extend the time period for implementation with prior written approval of the
578
+ Commission staff.
579
+ Second Review
580
+
581
+ FFF. Within one hundred twenty (120) days after the issuance of the first review report,
582
+ the Monitor shall submit a written work plan for the second review to Respondent and
583
+ Commission staff. Respondent and Commission staff shall provide any comments concerning the
584
+ work plan within thirty (30) days in writing to the Monitor. Any disputes between Respondent
585
+ and the Monitor with respect to the written work plan shall be decided by the Commission staff
586
+ in its sole discretion. Following comments by Respondent and Commission staff, the Monitor
587
+ will have fifteen (15) days to submit a final second review work plan.
588
+
589
+ GGG. The second review shall commence no later than one hundred eighty (180) days
590
+ after the issuance of the first review report (unless otherwise agreed by Respondent, the Monitor,
591
+ and the Commission staff). The Monitor shall issue a written second review report within one
592
+ hundred twenty (120) days of commencing the second review. The second review report shall
593
+ set forth the Monitor's assessment of, and any additional recommendations regarding,
594
+ Respondent's internal accounting controls and FCPA corporate compliance program as they
595
+ relate to Respondent's compliance with the FCPA and other applicable anti-corruption laws; the
596
+ Monitor's assessment of the implementation by Respondent of any recommendations made in the
597
+ first review report; and the Monitor's assessment of the commitment of Respondent's board of
598
+ directors and senior management to compliance with anti-corruption laws.
599
+
600
+ HHH. Within one hundred twenty (120) days after receiving the Monitor's second
601
+ review report, Respondent shall adopt and implement all recommendations in the report,
602
+ provided, however, that as to any recommendation that Respondent considers unduly
603
+ burdensome, impractical, costly, or inconsistent with applicable law or regulation, Respondent
604
+ need not adopt that recommendation at that time, but may submit in writing to the Monitor and
605
+ the Commission staff within thirty (30) days of receiving the report an alternative policy,
606
+ procedure, or system designed to achieve the same objective.
607
+
608
+ III. In the event Respondent and the Monitor are unable to agree on an acceptable
609
+ alternative proposal within thirty (30) days, Respondent shall promptly consult with the
610
+ Commission staff. Any disputes between Respondent and the Monitor with respect to the
611
+ recommendations shall be decided by the Commission staff in its sole discretion. The
612
+ Commission staff shall consider the Monitor's recommendation and Respondent's reasons for not
613
+ adopting the recommendation in determining whether Respondent has fully complied with its
614
+ obligations. Pending such determination, Respondent shall not be required to implement any
615
+ contested recommendation(s).
616
+
617
+
618
+
619
+ 14
620
+ Third Review
621
+
622
+ JJJ. The Monitor shall commence a third review no later than one hundred twenty
623
+ (120) days after the issuance of the second review report (unless otherwise agreed by
624
+ Respondent, the Monitor, and the Commission staff). The monitor shall issue a written third
625
+ review report within ninety (90) days of commencing the third review, setting forth the Monitor's
626
+ assessment and, if necessary, making recommendations in the same fashion as with the prior
627
+ reviews.
628
+ KKK. Within ninety (90) days after receiving the Monitor's third review report,
629
+ Respondent shall adopt and implement all recommendations in the report, provided, however,
630
+ that as to any recommendation that Respondent considers unduly burdensome, impractical,
631
+ costly, or inconsistent with applicable law or regulation, Respondent need not adopt that
632
+ recommendation at that time, but may submit in writing to the Monitor and the Commission staff
633
+ within thirty (30) days of receiving the report an alternative policy, procedure, or system
634
+ designed to achieve the same objective.
635
+
636
+ LLL. In the event Respondent and the Monitor are unable to agree on an acceptable
637
+ alternative proposal within thirty (30) days, Respondent shall promptly consult with the
638
+ Commission staff. Any disputes between Respondent and the Monitor with respect to the
639
+ recommendations shall be decided by the Commission staff in its sole discretion. The
640
+ Commission staff shall consider the Monitor's recommendation and Respondent's reasons for not
641
+ adopting the recommendation in determining whether Respondent has fully complied with its
642
+ obligations. Pending such determination, Respondent shall not be required to implement any
643
+ contested recommendation(s).
644
+ Certification
645
+
646
+ MMM. No later than seventy-five (75) days before the end of the term of the
647
+ Monitorship, the Monitor shall certify whether the Respondent's compliance program, including
648
+ its policies and procedures, is reasonably designed and implemented to prevent and detect
649
+ violations of the FCPA and is functioning effectively. Such certification shall be supported by a
650
+ written final certification report that certifies Respondent's compliance with its obligations under
651
+ the Order, and which shall set forth an assessment of the sustainability of the Respondent's
652
+ remediation efforts and may also recommend areas for further follow-up by Respondent.
653
+
654
+ NNN. The monitor shall orally notify the Commission staff at least fourteen (14) days
655
+ prior to the issuance of the final certification report whether he or she expects to be able to
656
+ certify as provided herein. In the event the Monitor is unable to certify within the three year
657
+ term of the monitor period, the following extension provisions shall be in effect.
658
+
659
+ Extension of Monitor Period
660
+
661
+ OOO. If, as informed by the Monitor's inability to certify that the Respondent's
662
+ compliance program, including its policies and procedures, is reasonably designed and
663
+ implemented to prevent and detect violations of the FCPA and is functioning effectively, the
664
+ Commission staff concludes that Respondent has not successfully satisfied its obligations under the
665
+
666
+ 15
667
+ Monitorship, the Monitor period shall be extended for a reasonable time not to exceed one year
668
+ absent extenuating circumstances.
669
+
670
+ PPP. Under such circumstances, the Monitor shall commence a fourth review no later
671
+ than sixty (60) days after the Commission staff concludes that Respondent has not successfully
672
+ satisfied its compliance obligations under the Order (unless otherwise agreed by Respondent, the
673
+ Monitor, and the Commission staff). The Monitor shall issue a written fourth review report
674
+ within ninety (90) days of commencing the fourth review in the same fashion as set forth in
675
+ Paragraph BBB with respect to the first review and in accordance with the procedures for follow-
676
+ up reports set forth in Paragraphs FFF to LLL. A determination to terminate the Monitorship
677
+ shall then be made in accordance with Paragraph MMM.
678
+
679
+ QQQ. If, after completing the fourth review the Monitor is unable to certify, the
680
+ Monitorship shall be extended, and the Monitor shall commence a fifth review (unless otherwise
681
+ agreed by Respondent, the Monitor, and the Commission staff). The Monitor shall issue a written
682
+ fifth review report within ninety (90) days of commencing the fifth review in the same fashion as
683
+ set forth in Paragraph BBB with respect to the first review and in accordance with the procedures
684
+ for follow-up reports set forth in Paragraphs FFF to LLL. These reviews shall continue until the
685
+ Monitor is able to certify, or unless as otherwise agreed by Respondent and Commission staff.
686
+
687
+ Monitor's Discovery of Potential or Actual Misconduct
688
+
689
+ RRR. Throughout the term of the Monitorship, the Monitor shall disclose to the
690
+ Commission staff any credible evidence that corrupt or otherwise suspicious transactions
691
+ occurred, or payments or things of value were offered, promised, made, or authorized by any
692
+ entity or person within Respondent, or any entity or person working directly or indirectly for or
693
+ on behalf of Respondent, or that related false books and records may have been maintained by or
694
+ on behalf of Respondent or that relevant internal accounting controls were circumvented or were
695
+ not reasonably designed or implemented. The Monitor shall contemporaneously notify
696
+ Respondent's general counsel, chief compliance officer, or audit committee for further action
697
+ unless at the Monitor's discretion he or she believes disclosure to Respondent would be
698
+ inappropriate under the circumstances. The Monitor shall address in his or her reports the
699
+ appropriateness of Respondent's response to all improper activities, whether previously disclosed
700
+ to the Commission staff or not.
701
+
702
+ Certification of Completion
703
+
704
+ SSS. No later than sixty (60) days from date of the completion of the undertakings with
705
+ respect to the Monitorship, Respondent shall certify, in writing, compliance with the
706
+ undertakings set forth above. The certification shall identify the undertakings, provide written
707
+ evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to
708
+ demonstrate compliance. The Commission staff may make reasonable requests for further
709
+ evidence of compliance, and Respondent agrees to provide such evidence.
710
+
711
+
712
+
713
+ 16
714
+ Extensions of Time
715
+
716
+ TTT. Upon request by the Monitor or Respondent, the Commission staff may extend
717
+ any procedural time period set forth above for good cause shown.
718
+
719
+ Confidentiality of Reports
720
+
721
+ UUU. The reports submitted by the Monitor and the periodic reviews and reports
722
+ submitted by Respondent will likely include confidential financial, proprietary, competitive
723
+ business, or commercial information. Public disclosure of the reports could discourage
724
+ cooperation, impede pending or potential government investigations, or undermine the objective
725
+ of the reporting requirement. For these reasons the reports and the contents thereof are intended
726
+ to remain and shall remain non-public, except (i) pursuant to court order, (ii) as agreed to by the
727
+ parties in writing, (iii) to the extent that the Commission determines in its sole discretion that
728
+ disclosure would be in furtherance of the Commission's discharge of its duties and
729
+ responsibilities, or (iv) as is otherwise required by law.
730
+ Address for All Written Communications and Reports
731
+
732
+ VVV. All reports or other written communications by the Monitor or Respondent
733
+ directed to the Commission staff shall be transmitted to Charles E. Cain, Chief, FCPA Unit,
734
+ Division of Enforcement, U.S. Securities and Exchange Commission, 100 F Street, N.E.,
735
+ Mailstop 5631, Washington, D.C. 20549. A copy of the certification of completion and
736
+ supporting materials shall also be transmitted to the Office of Chief Counsel of the Enforcement
737
+ Division at the same address.
738
+
739
+ IV
740
+
741
+ Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that:
742
+
743
+ A. Respondent cease and desist from committing or causing any violations and any
744
+ future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of
745
+ 1934 [15 U.S.C. §§ 78dd-1, 78m(b)(2)(A), and 78m(b)(2)(B)].
746
+
747
+ B. Respondent shall, within 14 days of the entry of this Order, pay a civil money
748
+ penalty in the amount of $100,000,000 to the Securities and Exchange Commission for transfer
749
+ to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If
750
+ timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.
751
+
752
+ C. Payment must be made in one of the following ways:
753
+
754
+ (1) Respondent may transmit payment electronically to the Commission,
755
+ which will provide detailed ACH transfer/Fedwire instructions upon
756
+ request;
757
+
758
+ (2) Respondent may make direct payment from a bank account via Pay.gov
759
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
760
+
761
+ 17
762
+
763
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
764
+ States postal money order, made payable to the Securities and Exchange
765
+ Commission and hand-delivered or mailed to:
766
+
767
+ Enterprise Services Center
768
+ Accounts Receivable Branch
769
+ HQ Bldg., Room 181, AMZ-341
770
+ 6500 South MacArthur Boulevard
771
+ Oklahoma City, OK 73169
772
+
773
+ D. Payments by check or money order must be accompanied by a cover letter
774
+ identifying MTS as a Respondent in these proceedings, and the file number of these proceedings;
775
+ a copy of the cover letter and check or money order must be sent to Charles Cain, Division of
776
+ Enforcement, Securities and Exchange Commission, 100 F St., NE, Mailstop 5631, Washington,
777
+ DC 20549.
778
+
779
+ E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall
780
+ be treated as penalties paid to the government for all purposes, including all tax purposes. To
781
+ preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
782
+ Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any
783
+ award of compensatory damages by the amount of any part of Respondent’s payment of a civil
784
+ penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such
785
+ a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order
786
+ granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of
787
+ the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be
788
+ deemed an additional civil penalty and shall not be deemed to change the amount of the civil
789
+ penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action"
790
+ means a private damages action brought against Respondent by or on behalf of one or more
791
+ investors based on substantially the same facts as alleged in the Order instituted by the
792
+ Commission in this proceeding.
793
+
794
+ F. Respondent shall comply with the undertakings enumerated above at Section III,
795
+ paragraphs MM through VVV.
796
+
797
+ By the Commission.
798
+
799
+
800
+ Brent J. Fields
801
+ Secretary
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1
+ UNITED STATES OF AMERICA
2
+ before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 85284 / March 11, 2019
8
+
9
+ ACCOUNTING AND AUDITING ENFORCEMENT
10
+ Release No. 4029 / March 11, 2019
11
+
12
+ Admin. Proc. File No. 3-18994
13
+
14
+
15
+ In the Matter of
16
+
17
+ JOSEPH S. AMUNDSEN, CPA,
18
+ MICHAEL T. REMUS, CPA, AND
19
+ MICHAEL REMUS CPA.
20
+
21
+
22
+
23
+ ORDER
24
+ On February 8, 2019, the Commission issued an order (the “OIP”) instituting
25
+ administrative and cease-and-desist proceedings pursuant to Sections 4C(a)(2) and (a)(3) and
26
+ 21C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) and (iii) of the Commission’s
27
+ Rules of Practice against Joseph S. Amundsen, CPA, Michael T. Remus, CPA, and Michael
28
+ Remus CPA.1 In compliance with the statutory provision governing cease-and-desist
29
+ proceedings, the OIP specified that a “public hearing before the Commission for the purposes of
30
+ taking evidence . . . shall be convened not earlier than 30 days and not later than 60 days” from
31
+ service of the OIP.2 The statute also provides that “an earlier or later date” for the hearing may
32
+ be “set by the Commission with the consent of any respondent so served.”3
33
+ On March 5, 2019, respondents Michael T. Remus, CPA and Michael Remus CPA
34
+ (“Remus Respondents”) filed a motion seeking to extend their time for filing an answer to the
35
+ OIP to March 20, 2019. The Remus Respondents assert that “they were never properly served
36
+ with” the OIP and that they should not be required to file an answer “in the midst of a genuine
37
+ dispute over service.” They represent that the Division of Enforcement and the other respondent,
38
+ Joseph S. Amundsen, CPA, “agree[] to an extension of time for the Remus Respondents to file
39
+ their Answer but have not agreed as to the timing of the Hearing in this matter.” The Remus
40
+ Respondents “contend that the Hearing should be held no later than sixty (60) days after the
41
+ responsive pleadings are served and filed” but, according to them, the Division does not agree.
42
+ The motion does not state Amundsen’s position on the timing of the hearing.
43
+
44
+ 1 Exchange Act Release No. 85081, 2019 WL 497277 (Feb. 8, 2019).
45
+ 2 Id. at *8.
46
+ 3 15 U.S.C. § 78u-3(b).
47
+ 2
48
+
49
+ On March 7, 2019, the Division filed a response to the motion for an extension. The
50
+ Division confirms that it “does not object” to the requested extension of time for the Remus
51
+ Respondents to file their answer. The Division does, however, object to scheduling a date for the
52
+ hearing until the respondents have filed answers and a prehearing conference has been
53
+ conducted. Finally, the Division represents that Amundsen “has separately communicated . . .
54
+ his consent that the hearing in this matter be held after the 60-day statutory deadline.”
55
+ Rule of Practice 161(a) authorizes the Commission to extend time limits upon a showing
56
+ of good cause.4 In evaluating a request for an extension, Rule of Practice 161(b) provides that
57
+ the Commission should consider the length of the proceeding to date, the number of extensions
58
+ already granted, the stage of the proceedings, the impact of an adjournment on the ability to
59
+ complete the proceeding in a timely fashion, and other such matters as justice may require.5
60
+ The Remus Respondents state that extending the time to file their answer “will not have a
61
+ material impact on the ability to complete the proceeding in a timely fashion.” Based on the
62
+ representations in the Remus Respondents’ motion and the Division’s response, it appears that
63
+ although the parties have not agreed on the timing of the hearing and the Remus Respondents
64
+ have not agreed to hold the hearing more than 60 days after the filing of respondents’ answers all
65
+ respondents consent to the hearing being held after the 60-day statutory deadline from service of
66
+ the OIP. As such, extending the Remus Respondents’ time to file their answer will not have a
67
+ material impact on the ability to complete the proceeding in a timely fashion.
68
+ Accordingly, it is ORDERED that the motion is CONDITIONALLY GRANTED, and
69
+ that the Remus Respondents’ time for filing an answer to the OIP is extended to March 20, 2019,
70
+ unless Amundsen disputes the Remus Respondents’ representation regarding his agreement to an
71
+ extension of time for answering the OIP or the Division’s representation regarding his consent to
72
+ a later hearing date, and files an objection by March 18, 2019.
73
+ To date, Amundsen has not filed an answer to the OIP or sought an extension for doing
74
+ so. According to the Division, Amundsen has “advised” that his answer is a “Claim for
75
+ Disparagement” filed in the U.S. Court of Appeals for the Ninth Circuit on February 19, 2019.
76
+ The document in question is not directed to the Commission and does not comply with Rule of
77
+ Practice 220; among other things, it does not “specifically admit, deny, or state that the party
78
+ does not have, and is unable to obtain, sufficient information to admit or deny each allegation” in
79
+ the OIP.6 It generally asserts that there “have been no securities violations of any kind by
80
+ Amundsen” and that it is “not a securities violation for someone who has accepted a settlement
81
+ to have a family.” It is ORDERED that Amundsen file an answer in compliance with Rule of
82
+ Practice 220 by March 18, 2019. If Amundsen fails to do so, he will be deemed to have filed an
83
+ answer denying all of the allegations in the OIP.
84
+
85
+ 4 17 C.F.R. § 201.161(a).
86
+ 5 17 C.F.R. § 201.161(b).
87
+ 6 17 C.F.R. § 201.220(c).
88
+ 3
89
+
90
+ It is FURTHER ORDERED that the parties shall conduct a prehearing conference
91
+ pursuant to Rule of Practice 221 by April 3, 2019. The parties may meet in person or participate
92
+ by telephone or other remote means. By April 5, 2019, they shall promptly file a statement
93
+ reporting the parties’ positions with respect to the matters listed in Rule of Practice 221(c) and
94
+ advising the Commission of any agreements reached at said conference.7 The Commission will
95
+ specify further procedures by subsequent order.
96
+ It is FURTHER ORDERED that the Commission’s March 1, 2019 order is hereby
97
+ vacated.8
98
+ For the Commission, by the Office of the General Counsel, pursuant to delegated
99
+ authority.
100
+
101
+
102
+
103
+ Vanessa A. Countryman
104
+ Acting Secretary
105
+
106
+ 7 17 C.F.R. § 201.221(c).
107
+ 8 Joseph S. Amundsen, CPA, Exchange Act Release No. 85237, 2019 WL 995509 (Mar. 1,
108
+ 2019).
raw/aaer/2019/AAER-4030.pdf ADDED
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raw/aaer/2019/AAER-4031.txt ADDED
@@ -0,0 +1,159 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES EXCHANGE ACT OF 1934
6
+ Release No. 85398 / March 22, 2019
7
+
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4031 / March 22, 2019
10
+
11
+ ADMINISTRATIVE PROCEEDING
12
+ File No. 3-19115
13
+ In the Matter of
14
+
15
+ JUDSON F. “RICK”
16
+ HOOVER, CPA,
17
+ Respondent.
18
+
19
+
20
+
21
+ ORDER INSTITUTING PUBLIC
22
+ ADMINISTRATIVE PROCEEDINGS
23
+ PURSUANT TO RULE 102(e) OF THE
24
+ COMMISSION’S RULES OF PRACTICE,
25
+ MAKING FINDINGS, AND IMPOSING
26
+ REMEDIAL SANCTIONS
27
+
28
+ I.
29
+
30
+ The Securities and Exchange Commission (“Commission”) deems it appropriate and in the
31
+ public interest that public administrative proceedings be, and hereby are, instituted against Judson
32
+ F. “Rick” Hoover (“Respondent” or “Hoover”) pursuant to Rule 102(e)(3)(i) of the Commission’s
33
+ Rules of Practice.1
34
+
35
+ II.
36
+
37
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
38
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
39
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
40
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
41
+ herein, except as to the Commission’s jurisdiction over him and the subject matter of these
42
+ proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent
43
+
44
+ 1 Rule 102(e)(3)(i) provides, in relevant part, that:
45
+
46
+ The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . .
47
+ suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently
48
+ enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the
49
+ Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of
50
+ the rules and regulations thereunder.
51
+ consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule
52
+ 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
53
+ Sanctions (“Order”), as set forth below.
54
+
55
+ III.
56
+
57
+ On the basis of this Order and Respondent’s Offer, the Commission finds that:
58
+
59
+ 1. Hoover, age 60, is and has been a certified public accountant licensed to
60
+ practice in the state of Colorado. He served as Chief Financial Officer of Breitling Energy
61
+ Corporation (“BECC”) from February 2014 until his termination in February 2015. Prior to
62
+ February 2014, he served as a consultant to BECC and Breitling Oil & Gas Corporation (“BOG”).
63
+
64
+ 2. BECC was, at all relevant times, a Nevada corporation with its principal
65
+ place of business in Dallas, Texas. At all relevant times, BECC purported to be in the business of
66
+ acquiring and developing oil-and-gas prospects in Texas, Oklahoma and North Dakota. At all
67
+ relevant times, BECC’s stock was registered with the Commission pursuant to 12(g) of the
68
+ Securities Exchange Act of 1934 (“Exchange Act”) and was quoted on OTC Link operated by
69
+ OTC Markets Group, Inc. (“OTC Link”).
70
+
71
+ 3. On June 24, 2016, the Commission filed a complaint, and on August 11,
72
+ 2016, an amended complaint, against Hoover and others in SEC v. Christopher A. Faulkner, et al.
73
+ (Civil Action No. 3:16-1735-D (N.D. Tex.). On December 19, 2018, the court entered an order
74
+ permanently enjoining Hoover, by consent, from violating Sections 10(b) of Exchange Act and
75
+ Exchange Act Rules 10b-5, 13a-14, 13b2-1, and 13b2-2, and from aiding and abetting violations of
76
+ Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Exchange Act Rules 13a-1, 13a-11,
77
+ 13a-13, and 12b-20. Hoover was also ordered to pay a civil penalty of $160,000.
78
+
79
+ 4. The Commission’s complaint, as amended, alleged that between December
80
+ 2013 and February 2015, Hoover participated with others in a scheme that served to defraud
81
+ investors who purchased oil-and-gas securities in transactions with four companies: BECC, BOG,
82
+ Crude Energy, LLC (“Crude”), and Patriot Energy, Inc. Hoover signed several of BECC’s public
83
+ reports filed with the Commission that contained materially false and misleading representations
84
+ about, among other things, BECC’s relationship with Crude, BECC’s business model and results
85
+ and operation, and BECC’s internal controls. Hoover also made similar false and misleading
86
+ statements to the company’s auditors. Moreover, Hoover also approved the reimbursement of
87
+ personal expenses charged by BECC’s CEO, Christopher A. Faulkner as if they were legitimate
88
+ business expenses, without any regard for BECC’s reimbursement policy. Furthermore, Hoover
89
+ also aided-and-abetted BECC’s failure to keep and maintain accurate books and records.
90
+
91
+ IV.
92
+
93
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to
94
+ impose the sanction agreed to in Respondent Hoover’s Offer.
95
+
96
+ Accordingly, it is hereby ORDERED, effective immediately, that:
97
+
98
+ A. Hoover is suspended from appearing or practicing before the Commission as an
99
+ accountant for five years from the date of this Order.
100
+
101
+ B. After five years from the date of this Order, Hoover may request that the
102
+ Commission consider his reinstatement by submitting an application (attention: Office of the Chief
103
+ Accountant) to resume appearing or practicing before the Commission as:
104
+
105
+ 1. a preparer or reviewer, or a person responsible for the preparation or review,
106
+ of any public company’s financial statements that are filed with the Commission (other than as a
107
+ member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities
108
+ Exchange Act of 1934). Such an application must satisfy the Commission that Hoover’s work in
109
+ his practice before the Commission as an accountant will be reviewed either by the independent
110
+ audit committee of the public company for which he works or in some other acceptable manner, as
111
+ long as he practices before the Commission in this capacity; and/or
112
+
113
+ 2. a preparer or reviewer, or a person responsible for the preparation or review,
114
+ of any public company’s financial statements that are filed with the Commission as a member of an
115
+ audit committee, as that term is defined in Section 3(a)(58) of the Securities Act of 1934. Such an
116
+ application will be considered on a facts and circumstances basis with respect to such membership,
117
+ and the applicant’s burden of demonstrating good cause for reinstatement will be particularly high
118
+ given the role of the audit committee in financial and accounting matters; and/or
119
+
120
+ 3. an independent accountant.
121
+
122
+ Such an application must satisfy the Commission that:
123
+
124
+ (a) Hoover, or the public accounting firm with which he is associated, is
125
+ registered with the Public Company Accounting Oversight Board (“Board”) in accordance with the
126
+ Sarbanes-Oxley Act of 2002, and such registration continues to be effective;
127
+
128
+ (b) Hoover, or the registered public accounting firm with which he is
129
+ associated, has been inspected by the Board and that inspection did not identify any criticisms of or
130
+ potential defects in the Hoover’s or the firm’s quality control system that would indicate that the
131
+ respondent will not receive appropriate supervision;
132
+
133
+ (c) Hoover has resolved all disciplinary issues with the Board, and has
134
+ complied with all terms and conditions of any sanctions imposed by the Board (other than
135
+ reinstatement by the Commission); and
136
+
137
+ (d) Hoover acknowledges his responsibility, as long as he appears or
138
+ practices before the Commission as an independent accountant, to comply with all requirements of
139
+ the Commission and the Board, including, but not limited to, all requirements relating to
140
+ registration, inspections, concurring partner reviews and quality control standards.
141
+
142
+ C. The Commission will consider an application by Hoover to resume appearing or
143
+ practicing before the Commission provided that his state CPA license is current and he has resolved
144
+ all other disciplinary issues with the applicable state boards of accountancy. However, if state
145
+ licensure is dependent on reinstatement by the Commission, the Commission will consider an
146
+ application on its other merits. The Commission’s review may include consideration of, in addition
147
+ to the matters referenced above, any other matters relating to Hoover’s character, integrity,
148
+ professional conduct, or qualifications to appear or practice before the Commission as an
149
+ accountant. Whether an application demonstrates good cause will be considered on a facts and
150
+ circumstances basis with due regard for protecting the integrity of the Commission’s processes.
151
+
152
+ By the Commission.
153
+
154
+
155
+
156
+ Vanessa A. Countryman
157
+ Acting Secretary
158
+
159
+
raw/aaer/2019/AAER-4032.txt ADDED
@@ -0,0 +1,98 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 85423 / March 26, 2019
8
+
9
+ ACCOUNTING AND AUDITING ENFORCEMENT
10
+ Release No. 4032 / March 26, 2019
11
+
12
+ Admin. Proc. File No. 3-18994
13
+
14
+
15
+ In the Matter of
16
+
17
+ JOSEPH S. AMUNDSEN, CPA,
18
+ MICHAEL T. REMUS, CPA, AND
19
+ MICHAEL REMUS CPA.
20
+
21
+
22
+
23
+ NOTICE REGARDING CORRESPONDENCE
24
+ The Commission has received seven items of correspondence from respondent Joseph S.
25
+ Amundsen. This notice addresses those seven items.
26
+ The first item, dated March 6, 2019 and titled “Response to SEC Order - Rule of Practice
27
+ 161,” asserts that the Commission “agreed to have these matters presented to the SF District
28
+ Court on March 20, 2019,” but is now “trying to suspend” the court date. It also asserts that the
29
+ Commission has “informally agreed to stay” these “administrative charges” until April 20, 2019.
30
+ Amundsen continues to conflate this administrative proceeding with the entirely separate civil
31
+ injunctive action in the U.S. District Court for the Northern District of California. To be clear,
32
+ none of the orders issued by the Commission in this proceeding purports to suspend any court
33
+ date—nor could it—including the hearing before the district court that is currently set for March
34
+ 28, 2019.1 As to this proceeding, the Commission has neither been presented with nor approved
35
+ any stipulation among the parties to continue the matter until April 20, 2019. The Commission
36
+ reminds the parties that they must conduct a prehearing conference pursuant to Rule of Practice
37
+ 221 by April 3, 2019, and that they shall file a statement by April 5, 2019 reporting the parties’
38
+ positions with respect to the matters listed in Rule of Practice 221(c) and advising the
39
+ Commission of any agreements reached at said conference.2
40
+ The second item, dated March 8, 2019, purports to be an answer to the order instituting
41
+ proceedings. It “requests that this Administrative Proceeding[] be summarily dismissed” and
42
+
43
+ 1 See DE 124, Case No. 3:83-cv-00711-WHA (N.D. Cal. Mar. 25, 2019); DE 112, Case
44
+ No. 3:83-cv-00711-WHA (N.D. Cal. Feb. 11, 2019).
45
+ 2 Joseph S. Amundsen, CPA, Exchange Act Release No. 85284, 2019 WL 1116195, at *2
46
+ (Mar. 11, 2019).
47
+ 2
48
+
49
+ asserts “[t]here is no violation.”3 This document does not comply with Rule of Practice 220,
50
+ governing the content of answers, because it does not “specifically admit, deny, or state that the
51
+ party does not have, and is unable to obtain, sufficient information to admit or deny each
52
+ allegation” in the OIP.4 Because Amundsen has not “file[d] an answer in compliance with Rule
53
+ of Practice 220 by March 18, 2019,” as required by the Commission’s March 11, 2019 order, he
54
+ is “deemed to have filed an answer denying all of the allegations in the OIP.”5
55
+ The third item, dated March 16, 2019 and titled “Response to letter March 13, 2019,”
56
+ argues that the Commission has “no authority” to institute administrative proceedings because,
57
+ Amundsen asserts, a 1983 settlement extinguished “all charges against [him].” Amundsen, so
58
+ long as he complies with the applicable deadlines and other procedural rules governing the
59
+ timely and proper presentation of issues,6 will have the opportunity to develop and press this
60
+ argument. But at this very early stage of the proceedings, and without the benefit of adversarial
61
+ briefing, it is not yet ripe for disposition.
62
+ The remaining four items—a “Request for Reconsideration” dated February 27, 2019;
63
+ two additional such requests dated March 6, 2019 and March 8, 2019; and a “Petition to Vacate
64
+ and Answer to Contempt Charge” dated March 9, 2019—are directed to either the U.S. Court of
65
+ Appeals for the Ninth Circuit or the U.S. District Court for the Northern District of California.
66
+ As made clear above and in two prior notices, this administrative proceeding is set before the
67
+ Securities and Exchange Commission, and is separate from the cases or appeals in other fora in
68
+ which Amundsen may also be a party.7 It is neither necessary nor appropriate for Amundsen to
69
+ transmit copies of his filings in other cases or appeals to the Office of the Secretary. No further
70
+
71
+ 3 The letter also contends that the Division of Enforcement “has offered legal advice to
72
+ Amundsen, without notification to the other” respondents. This claim appears to be premised on
73
+ a March 7, 2019 email from a Division attorney informing Amundsen that although he is “free to
74
+ submit materials to the Office of the Secretary in this matter, [the Division] will not undertake to
75
+ do so on [his] behalf.” This is not legal advice—it is an accurate, factual statement about the
76
+ Commission’s filing process, Rule of Practice 151, 17 C.F.R. § 201.151—and, insofar as it is a
77
+ communication entirely between two parties, is not subject to the prohibition against ex parte
78
+ communications with the decisionmaker. Cf. Rule of Practice 120, 17 C.F.R. § 201.120.
79
+ 4 Rule of Practice 220, 17 C.F.R. § 201.220.
80
+ 5 Joseph S. Amundsen, CPA, 2019 WL 1116195, at *2.
81
+ 6 See, e.g., McBarron Capital LLC, Exchange Act Release No. 81789, 2017 WL 4350655,
82
+ at *5 (Sep. 29, 2017); see also Bennett Group Fin. Servs., LLC, Exchange Act Release No.
83
+ 80347, 2017 WL 1176053, at *2 (Mar. 30, 2017) (holding that the Commission has no obligation
84
+ to “independently . . . identify and develop arguments that a party fails to advance with clarity”).
85
+ 7 Joseph S. Amundsen, CPA, Exchange Act Release No. 85310, 2019 WL 1167740, at *1
86
+ (Mar. 13, 2019); Joseph S. Amundsen, CPA, Exchange Act Release No. 85250, 2019 WL
87
+ 1036154, at *1 (Mar. 5, 2019).
88
+ 3
89
+
90
+ action will be taken regarding these filings, or any future ones that are not directed to the
91
+ Commission or that seek relief that is not available from the Commission in this proceeding.
92
+ For the Commission, by the Office of the General Counsel, pursuant to delegated
93
+ authority.
94
+
95
+
96
+
97
+ Vanessa A. Countryman
98
+ Acting Secretary
raw/aaer/2019/AAER-4033.txt ADDED
@@ -0,0 +1,1064 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+ 1
4
+
5
+
6
+ UNITED STATES OF AMERICA
7
+ Before the
8
+ SECURITIES AND EXCHANGE COMMISSION
9
+
10
+ SECURITIES EXCHANGE ACT OF 1934
11
+ Release No. 85468 / March 29, 2019
12
+
13
+ ACCOUNTING AND AUDITING ENFORCEMENT
14
+ Release No. 4033 / March 29, 2019
15
+
16
+ ADMINISTRATIVE PROCEEDING
17
+ File No. 3-19126
18
+
19
+
20
+ In the Matter of
21
+
22
+ Fresenius Medical Care AG
23
+ & Co. KGaA
24
+
25
+ Respondent.
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+
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+
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+
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+
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+ CORRECTED ORDER INSTITUTING
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+ CEASE-AND-DESIST PROCEEDINGS
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+ PURSUANT TO SECTION 21C OF THE
33
+ SECURITIES EXCHANGE ACT OF 1934,
34
+ MAKING FINDINGS, AND IMPOSING A
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+ CEASE-AND-DESIST ORDER
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+
37
+ I.
38
+
39
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-
40
+ and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities
41
+ Exchange Act of 1934 (“Exchange Act”), against Fresenius Medical Care AG & Co. KGaA
42
+ (“FMC” or “Respondent”).
43
+
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+ II.
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+
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+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
47
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
48
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
49
+ Commission, or to which the Commission is a party, Respondent admits the Commission’s
50
+ jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this
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+ Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities
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+
53
+ 2
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+ Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as
55
+ set forth below.
56
+ III.
57
+
58
+ On the basis of this Order and Respondent’s Offer, the Commission finds that:
59
+
60
+ Summary
61
+ 1. This matter concerns violations of the anti-bribery, books and records and internal
62
+ accounting controls provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”) [15
63
+ U.S.C. 78dd] by FMC, a world-wide provider of products and services for individuals with chronic
64
+ kidney failure headquartered in Bad Homburg, Germany. From at least 2009 through 2016,
65
+ millions of dollars in bribes were paid to procure business throughout its operations, including in
66
+ Saudi Arabia, Angola, and eight countries in the West African region. Further, in FMC’s
67
+ operations in those countries, as well as Turkey, Spain, China, Serbia, Bosnia, and Mexico,
68
+ payments were not accurately reflected in FMC’s books and records. FMC also failed to have
69
+ sufficient internal accounting controls in place, which contributed to the misconduct continuing for
70
+ many years across multiple continents. In connection with the misconduct described in Saudi
71
+ Arabia, West Africa, and Angola, FMC employees and agents utilized the means and
72
+ instrumentalities of U.S. interstate commerce, including the use of internet-based email accounts
73
+ hosted by numerous service providers located in the United States. The company benefitted by
74
+ over $135 million as a result of the improper payments.
75
+ Respondent
76
+
77
+
78
+ 2. FMC is a provider of products and services for individuals with chronic kidney
79
+ failure. FMC, operating in over 150 countries, is incorporated under the federal laws of Germany
80
+ and is headquartered in Bad Homburg. Since 1996, FMC’s American Depositary Shares traded on
81
+ the New York Stock Exchange under the ticker “FMS” and are registered with the Commission
82
+ pursuant to Section 12(b). The company files periodic reports, including Form 20-F, with the
83
+ Commission pursuant to Section 13(a) of the Exchange Act.
84
+
85
+ Relevant Entities
86
+
87
+ 3. The misconduct took place in FMC subsidiaries in Morocco, Portugal, Angola,
88
+ Turkey, Spain, China, Serbia, Bosnia, and Mexico. During the relevant time period FMC’s West
89
+ Africa business was managed and operated from Fresenius Medical Care Deutschland GmbH, a
90
+ limited liability company organized under the federal laws of Germany, and was later operated
91
+ from FMC Morocco. The financials for each subsidiary were consolidated with those of FMC.
92
+
93
+ 4. Saudi Advanced Renal Services Ltd. (“SRS”) is a wholly consolidated distributor
94
+ that promotes and sells FMC’s products in the Kingdom of Saudi Arabia pursuant to a
95
+ Management Assistance Agreement and an Agency and Distributorship Agreement with FMC.
96
+ SRS’s financial statements are consolidated with those of FMC.
97
+
98
+ 3
99
+
100
+ FACTS
101
+ Background
102
+
103
+ 5. FMC failed to promptly address numerous red flags of corruption in its operations
104
+ that were known since the early 2000s. This includes employees making improper payments
105
+ through a variety of schemes, including using sham consulting contracts, falsifying documents, and
106
+ funneling bribes through a system of third party intermediaries. FMC failed to properly assess and
107
+ manage its worldwide risks, and devoted insufficient resources to compliance. In many instances,
108
+ senior management actively thwarted compliance efforts, personally engaging in corruption
109
+ schemes and directing employees to destroy records of the misconduct. The improper conduct
110
+ continued for years in Saudi Arabia, Morocco, eight countries in the West African region, Angola,
111
+ Turkey, Spain, China, Serbia, Bosnia, and Mexico.
112
+
113
+ Conduct Relevant to Saudi Arabia
114
+
115
+ 6. From 2007 to 2012, FMC’s wholly consolidated distributor Saudi Advanced Renal
116
+ Services (“SRS”) paid over $4.9 million in improper payments to publicly-employed doctors
117
+ (“HCPs”), government officials and others in Saudi Arabia to retain or obtain business. FMC
118
+ knew of the high risks in the business, but failed to ensure that sufficient internal accounting
119
+ controls were in place. FMC also failed to assign a compliance officer to the region. In 2009 and
120
+ early 2011, senior officials at FMC’s German headquarters received reports from a senior SRS
121
+ finance officer that the SRS General Manager (“GM”) submitted false invoices and that there was
122
+ a practice of making improper marketing and travel expenditures without proper documentation.
123
+ The conduct continued and by December 2011, the SRS finance officer elevated his complaints to
124
+ the FMC controller and the head of Internal Audit. The conduct continued until late 2012 when
125
+ remedial action was first initiated and the GM was terminated in 2013. Overall, FMC benefitted
126
+ by over $40 million as a result of the corruption schemes in Saudi Arabia.
127
+
128
+ 7. Payments were made to private and public HCPs, other government officials, and
129
+ high ranking officials at a Saudi Technical Organization that was acting in an official capacity
130
+ for or on behalf of the Kingdom of Saudi Arabia when it reviewed and approved dialysis
131
+ products for use in tenders. Between 2007 and 2012, SRS generated approximately $1.77
132
+ million through a check writing scheme. Checks were written to SRS employees who cashed the
133
+ checks and handed the cash to the SRS GM. SRS employees sometimes stored bags of cash in a
134
+ safe without proper documentation. The transactions were falsely recorded as project marketing
135
+ expenses and collection commissions in SRS’ books and records, which FMC consolidated. In
136
+ addition to false descriptions, the transactions lacked appropriate support for the accounting
137
+ entries.
138
+
139
+ 8. Through another scheme, SRS entered into a purported collection commission
140
+ agreement with the relative of a MOH employee in connection with bidding on MOH dialysis
141
+ machine tenders. While SRS had salaried employees that collected overdue receivables from FMC
142
+
143
+ 4
144
+ customers, the MOH relative was paid over $200,000 for work already performed by these
145
+ employees – which was more than the combined total salary paid to these same employees. As a
146
+ result, FMC won the tender.
147
+
148
+ 9. A variety of other questionable business schemes included: i) sham consulting
149
+ agreements with doctors for services never performed, ii) payments to third party agents in which
150
+ doctors had beneficial interest, and iii) improper travel, entertainment, and gifts to doctors. FMC
151
+ failed to conduct due diligence on the doctors and agents, or take steps to ensure that agreed upon
152
+ services were provided.
153
+
154
+ 10. Some specific examples of the methods used by FMC to make illicit payments to
155
+ doctors in Saudi Arabia are as follows:
156
+
157
+  Improper payments to Doctor A, a high-ranking official at Saudi Technical Organization , who according to
158
+ one email, played a critical role in FMC’s factory avoiding an inspection that “could have shut down the
159
+ factory or made it ineligible for tenders.” FMC payments to Doctor A were made through commission
160
+ agreements with no evidence of services provided. On at least one occasion, it was communicated to SRS
161
+ and FMC that Doctor A would not sign necessary papers for FMC products because he had not been paid.
162
+ Doctor A received over $220,000. FMC also employed two of Doctor A’s family members despite
163
+ knowledge that they were low performers in order to keep the doctor happy.
164
+
165
+  Doctor B, another high-ranking official of Saudi Technical Organization and who served as a board
166
+ member of a prominent charity founded by the Saudi government as well as a director of a company that
167
+ provided FMC dialyzers to KSA hospitals, received payments pursuant to contracts with entities owned by
168
+ the doctor or consulting contracts in which there was no evidence that services were performed. Once the
169
+ contracts expired in 2008, SRS continued to make payments through late 2011 despite the lack of services
170
+ rendered. Doctor B was paid over $190,000.
171
+
172
+  Payments were also made to Doctor C, the CEO of a charity established by a senior Saudi Official and an
173
+ organization very influential in determining MOH tender award recipients. In one email, the GM stated
174
+ that Doctor C had informed SRS that those who “will support the charity will get the [MOH] orders as
175
+ simple as that.” Doctor C and his family were also provided with travel that had no business purpose. In
176
+ addition on March 15, 2012, Doctor C, using an internet-based email account, emailed SRS GM a draft
177
+ commission contract for his assistance in securing contracts on behalf of FMC. Doctor C received over
178
+ $93,000.
179
+
180
+  Head Nurse D, for a military hospital, also received cash payments over $213,000 through both the check -
181
+ to-cash scheme and payments as a purported consultant with no proof of services rendered. S RS made
182
+ product sales valued at approximately $1.467 million and won three MOH tenders for the military hospital .
183
+
184
+  Improper gifts valued over $330,000 were provided to doctors and customers without adequate supporting
185
+ documentation with the more expensive gifts given to the more influential customers.
186
+ 11. SRS also made at least $31,000 in improper payments to Saudi customs officials
187
+ through a third-party agent to avoid or reduce penalties and fees. Invoices from the customs agent
188
+ mischaracterized the payments as handling charges or miscellaneous expenses. SRS accounting
189
+
190
+ 5
191
+ records show that $1.76 million of additional payments to the customs agent lacked supporting
192
+ documentation of services it rendered.
193
+
194
+ 12. Numerous documents were altered, destroyed and falsified in the company’s
195
+ accounting records to conceal the bribes. The falsification and destruction of records intensified
196
+ once the company’s internal investigation began. For example, employees created fake accounting
197
+ records to support a $100,000 check-to-cash transaction related to a bid for a multi-billion dollar
198
+ MOH tender. The discovery of the $100,000 payment led FMC to withdraw from the tender.
199
+
200
+ Conduct Relevant to Morocco
201
+
202
+ 13. From 2006 to 2010, an FMC Senior Officer and FMC Sales Manager in Germany
203
+ engaged in a scheme to pay bribes to a Moroccan Official, the chief nephrologist at two state
204
+ owned military hospitals, to obtain contracts. They entered into a sham marketing agreement with
205
+ Moroccan Official to pay him a 10% commission on a contract with Agadir Military Hospital with
206
+ half to be paid in 2007 and afterwards 12.5% annually. They also agreed to pay him bribes on
207
+ future projects in Morocco including Rabat Military Hospital.
208
+
209
+ 14. In order to get $123,000 in cash for the Moroccan Official, they devised a scheme
210
+ in which they paid a fake bonus to a West Africa manager who had a German bank account. The
211
+ senior FMC Germany managers assisted in backdating the fake bonus payment and amending
212
+ West Africa manager’s employment contract. West Africa manager then traveled to Germany with
213
+ the brother of Morocco Official to retrieve the cash from his German bank, which he then gave to
214
+ the brother for the Moroccan Official. Numerous red flags were overlooked in connection with the
215
+ bonus payment, including that the bonus payment order and contract amendment were clearly
216
+ backdated and didn’t have any relevance to the Moroccan business.
217
+
218
+ 15. Less than one month later, in February 2007, FMC Morocco and the Agadir
219
+ Military Hospital entered into a contract to build and provide products for a dialysis center. From
220
+ 2008 through March 2012, FMC paid the Moroccan Official an additional $111,000 that was also
221
+ funneled through fake bonus payments to another FMC manager. All the bribe payments were
222
+ falsely recorded as commission payments. FMC earned over $2.3 million in revenue from the
223
+ Agadir hospital project as a result of its bribery scheme.
224
+
225
+ 16. FMC also paid bribes to the Moroccan Official to obtain a 2009 contract at the
226
+ Rabat Military Hospital, this time using a sham consultant contract with a Moroccan agent
227
+ associated with Moroccan Official. FMC failed to identify numerous red flags of the corruption,
228
+ including the fact that the contract was backdated and the purported invoices and endorsed checks
229
+ from the Moroccan agent were signed by Moroccan Official’s brother, who was also a FMC
230
+ Morocco manager. Between 2009 and 2010, FMC paid the agent approximately $221,000
231
+ intended for Moroccan Official and falsely recorded as marketing expenses.
232
+
233
+ 17. In April 2012, FMC received a whistleblower email raising various allegations
234
+ about payments to government officials in Morocco. In May 2013, FMC received an anonymous
235
+
236
+ 6
237
+ complaint about improper payments related to military hospitals located in Agadir and Rabat.
238
+ Despite the 2012 allegations, and a subsequent email received in July 2013, FMC did not initiate
239
+ an investigation until January 2014, almost eight months later. After receiving preservation notices
240
+ in January 2014, some FMC managers destroyed records and deleted files from computers.
241
+ Overall, FMC benefited by over $3 million as a result of the corruption schemes in Morocco.
242
+
243
+ Conduct Relevant to Eight West African Countries
244
+
245
+ 18. From 2007 to at least 2016, the same FMC Senior Officer and FMC Sales Manager
246
+ who orchestrated the bribe schemes in Morocco also engaged in schemes to bribe publicly-
247
+ employed hospital doctors and administrators in eight West African countries to win FMC
248
+ business. The countries include Gabon, Cameroon, Benin, Burkina Faso, Chad, Ivory Coast,
249
+ Niger, and Senegal.
250
+
251
+ 19. In Gabon for example, from October 2007 to 2009, FMC entered into sham
252
+ consultant agreements with three government hospital executives in return for their assistance in
253
+ obtaining business and timely payments from product sales to Centre Hospitalier de Libreville
254
+ (“CHL”), a public hospital. FMC agreed to pay the executives a kickback from each dialysis kit
255
+ sold to the hospital, paying the executives over $420,000. The bribe payments were falsely
256
+ recorded as “export commissions.”
257
+
258
+ 20. Beginning in 2009, a third party agent (“West African Supplier”) was used as a
259
+ conduit for the payments. FMC paid sham “service fees” to West African Supplier, who passed
260
+ the funds to public HCPs and hospital administrators who had previously been paid through fake
261
+ consultancy agreements. In May 2010, FMC backdated a service agreement with West African
262
+ Supplier to January 1, 2009 to better conceal the scheme. From 2009 to 2012, FMC paid West
263
+ African Supplier over $807,000 intended for the three Gabonese hospital executives, and over $2.1
264
+ million intended for doctors in other West African countries.
265
+
266
+ 21. In 2013, West African Supplier’s relationship with FMC was changed from a third
267
+ party agent to a purported distributor. Rather than pay West African Supplier a service fee, it was
268
+ provided with a significant margin on sales to the Ministry of Health, CHL, and other West
269
+ African hospitals to fund the payments to HCPs. Numerous red flags were present that West
270
+ African Supplier was not a true distributor, including the facts that FMC continued to pay for the
271
+ delivery of its products to customers and that products were sold to West African Supplier at a
272
+ greatly reduced price.
273
+
274
+ 22. A FMC Sales Manager raised concerns about FMC’s loss of revenue using West
275
+ African Supplier as a distributor since they were receiving almost 50% less than what had been
276
+ invoiced to the hospitals under the prior scheme. The FMC finance director for West Africa
277
+ explained the loss of revenue was justified since West African Supplier was absorbing the costs of
278
+ making the phony commission payments to the doctors. With the costs shifted to West African
279
+ Supplier, FMC books showed expenses were significantly lower, which enabled FMC executives
280
+ to conceal the bribe payments to the hospital officials. From 2007 to 2016, FMC made improper
281
+
282
+ 7
283
+ payments in Gabon of approximately $2.3 million either directly to hospital executives or through
284
+ West African Supplier.
285
+
286
+ 23. FMC also used West African Supplier as a distributor to funnel improper
287
+ commission payments to doctors in return for product sales with public hospitals in Benin, Burkina
288
+ Faso, Ivory Coast, Niger, and Senegal. The conduct started in 2007 and continued through at least
289
+ 2016 when FMC finally terminated the relationship. Throughout the schemes, an FMC West
290
+ Africa manager used his personal internet-based email accounts to send spreadsheets of bribe
291
+ payments to hospital employees to FMC Germany supervisors, who ensured that the improper
292
+ payments were made.
293
+
294
+ 24. From 2007 through 2012, FMC engaged in a similar bribery scheme in Cameroon,
295
+ but used a different distributor. For example, FMC gave one hospital official 15% of all hospital
296
+ sales and gave another doctor five euros per dialysis kit sold. From 2007 to 2016, approximately
297
+ $1.7 million in improper payments to publicly-employed doctors were made from Cameroon
298
+ Distributor’s margin on the resale of the FMC products.
299
+
300
+ 25. Despite the ongoing investigations of known corruption in multiple nearby
301
+ countries, FMC failed to implement a sufficient system of internal accounting controls. The
302
+ bribery schemes in West Africa continued by many of the same FMC managers involved in
303
+ schemes in other countries. The books and records often lacked adequate documentary support
304
+ and records were falsified. At the direction of more senior FMC managers, employees altered and
305
+ destroyed documents and deleted files from computers. Efforts were made to align fictitious
306
+ stories about the misuse of company funds and lower-level employees were berated if they didn’t
307
+ destroy their laptops or delete emails. Despite multiple red flags of bribery, FMC’s legal,
308
+ compliance, and internal audit functions failed to detect and prevent the bribery. Employees were
309
+ inadequately trained on the company’s anti-corruption policies, and due diligence on third parties
310
+ was minimal. Overall, FMC benefited by over $40 million as a result of the corruption schemes in
311
+ West African countries.
312
+
313
+ Conduct Relevant to Angola
314
+
315
+ 26. In 2004, FMC South Africa explored entering the Angolan dialysis market and
316
+ generated a report, which was circulated to several FMC employees, including FMC EMEA
317
+ Executive Vice President, that raised red flags about corruption, most notably that Angola’s
318
+ Director of Military Services (“Military Official”) received a 20% commission on all dialysis kits
319
+ sold to military hospitals and that Angolan Reseller was partially owned by government officials.
320
+ An August 7, 2007 email also warned of “concerns about this direct market entry . . . . [that] will
321
+ require some extra precaution, documentation, and management attention.”
322
+
323
+
324
+ 8
325
+ 27. In 2008, FMC Portugal began selling products into Angola through Angolan
326
+ Reseller, which was partly owned by Military Official. Further, FMC did not adequately train its
327
+ FMC Portugal employees about their dealings with government officials until late 2012. As a
328
+ result, from 2008 to 2010, bribes were paid in the form of 20% commissions to Military Official
329
+ through Angolan Reseller.
330
+
331
+ 28. In 2008, FMC created FMC Angola, a separate legal entity intended to make sales
332
+ into Angola with FMC Portugal retaining management. By 2010, FMC’s relationship with its
333
+ reseller became fractured. In June 2010, FMC Portugal orchestrated a scheme by which it
334
+ provided a 35% stake in FMC Angola to prominent Angolan nephrologists, including Military
335
+ Official, as well as to Angolan Doctor A, a key nephrologist at several Angolan public hospitals
336
+ that were state-owned entities. In April 2011, FMC granted a power of attorney to execute the
337
+ share transfer, signed by FMC’s senior legal and compliance officer and an FMC Board of
338
+ Management member. In January 2012, the shares were transferred to the Angolan officials
339
+ without their having paid anything in exchange and without any due diligence conducted on the
340
+ transaction.
341
+
342
+ 29. FMC Angola also entered into a business relationship with Angolan Distributor,
343
+ owned equally by the sons of Military Officer. First, FMC Angola paid Angolan Distributor
344
+ $559,972 for “temporary storage” services without a contract or actual services performed. FMC
345
+ Angola also entered into a contract with Angolan Distributor for “the Provision of Logistics
346
+ Services” whereby Angolan Distributor was to provide warehousing storage for $77,300 per
347
+ month, which it received despite never providing the warehousing. FMC Angola in fact already
348
+ had a lease agreement with another warehouse for the same services at a cost three times less than
349
+ the costs charged by Angolan Distributor.
350
+
351
+ 30. In June 2012, a draft internal audit report identified that in Angola “overall controls
352
+ are not functioning as intended” and flagged the Angolan Distributor temporary storage
353
+ arrangement as a problem since (1) the owner of the company was a shareholder of FMC Angola
354
+ and (2) there was a total lack of written documentation relating to the services. FMC Legal and
355
+ Compliance issued a directive in October 2012 freezing all payments to Angolan Distributor.
356
+ Despite the directive, FMC Angola continued to accrue an additional $878,900 on its books for
357
+ storage services never rendered, but ultimately was prevented from making the payment.
358
+
359
+ 31. During the freeze period, in addition to the temporary storage contract with
360
+ Angolan Distributor, FMC made Angolan Distributor its exclusive distributor in Angola of certain
361
+ products and gave Angolan Distributor one of FMC’s largest clients as a customer. The distributor
362
+ arrangement thereby created a significant margin, approximately 60% of sales, that was provided
363
+ to the government officials on over $433,000 in sales.
364
+
365
+ 32. FMC’s senior managers both in Portugal and at the parent level failed to take any
366
+ timely steps to put a stop to the numerous conflicts raised by the Angolan Distributor relationship.
367
+ FMC Portugal misled FMC’s internal audit team when they tried to determine if additional
368
+ relationships with the Angolan Distributor existed. Only upon being instructed in July 2013 to
369
+
370
+ 9
371
+ “Please freeze the contract” did a senior FMC Portugal manager report that Angolan Distributor
372
+ had been made a distributor for certain sales without any written contract.
373
+
374
+ 33. Despite this new information, it took until November 2013 for an FMC Legal and
375
+ Compliance team to review the relationship with Military Officer and the other minority
376
+ shareholders, including examining “the applicability and justification of dividends for shareholders
377
+ who have not paid for their interest in the company yet.” FMC Legal and Compliance ultimately
378
+ concluded in December 2013 that these facts raised “a serious issue under our company’s
379
+ government procedures and a problematic behavior . . . . it cannot be questioned that a clear
380
+ management board directive” was not followed.
381
+
382
+ 34. During the entire time, FMC Angola also made payments to the other minority
383
+ shareholders, Angolan Doctor A and Angolan Doctor B, both government officials, by entering
384
+ into consulting contracts with each doctor. Per contracts, Angolan Doctor A was paid $7,500 per
385
+ month while Angolan Doctor B was paid $3,140 monthly. Angolan Doctor A discussed his
386
+ consultancy payments with FMC using his personal internet-based email account. Pursuant to
387
+ these contracts and other salary payments, the doctors received a total of approximately $400,000
388
+ from FMC. There was no review of the contracts, no apparent due diligence for conflicts of
389
+ interest, and no documentation of services. Overall, FMC benefited by over $10 million as a result
390
+ of the corruption schemes in Angola.
391
+
392
+ Conduct Relevant to Turkey
393
+
394
+ 35. Between 2005 and 2014, FMC Turkey entered into four separate joint ventures with
395
+ publicly employed doctors in exchange for those doctors directing business from their public
396
+ employer to FMC clinics. The doctors did not provide any capital in exchange for their shares. In
397
+ some cases, doctors’ shares were held in the names of other individuals.
398
+
399
+ 36. In a 2007 internal presentation by a FMC Turkey Vice-President, FMC Turkey set
400
+ forth a strategy to “select and find ways to work with nephrologists who refer the patients from the
401
+ important state hospitals.” The presentation included a proposal to pay salaries and bonuses to
402
+ doctors and provide them with 20-30% shares in joint ventures in exchange for the doctors
403
+ directing patients to FMC Turkey clinics.
404
+
405
+ 37. In one joint venture involving a prominent doctor at a public hospital in Diyarbakir,
406
+ a senior manager at FMC Germany wrote: “The professor who is our shareholder has very strong
407
+ relations with all state authorities including the university and other state hospitals. He is in a way
408
+ protector of our interests, benefits and operation in the city…. It is very hard to compete and
409
+ operate in this city if a powerful local is not backing you…. He should stay as our doctor for the
410
+ health and wellbeing of our system in this city.”
411
+
412
+ 38. After recapitalizing the JV, FMC paid that same doctor over $350,000 for his
413
+ unpaid interest in the JV, a payment that was based in part on patient enrollment. Then in 2013,
414
+ FMC Turkey sold the clinic’s assets to the doctor for $830,000. The FMC AG Board of
415
+
416
+ 10
417
+ Management approved the sale to the doctor in June 2013. As early as at least 2008, FMC senior
418
+ management were aware that the doctor did not pay for his initial 35% stake in the clinic, and that
419
+ his shares were being held in someone else’s name.
420
+
421
+ 39. In Erzurum, FMC gave shares to a professor with ties to the Turkish Minister of
422
+ Health, for referring patients from the university’s clinics. The professor didn’t make any capital
423
+ contributions for his shares. Ultimately, the professor was paid $323,000 for his 40% stake despite
424
+ having an outstanding $1,553,000 receivable. FMC Turkey managers discussed the need to make
425
+ the payment to the professor despite the outstanding receivable. In one exchange among FMC
426
+ managers, they noted that if they pushed for payment the “[Professor] would immediately turn his
427
+ back to us and fight with us. Knowing his before mentioned local and country level power, … he
428
+ would ask the doctors to refer back their patients to state hospital clinic and would also ask the
429
+ doctors to change to [a FMC competitor] all our PD patients.”
430
+
431
+ 40. In one JV that should have raised significant red flags, the approval request to the
432
+ FMC Board of Management stated that three doctors “currently working in the dialysis unit of the
433
+ State Hospital will participate in the startup both as shareholders and employees. It is expected that
434
+ on opening 60 patients will be referred from the State Hospital to the new clinic.” An email among
435
+ FMC Turkey senior management noted “Our expectations regarding [Yalova] are high as we have
436
+ very powerful doctors as partners in these startups. So after a year’s time we expect high patient
437
+ numbers and at least breakeven results in two years and a profitable operation after then.” None of
438
+ the doctors contributed capital for their shares.
439
+
440
+ 41. In another example, in Kayseri, FMC Turkey entered into a joint venture with a
441
+ nephrologist at the state hospital, noting “After 2 years, when the patient number increases preset
442
+ levels, [the doctor] will sell their shares at preset amounts and their debt to the company will be
443
+ deducted from this amount and the rest will be paid to them.” In August 2012, FMC Turkey
444
+ entered into a share purchase agreement to purchase the doctor’s 20% interest, which provided for
445
+ a purchase price predicated on the number of patients at the clinic. Between 2012 and 2013, the
446
+ doctor received $63,000. In 2014, he received $451,000 in cash and debt reductions, including
447
+ debts unrelated to the transaction, for his 20% stake. The payment was based principally on the
448
+ number of patients enrolled at the clinic at the time of the sale. Overall, FMC benefited by over $1
449
+ million as a result of the improper conduct in Turkey.
450
+
451
+ Conduct Relevant to Spain
452
+
453
+ 42. In certain public tenders between 2007 and 2014, FMC Spain received advance
454
+ information about tender specifications from publicly employed doctors or administrators. Some
455
+ of those doctors received improper payments from FMC Spain, including pursuant to consulting
456
+ agreements, or other benefits such as travel to medical congresses, trips to the United States,
457
+ donations to fund projects for the doctors, and gifts. In some of these tenders, FMC Spain sought
458
+ to have the doctors modify aspects of the tenders before the tenders were publicly announced or to
459
+ direct hospital sales to FMC.
460
+
461
+
462
+ 11
463
+ 43. FMC Spain entered into numerous consulting agreements with publicly employed
464
+ doctors with limited or no due diligence or compliance review. FMC Spain failed to adequately
465
+ document services performed by doctors who also assisted in obtaining or retaining business. Per
466
+ the agreements, fixed amounts to be paid to the doctors as “consultants” ranged from $16,000 to
467
+ approximately $187,000 per year. Sometimes payments were made without a written agreement.
468
+
469
+ 44. For example, in connection with a 2011 tender held by a Valencia state-owned
470
+ hospital, FMC Spain provided Spain Doctor A with draft tender technical specifications and
471
+ improvements, a draft scoring methodology, and proposed scores to win the tender. The doctor
472
+ used his personal email account to agree to some of the proposals with FMC winning the $2
473
+ million tender. FMC Spain paid Spain Doctor A over $114,000 between 2008 and 2011. A
474
+ donation of over $40,000 was made to the hospital’s foundation for the doctor’s training programs,
475
+ and additional payments were made to the doctor between 2012 and 2014 of $51,600, along travel
476
+ sponsorships and gifts.
477
+
478
+ 45. According to a December 2014 email between senior FMC managers discussing
479
+ influencing a 2015 tender at a state-owned hospital in Torrecardenas, the company “got [Spain
480
+ Doctor B] to decide to support [FMC Spain] to obtain 60% of the adjudication.” Afterward, FMC
481
+ won 60% of the tender, valued at approximately $3 million. Spain Doctor B received payments
482
+ from FMC, as well as travel sponsorships and gifts.
483
+
484
+ 46. In some instances, FMC Spain made improper payments to doctors to refer patients
485
+ to FMC clinics or to use more expensive FMC products. Payments were sometimes made to the
486
+ doctors indirectly through consortiums owned by the doctors, or by FMC acquiring businesses
487
+ from the doctors and, thereafter, paying for the use of the buildings in which the businesses were
488
+ located.
489
+
490
+ 47. For example, FMC Spain made improper payments and provided benefits to six
491
+ publicly-employed doctors at a Spanish state-owned hospital. FMC Spain acquired a clinic owned
492
+ by the doctors and then paid them 5% of all subsequent sales, and then later leased space from the
493
+ doctors. FMC Spain provided additional compensation to the six doctors by entering into a
494
+ consulting agreement with various forms of businesses owned by the doctors. In total, FMC paid
495
+ the doctors over $3 million.
496
+
497
+ 48. In 2010, FMC’s Internal Audit team found FMC Spain failed to comply with the
498
+ company’s policy concerning dealings with foreign officials. In 2014, another Internal Audit
499
+ report, sent to the same recipients as the 2010 report and the entire FMC Management Board,
500
+ raised significant red flags about FMC Spain’s payments to public officials, including a lack of
501
+ documentation for payments related to gifts, donations, sponsorships, commissions, and
502
+ consultancy payments. The payments to doctors continued until 2015. Many of these payments
503
+ were improperly recorded as consulting expenses in the books and records of FMC and FMC
504
+ Spain. Overall, FMC benefited by over $20 million as a result of the improper conduct.
505
+
506
+
507
+ 12
508
+ Conduct Relevant to China
509
+
510
+ 49. From 2007 to 2014, FMC China’s clinic business, Nephrocare, planned and
511
+ implemented incentive programs in which bonus payments were provided to publicly-employed
512
+ HCPs with which FMC China had supply agreements. The amounts of the payments were based
513
+ in part on the number of treatments provided and/or the number of new patients treated, and were
514
+ taken into consideration in the clinics’ financial models. Certain emails between FMC China
515
+ personnel suggest that the purpose of the bonus payments was to influence clinic procurement
516
+ decisions.
517
+
518
+ 50. During this time period, approximately $6.4 million in expense accrual entries were
519
+ related to such bonuses. However, only $1.7 million of the $6.4 million were reconciled to specific
520
+ payments. Of the remaining $4.7 million in accruals, the FMC China accounting records failed to
521
+ adequately tie the accruals and payments. They were recorded either in the year-end bonus or
522
+ other promotional expenses general ledger accounts, and were generally described in underlying
523
+ accounting records as “center marketing fees.” The inaccurate record-keeping can be attributed to
524
+ a senior FMC China manager, who cautioned a fellow employee in 2011 to avoid the use of the
525
+ term bonus due to “internal legal compliance” concerns when describing these payments.
526
+
527
+ 51. As a general practice, these bonuses would be paid once FMC China received
528
+ payments it was owed from hospitals for equipment purchases. Payments were made directly to
529
+ the doctors and nurses responsible for managing the clinics and in positions to influence clinic
530
+ procurement decisions. Some payments were made in cash, while others were made by wire
531
+ transfer, and later by a third party agent. FMC China stopped using the third party agent in 2014
532
+ after an internal audit report raised concerns that the agent was being paid without corresponding
533
+ reports showing proof of services rendered. Overall, FMC benefited by over $10 million as a
534
+ result of the improper conduct.
535
+
536
+ Conduct Relevant to the Balkan Region (Serbia and Bosnia)
537
+
538
+ 52. From 2007 to 2014, four doctors were paid over $329,000 by FMC while serving
539
+ on the Serbian Health Fund (“RFZO”) commission or other public tender commission while FMC
540
+ sought business from those same public commissions. FMC also paid for side trips and extra day
541
+ accommodations for publicly-employed doctors in connection with travel to medical conferences.
542
+ For example in 2008, FMC paid $393,000 for travel and accommodations for those same four
543
+ dual-employed doctors and their spouses to attend a conference in Philadelphia, PA, which
544
+ included non-business side trips to New York City and Cancun, Mexico. Doctors were also
545
+ provided laptops and GPS devices.
546
+
547
+ 53. FMC paid dual-employed doctors through a Serbian Agent. In 2010, FMC
548
+ compliance issued a directive prohibiting the use of Serbian Agent and requiring that service
549
+ contracts have more specificity to support payments. The directive was circumvented when an
550
+ FMC Serbia executive approved payments through a third-party transport vendor, who then paid
551
+ over $170,000 to the dual-employed doctors. FMC also made over $1 million in payments to
552
+
553
+ 13
554
+ “speed up” the clinic privatization process for four clinics. The consultant’s quarterly reports used
555
+ to support the payments were drafted by FMC senior managers. In another instance, FMC senior
556
+ managers gave a distributor, operated by a Serbian doctor, cash payments of over $62,000 plus 10
557
+ dialysis machines free of charge, which he resold to FMC for $139,500 to prolong a tender silently
558
+ and avoid import taxes.
559
+
560
+ 54. In Bosnia, FMC also made improper payments to a prominent Bosnian government
561
+ doctor to support FMC’s bid to win a government tender to establish and operate clinics in the
562
+ regions of Srpska and Brcko. In November 2008, the doctor was elected to the Brcko Assembly.
563
+ A 2008 fourth quarter activity report from the doctor to FMC listed as an achievement for the
564
+ quarter “removing all problems regarding the tender in Brcko.” FMC initially failed to investigate
565
+ the meaning of that entry and instead paid the doctor $80,850 in December 2008. In February
566
+ 2009, the doctor was elected the mayor of Brcko and thereafter the consultant agreement was
567
+ placed in the name of the doctor’s wife. By 2009, FMC paid the doctor over $1.3 million to
568
+ successfully win the bid. FMC also made over $957,000 in payments to a Bosnian healthcare
569
+ executive to assist FMC’s establishment of clinics in Brcko and Hercegovina, without any
570
+ evidence of services performed. Overall, FMC benefited by over $10 million as a result of the
571
+ improper conduct in Serbia and Bosnia.
572
+
573
+ Conduct Relevant to Mexico
574
+
575
+ 55. In 2010, FMC Mexico engaged in a scheme to increase the price per dialysis kit for
576
+ a tender with one of its largest customers in Mexico, Instituto Mexicano del Seguro Social
577
+ (“IMSS”), Mexico’s state-run social insurance agency. FMC Mexico employed the services of a
578
+ third party agent, Mexican Distributor, to pay kickbacks to IMSS officials relating to the tender
579
+ bid. Among other products, Mexican Distributor sold medical kits used in hemodialysis
580
+ treatments.
581
+
582
+ 56. In January 2010, FMC Mexico was awarded a portion of an IMSS subrogation
583
+ tender, at an agreed reimbursement price of $92 per treatment, which reflected a price increase that
584
+ Mexican Distributor supposedly negotiated for its kits. On December 8, 2010, almost a full year
585
+ after the IMSS tender award, FMC Mexico’s General Director and Chief Financial Officer
586
+ executed a contract with Mexican Distributor, agreeing to pay Mexican Distributor a commission
587
+ of $0.40 per treatment performed on IMSS patients in 2010 and $0.20 per treatment in 2011. The
588
+ retroactive contract improperly identified the commissions as being for “advice.”
589
+
590
+ 57. An FMC internal audit report found several problems with this arrangement,
591
+ including insufficient evidence that Mexican Distributor rendered services that contributed to the
592
+ increase in price, the contract was signed a year after services were supposedly rendered, and
593
+ monetary payments were made retroactively. The audit identified $213,500 in improper
594
+ commissions paid to Mexican Distributor intended in part for IMSS officials in 2010 and 2011.
595
+ Overall, FMC benefited by over $2 million as a result of the improper conduct.
596
+
597
+
598
+ 14
599
+ Legal Standards and Violations
600
+ 58. Under Section 21C of the Exchange Act, the Commission may impose a cease-and-
601
+ desist order upon any person who is violating, has violated, or is about to violate any provision of
602
+ the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, or
603
+ would be a cause of the violation, due to an act or omission the person knew or should have known
604
+ would contribute to such violation.
605
+ 59. As a result of conduct described above in Saudi Arabia, Angola and West Africa,
606
+ FMC violated Section 30A of the Exchange Act, which in relevant part makes it unlawful for an
607
+ issuer with securities registered under Section 12 of the Exchange Act or which is required to file
608
+ reports under Section 15(d) of the Exchange Act, or any employee or agent acting on its behalf, to
609
+ make use of the mails or any means or instrumentality of interstate commerce corruptly in
610
+ furtherance of an effort to pay or offer to pay anything of value to foreign officials for the purpose
611
+ of influencing their official decision-making, in order to assist in obtaining or retaining business.
612
+ Finally, each FMC subsidiary and entity was also an “agent” of FMC within the meaning of the
613
+ Foreign Corrupt Practices Act.
614
+
615
+ 60. Further, as a result of the conduct described in each of the countries above, FMC
616
+ violated Section 13(b)(2)(A) of the Exchange Act, which requires issuers to make and keep books,
617
+ records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions
618
+ and dispositions of the assets of the issuer.
619
+ 61. In addition, as a result of the conduct described in each of the countries above,
620
+ FMC violated Section 13(b)(2)(B) of the Exchange Act, which requires issuers to devise and
621
+ maintain a system of internal accounting controls sufficient to provide reasonable assurances that
622
+ (i) transactions are executed in accordance with management’s general or specific authorization; (ii)
623
+ transactions are recorded as necessary (I) to permit preparation of financial statements in conformity
624
+ with generally accepted accounting principles or any other criteria applicable to such statements,
625
+ and (II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance
626
+ with management’s general or specific authorization; and (iv) the recorded accountability for assets
627
+ is compared with the existing assets at reasonable intervals and appropriate action is taken with
628
+ respect to any differences.
629
+
630
+ FMC’s Self-Disclosure, Cooperation, and Remedial Efforts
631
+
632
+ 62. In determining to accept the Offer, the Commission considered remedial acts
633
+ promptly undertaken by Respondent and cooperation afforded the Commission staff. FMC self-
634
+ reported certain misconduct and voluntarily provided facts developed during its internal
635
+ investigation. FMC’s cooperation with the Commission’s investigation varied at times. FMC
636
+ produced documents, including key document binders and translations as needed, and made
637
+ current or former employees available to the Commission staff, including those who needed to
638
+ travel to the United States.
639
+
640
+
641
+ 15
642
+ 63. FMC’s remediation included the termination of employees and third parties
643
+ responsible for the misconduct and enhancements to its internal accounting controls. FMC
644
+ strengthened its global compliance organization; enhanced its policies and procedures regarding
645
+ the due diligence process and the use of third parties; created positions to address potential risks;
646
+ and increased training of employees on anti-bribery issues.
647
+
648
+ Undertakings
649
+
650
+ 64. Respondent undertakes to engage an Independent Compliance Monitor and report
651
+ to the Commission staff periodically pursuant to the provisions set forth in Attachment A of the
652
+ Order.
653
+
654
+ 65. Respondent undertakes to require the Independent Compliance Monitor to enter
655
+ into an agreement that provides that for the period of engagement and for a period of two years
656
+ from completion of the engagement, the Independent Compliance Monitor shall not enter into any
657
+ employment, consultant, attorney-client, auditing or other professional relationship with
658
+ Respondent, or any of its present or former affiliates, directors, officers, employees, or agents
659
+ acting in their capacity. The agreement will also provide that the Independent Compliance
660
+ Monitor will require that any firm with which he/she is affiliated or of which he/she is a member,
661
+ and any person engaged to assist the Independent Compliance Monitor in performance of his/her
662
+ duties under this Order shall not, without prior written consent of the Division of Enforcement,
663
+ enter into any employment, consultant, attorney-client, auditing or other professional relationship
664
+ with Respondent, or any of its present or former affiliates, directors, officers, employees, or agents
665
+ acting in their capacity as such for the period of the engagement and for a period of two years after
666
+ the engagement.
667
+
668
+ 66. Certify, in writing, compliance with the undertaking(s) set forth above. The
669
+ certification shall identify the undertaking(s), provide written evidence of compliance in the form
670
+ of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The
671
+ Commission staff may make reasonable requests for further evidence of compliance, and
672
+ Respondent agrees to provide such evidence. The certification and supporting material shall be
673
+ submitted to Tracy L. Price, Deputy Chief, FCPA Unit, Division of Enforcement, U.S. Securities
674
+ and Exchange Commission, 100 F Street, N.E., Mail Stop 5631, Washington, D.C. 20549, with a
675
+ copy to the Office of Chief Counsel of the Enforcement Division, no later than sixty (60) days
676
+ from the date of the completion of the undertakings.
677
+
678
+ 67. Respondent undertakes to do the following: in connection with this action and any
679
+ related judicial or administrative proceeding or investigation commenced by the Commission or to
680
+ which the Commission is a party, Respondent (i) agrees to appear and be interviewed by
681
+ Commission staff at such times and places as the staff requests upon reasonable notice; (ii) will
682
+ accept service by mail or facsimile transmission of notices or subpoenas issued by the Commission
683
+ for documents or testimony at depositions, hearings, or trials, or in connection with any related
684
+ investigation by Commission staff; (iii) appoints Respondent's undersigned attorney as agent to
685
+ receive service of such notices and subpoenas; (iv) with respect to such notices and subpoenas,
686
+
687
+ 16
688
+ waives the territorial limits on service contained in Rule 45 of the Federal Rules of Civil Procedure
689
+ and any applicable local rules, provided that the party requesting the testimony reimburses
690
+ Respondent's travel, lodging, and subsistence expenses at the then-prevailing U.S. Government per
691
+ diem rates; and (v) consents to personal jurisdiction over Respondent in any United States District
692
+ Court for purposes of enforcing any such subpoena.
693
+
694
+ Non-Prosecution Agreement
695
+
696
+ 68. FMC has entered into a three-year non-prosecution agreement with the United
697
+ States Department of Justice that acknowledges responsibility for criminal conduct relating to
698
+ certain findings in the Order.
699
+
700
+ Non-Imposition of a Civil Penalty
701
+
702
+ 69. FMC acknowledges that the Commission is not imposing a civil penalty based
703
+ upon the imposition of an $84.7 million criminal fine as part of its resolution with the Department
704
+ of Justice.
705
+
706
+ IV.
707
+
708
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
709
+ agreed to in Respondent FMC’s Offer.
710
+
711
+ Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that:
712
+
713
+ A. Respondent FMC cease-and-desist from committing or causing any violations and
714
+ any future violations of Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C.
715
+ §§ 78m(b)(2)(A), 78m(b)(2)(B), and 78dd-1].
716
+
717
+ B. Respondent shall comply with its Undertakings as enumerated in paragraphs 64 to
718
+ 67 above.
719
+
720
+ C. Respondent shall, within fourteen days of the entry of this Order, pay disgorgement
721
+ of $135 million and prejudgment interest of $12 million, for total payment of $147 million to the
722
+ Securities and Exchange Commission for transfer to the general fund of the United States Treasury,
723
+ subject to Exchange Act Section 21F(g)(3). If payment of disgorgement and prejudgment interest is
724
+ not made by the date the payment is required by this Order, additional interest shall accrue pursuant
725
+ to SEC Rule of Practice 600.
726
+
727
+ Payment must be made in one of the following ways:
728
+
729
+ (1) Respondent may transmit payment electronically to the Commission, which will
730
+ provide detailed ACH transfer/Fedwire instructions upon request;
731
+
732
+
733
+ 17
734
+ (2) Respondent may make direct payment from a bank account via Pay.gov through the
735
+ SEC website at http://www.sec.gov/about/offices/ofm.htm; or
736
+
737
+ (3) Respondent may pay by certified check, bank cashier’s check, or United States
738
+ postal money order, made payable to the Securities and Exchange Commission and
739
+ hand-delivered or mailed to:
740
+
741
+ Enterprise Services Center
742
+ Accounts Receivable Branch
743
+ HQ Bldg., Room 181, AMZ-341
744
+ 6500 South MacArthur Boulevard
745
+ Oklahoma City, OK 73169
746
+
747
+ Payments by check or money order must be accompanied by a cover letter identifying
748
+ FMC as a Respondent in these proceedings, and the file number of these proceedings; a copy of the
749
+ cover letter and check or money order must be sent to Tracy L. Price, Deputy Chief, FCPA Unit,
750
+ Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC
751
+ 20549-5631.
752
+
753
+ D. Respondent acknowledges that the Commission is not imposing a civil penalty
754
+ based in part upon its cooperation in a Commission investigation and related enforcement action.
755
+ If at any time following the entry of the Order, the Division of Enforcement (“Division”) obtains
756
+ information indicating that Respondent knowingly provided materially false or misleading
757
+ information or materials to the Commission, or in a related proceeding, the Division may, at its
758
+ sole discretion and with prior notice to the Respondent, petition the Commission to reopen this
759
+ matter and seek an order directing that the Respondent pay an additional civil penalty.
760
+ Respondent may contest by way of defense in any resulting administrative proceeding whether it
761
+ knowingly provided materially false or misleading information, but may not: (1) contest the
762
+ findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited
763
+ to, any statute of limitations defense.
764
+
765
+ By the Commission.
766
+
767
+
768
+
769
+ Vanessa A. Countryman
770
+ Acting Secretary
771
+
772
+
773
+
774
+
775
+
776
+
777
+
778
+
779
+ 18
780
+ Attachment A
781
+ Independent Compliance Monitor
782
+ Retention of Monitor and Term of Engagement
783
+ 1. Fresenius Medical Care AG & Co. KGaA (“Company”) shall engage an
784
+ independent compliance monitor (the “Monitor”) not unacceptable to the staff of the Commission
785
+ within sixty (60) calendar days of the issuance of the Order. The Monitor shall have, at a
786
+ minimum, the following qualifications: (i) demonstrated expertise with respect to the FCPA and
787
+ other applicable anti-corruption laws, including experience counseling on FCPA issues; (ii)
788
+ experience designing or reviewing corporate compliance policies, procedures, and internal
789
+ accounting controls, including FCPA and anti-corruption policies and procedures; (iii) the ability
790
+ to access and deploy resources as necessary to discharge the Monitor’s duties; and (iv) sufficient
791
+ independence from the Company to ensure effective and impartial performance of the Monitor’s
792
+ duties. The Commission staff may extend the Company’s time period to retain the Monitor, in its
793
+ sole discretion. If the Monitor resigns or is otherwise unable to fulfill the obligations herein, the
794
+ Company shall within thirty (30) days retain a successor Monitor that has the same minimum
795
+ qualifications as the original monitor and that is not unacceptable to the Commission staff.
796
+ 2. The Company shall retain the Monitor for a period of not less than twenty-four
797
+ (24) months from the date the Monitor is retained (the “Term of the Monitorship”), unless the
798
+ Commission staff finds, in its sole discretion, that there exists a change in circumstances
799
+ sufficient to terminate the Monitorship early or extend the Monitorship as set forth in paragraphs
800
+ 24-25 (Termination or Extension of Monitorship).
801
+
802
+ 19
803
+ Company’s Obligations
804
+ 3. The Company shall cooperate fully with the Monitor and provide the Monitor with
805
+ access to all non-privileged information, documents, books, records, facilities, and personnel as
806
+ reasonably requested by the Monitor, which fall within the Monitor’s mandate; such access shall
807
+ be provided consistent with the Company’s and the Monitor’s obligations under applicable local
808
+ laws and regulations, including but not limited to, applicable data privacy and national security
809
+ laws and regulations. The Company shall use its best efforts, to the extent reasonably requested, to
810
+ provide the Monitor with access to the Company’s former employees, third party vendors, agents,
811
+ and consultants. The Company does not intend to waive the protection of the attorney work
812
+ product doctrine, attorney-client privilege, or any other privilege applicable as to third parties.
813
+ 4. The parties agree that no attorney-client relationship shall be formed between the
814
+ Company and the Monitor. In the event that the Company seeks to withhold from the Monitor
815
+ access to information, documents, books, records, facilities, current or former personnel of the
816
+ Company, its third-party vendors, agents, or consultants that may be subject to a claim of attorney-
817
+ client privilege or to the attorney work-product doctrine, or where the Company reasonably
818
+ believes production would otherwise be inconsistent with the applicable law, the Company shall
819
+ work cooperatively with the Monitor to resolve the matter to the satisfaction of the Monitor. If,
820
+ during the Term of the Monitorship, the Monitor believes that the Company is unreasonably
821
+ withholding access on the basis of a claim of attorney-client privilege, attorney work-product
822
+ doctrine, or other asserted applicable law, and cannot resolve the matter cooperatively with the
823
+ Company, the Monitor shall notify the Commission staff.
824
+
825
+ 20
826
+ 5. Upon entry of this Order and during the Term of the Monitorship, should the
827
+ Company learn of credible evidence or allegations of corrupt payments, false books, records, or
828
+ accounts, or the failure to implement adequate internal accounting controls, the Company shall
829
+ promptly report such credible evidence or allegations to the Commission staff. Any disclosure by
830
+ the Company to the Monitor concerning credible evidence of corrupt payments, false books and
831
+ records, or internal accounting control issues shall not relieve the Company of any otherwise
832
+ applicable obligation to truthfully disclose such matters to the Commission staff.
833
+ Monitor’s Mandate
834
+ 6. The Monitor shall review and evaluate the effectiveness of the Company’s policies,
835
+ procedures, practices, internal accounting controls, recordkeeping, SOX controls, and financial
836
+ reporting processes (collectively, “Policies and Procedures”), as they relate to the Company’s
837
+ current and ongoing compliance with the anti-bribery, books and records, and internal accounting
838
+ controls provisions of the FCPA and other applicable anti-corruption laws (collectively, “Anti-
839
+ corruption Laws”), and make recommendations reasonably designed to improve the effectiveness
840
+ of the Company’s Policies and Procedures and FCPA corporate compliance program (the
841
+ “Mandate”). This Mandate shall include an assessment of the Management and Supervisory
842
+ Boards and senior management’s commitment to, and effective implementation of, the Policies and
843
+ Procedures and FCPA corporate compliance program. In carrying out the Mandate, to the extent
844
+ appropriate under the circumstances, the Monitor may coordinate with the Company personnel,
845
+ including in-house counsel or through designated outside counsel, compliance personnel, and
846
+ internal auditors. To the extent the Monitor deems appropriate, it may rely on the Company’s
847
+ processes, and on sampling and testing methodologies. The Monitor is not expected to conduct a
848
+
849
+ 21
850
+ comprehensive review of all business lines, all business activities, and all markets. This Mandate
851
+ shall not apply to Fresenius Medical Care Holdings, Inc. and its subsidiaries, to the extent that
852
+ those entities and/or their employees and agents operate exclusively within the United States.
853
+ Nonetheless, the Monitor may seek a briefing on the regulatory environment and the structure of
854
+ the compliance program in the United States. If requested by the Monitor, the Company shall
855
+ provide such a briefing, with reasonable consideration of the scope of the Mandate. Any disputes
856
+ between the Company and the Monitor with respect to the Work Plan shall be decided by the
857
+ Commission staff in its sole discretion.
858
+ 7. During the Term of the Monitorship, the Monitor shall conduct an initial review
859
+ and two follow-up reviews and prepare an initial report and a first and second follow-up report,
860
+ and issue a Certification Report if appropriate, as described below.
861
+ Initial Review and Report
862
+ 8. Promptly upon being retained, the Monitor shall prepare a written Work Plan,
863
+ which shall be submitted to the Company and the Commission staff for comment no later than
864
+ thirty (30) days after being retained.
865
+ 9. In order to conduct an effective Initial Review and to understand fully any existing
866
+ deficiencies in the Company’s Policies and Procedures and FCPA corporate compliance program,
867
+ the Monitor’s Work Plan shall include such steps as are reasonably necessary to understand the
868
+ Company’s business and its global anti -corruption risks. The steps shall include:
869
+ (a) inspection of relevant documents, including the internal accounting
870
+ controls, recordkeeping, and financial reporting policies and procedures as
871
+ they relate to the Company’s compliance with the books and records,
872
+
873
+ 22
874
+ internal accounting controls, and anti-bribery provisions of the FCPA and
875
+ other applicable anti-corruption laws;
876
+ (b) onsite observation of selected systems and procedures comprising the
877
+ Company’s Policies and Procedures and FCPA corporate compliance
878
+ program, including anti-corruption compliance procedures, internal
879
+ accounting controls, recordkeeping, due diligence, and internal audit
880
+ procedures, including at sample sites;
881
+ (c) meetings with, and int erviews o f, as relevant, the Company employees,
882
+ officers, di rectors, and, where appropriate and feasible, its thi rd-party
883
+ vendors, agents, or consultants and other persons at mutually convenient
884
+ times and places; and
885
+ (d) risk-based analyses, studies, and testing of the Company’s FCPA
886
+ corporate compliance program.
887
+ 10. The Monitor may take steps as reasonably necessary to develop an understanding
888
+ of the facts and circumstances surrounding prior FCPA violations that gave rise to this action
889
+ or violations of other applicable Anti-corruption Laws, but shall not conduct his or her own
890
+ inquiry into those historical events.
891
+ 11. After receiving the Initial Review Work Plan, the Company and Commission staff
892
+ shall provide any comments concerning the Initial Review Work Plan within fifteen (15) days to
893
+ the Monitor. Any disputes between the Company and the Monitor with respect to the Initial
894
+ Review Work Plan shall be decided by the Commission staff in its sole discretion. Following
895
+
896
+ 23
897
+ comments by the Company and Commission staff, the Monitor will have ten (10) days to submit a
898
+ Final Initial Review Work Plan.
899
+ 12. The Initial Review shall commence no later than sixty (60) days from the date of
900
+ the engagement of the Monitor (unless otherwise agreed by the Company, the Monitor, and the
901
+ Commission staff). The Monitor shall issue a written report within one hundred twenty (120) days
902
+ of commencing the Initial Review, setting forth the Monitor’s assessment and, if necessary,
903
+ making recommendations reasonably designed to improve the effectiveness of the Company’s
904
+ Policies and Procedures and FCPA corporate compliance program as they relate to the Company’s
905
+ compliance with the FCPA and other applicable Anti-corruption Laws. The Monitor should
906
+ consult with the Company concerning his or her findings and recommendations on an ongoing
907
+ basis and should consider the Company’s comments and input to the extent the Monitor deems
908
+ appropriate. The Monitor may also choose to share a draft of his or her report with the Company
909
+ and Commission staff prior to finalizing it. The Monitor shall provide the report to the
910
+ Management Board of the Company and contemporaneously transmit a copy to Commission staff.
911
+ 13. Within ninety (90) days after receiving the Monitor’s Initial Review Report, the
912
+ Company shall adopt and implement all recommendations in the report, provided, however, that as
913
+ to any recommendation that the Company considers unduly burdensome, impractical, costly, or
914
+ inconsistent with applicable law or regulation, the Company need not adopt that recommendation
915
+ at that time, but may submit in writing to the Monitor and the Commission staff within fifteen (15)
916
+ days of receiving the report, an alternative policy, procedure, or system designed to achieve the
917
+ same objective or purpose.
918
+
919
+ 24
920
+ 14. In the event the Company and the Monitor are unable to agree on an acceptable
921
+ alternative proposal, the Company shall promptly consult with the Commission staff. Any
922
+ disputes between the Company and the Monitor with respect to the recommendations shall be
923
+ decided by the Commission staff in its sole discretion. The Commission staff shall consider the
924
+ Monitor’s recommendation and the Company’s reasons for not adopting the recommendation in
925
+ determining whether the Company has fully complied with its obligations. Pending such
926
+ determination, the Company shall not be required to implement any contested recommendation(s).
927
+ 15. With respect to any recommendation that the Monitor determines cannot
928
+ reasonably be implemented within ninety (90) days after receiving the report, the Monitor may
929
+ extend the time period for implementation with prior written approval of the Commission staff.
930
+ Follow Up Reviews
931
+ 16. The Monitor shall conduct a minimum of two Follow-Up Reviews. The Monitor
932
+ shall submit a written work plan for each follow-up review to the Company and Commission
933
+ staff within sixty (60) calendar days after the issuance of either the initial report, or the
934
+ applicable follow-up report. The Company and Commission staff shall provide any comments
935
+ concerning the work plan within fifteen (15) calendar days in writing to the Monitor. Any
936
+ disputes between the Company and the Monitor with respect to the written work plan shall be
937
+ decided by the Commission staff in its sole discretion. Following comments by the Company
938
+ and Commission staff, the Monitor will have ten (10) calendar days to make revisions to the
939
+ follow-up work plan.
940
+ 17. The Monitor shall commence the follow-up review pursuant to the work plan no
941
+ later than ninety (90) calendar days after the issuance of the initial report, or applicable follow-up
942
+
943
+ 25
944
+ report, (unless otherwise agreed by the Company, the Monitor and the Commission staff). The
945
+ Monitor shall issue its written follow-up report within one hundred-twenty (120) calendar days
946
+ of commencing the follow-up review. The follow-up report shall set forth the Monitor’s
947
+ assessment of, and any additional recommendations regarding, the Policies and Procedures as
948
+ they relate to the Company’s compliance with the Anti-corruption Laws; the Monitor’s
949
+ assessment of the implementation by the Company of any recommendations made in the initial
950
+ report, or follow-up report if applicable; and the Monitor’s assessment of the commitment of the
951
+ Company’s Supervisory and Management Boards and senior management to compliance with
952
+ the FCPA.
953
+ 18. Within ninety (90) days after receiving the Monitor’s follow up report, the
954
+ Company shall adopt and implement all recommendations in the report, provided, however, that as
955
+ to any recommendation that the Company considers unduly burdensome, impractical, costly, or
956
+ inconsistent with applicable law or regulation, the Company need not adopt that recommendation
957
+ at that time, but may submit in writing to the Monitor and the Commission staff within fifteen (15)
958
+ days of receiving the report, an alternative policy, procedure, or system designed to achieve the
959
+ same objective or purpose.
960
+ 19. In the event the Company and the Monitor are unable to agree on an acceptable
961
+ alternative proposal within fifteen (15) days, the Company shall promptly consult with the
962
+ Commission staff. Any disputes between the Company and the Monitor with respect to the
963
+ recommendations shall be decided by the Commission staff in its sole discretion. The
964
+ Commission staff shall consider the Monitor’s recommendation and the Company’s reasons for
965
+ not adopting the recommendation in determining whether the Company has fully complied with
966
+
967
+ 26
968
+ its obligations. Pending such determination, the Company shall not be required to implement any
969
+ contested recommendation(s). The Monitor shall repeat the process of Follow-Up Reviews
970
+ until the terms in paragraph 21 (Certification of Compliance) or paragraphs 24-25 (Termination
971
+
972
+ or Extension of Monitorship) are met.
973
+
974
+ 20. Throughout the Term of the Monitorship, the Monitor shall disclose to the
975
+ Commission staff any credible evidence that corrupt or otherwise suspicious transactions
976
+ occurred, or payments of things of value were offered, promised, made or authorized by any
977
+ entity or person within the Company, or any entity or person working directly or indirectly for or
978
+ on behalf of the Company, or that related false books and records may have been maintained by
979
+ or on behalf of the Company. The Monitor shall contemporaneously notify the Company’s
980
+ Global General Counsel, Chief Compliance Officer, or Audit Committee for further action unless
981
+ at the Monitor’s discretion he or she believes disclosure to the Company would be inappropriate
982
+ under the circumstances. The Monitor shall address in his or her reports the appropriateness of
983
+ the Company’s response to all improper activities, whether previously disclosed to the
984
+ Commission staff or not.
985
+ Certification of Compliance
986
+
987
+ 21. At the conclusion of the ninety (90) calendar day period following the issuance of
988
+ the second follow-up report, or later follow-up report if applicable, if the Monitor believes that
989
+ the Company’s Policies and Procedures and FCPA compliance program are reasonably designed
990
+ and implemented to detect and prevent violations of the Anti-corruption Laws and are
991
+ functioning effectively, the Monitor shall certify the Company’s compliance with its compliance
992
+ obligations under the Order. The Monitor shall then submit to the Commission staff a written
993
+
994
+ 27
995
+ report (“Certification Report”) within forty (40) calendar days. The Certification Report shall set
996
+ forth an overview of the Company’s remediation efforts to date, including the implementation
997
+ status of the Monitor’s recommendations, and an assessment of the sustainability of the
998
+ Company’s remediation efforts. The Certification Report should also recommend the scope of
999
+ the Company’s future self-reporting. Also at the conclusion of the ninety (90) calendar day
1000
+ period following the issuance of the second follow-up report, the Company shall certify in
1001
+ writing to the Commission staff, with a copy to the Monitor, that the Company has adopted and
1002
+ implemented all of the Monitor’s recommendations in the initial and follow-up report(s), or the
1003
+ agreed-upon alternatives. The Monitor or the Company may extend the time period for issuance
1004
+ of the Certification Report or the Company’s certification, respectively, with prior written
1005
+ approval of the Commission staff.
1006
+ Self-Reporting Period
1007
+
1008
+ 22. At such time as the Commission staff approves the Certification Report and the
1009
+ Company’s certification, the monitorship shall be terminated, and the Company will be permitted
1010
+ to self-report to the Commission staff on its enhanced compliance obligations for the remainder
1011
+ of the term of the Order. The Commission staff, however, reserves the right to terminate the
1012
+ monitorship absent certification by the Monitor, upon a showing by the Company that
1013
+ termination is, nevertheless, in the interests of justice.
1014
+ 23. If permitted to self-report to the Commission staff, the Company shall thereafter
1015
+ submit to the Commission staff a written Initial Self-Report and Follow Up Self-Report at six (6)
1016
+ month intervals, setting forth a complete description of its remediation efforts to date, its
1017
+ proposals to improve the Company’s Policies and Procedures and FCPA compliance program for
1018
+
1019
+ 28
1020
+ ensuring compliance with the Anti-corruption Laws, and the proposed scope of the subsequent
1021
+ reviews. The Company shall disclose any credible evidence that corrupt or otherwise suspicious
1022
+ transactions occurred, or payments of things of value were offered, promised, or provided to
1023
+ foreign officials, that it learns of that occurred after the date of this Consent. The Company may
1024
+ extend the time period for issuance of the self-report with prior written approval of the
1025
+ Commission staff.
1026
+ Termination or Extension of the Monitorship
1027
+
1028
+ 24. If at the conclusion of the ninety (90) calendar-day period following the issuance
1029
+ of the second follow-up report, or later follow-up report if applicable, the Commission staff
1030
+ concludes in its sole discretion that the Company has not by that time successfully satisfied its
1031
+ compliance obligations under the Order, the Term of the Monitorship shall be extended for
1032
+ twelve (12) months. Under such circumstances, the Monitor shall commence additional Follow-
1033
+ Up Reviews in accordance with Paragraphs 16-19.
1034
+ 25. If at the conclusion of the thirty-six (36) month period the Commission staff
1035
+ concludes the Company has not met its obligations under the Order, the Commission staff in its
1036
+ sole discretion may extend the Monitorship or Self-Reporting requirements up to forty-eight (48)
1037
+
1038
+ months from the issuance of the Order, and require reporting as set forth for Follow-Up Reviews
1039
+ or Self-Reporting.
1040
+ Extensions of Time
1041
+
1042
+ 26. Upon request by the Monitor or the Company, the Commission staff may extend
1043
+ any procedural time period set forth above for good cause shown.
1044
+
1045
+ 29
1046
+ Confidentiality of Reports
1047
+ 27. The reports submitted by the Monitor and the periodic reviews and reports
1048
+ submitted by the Company will likely include confidential financial, proprietary, competitive
1049
+ business, or commercial information. Public disclosure of the reports could discourage
1050
+ cooperation, impede pending or potential government investigations, or undermine the objective
1051
+ of the reporting requirement. For these reasons, among others, the reports and the contents
1052
+ thereof are intended to remain and shall remain non-public, except (i) pursuant to court order, (ii)
1053
+ as agreed to by the parties in writing, (iii) to the extent that the Commission determines in its
1054
+ sole discretion that disclosure would be in furtherance of the Commission’s discharge of its
1055
+ duties and responsibilities, or (iv) as is otherwise required by law.
1056
+ Address for All Written Communications and Reports
1057
+
1058
+ 28. All reports or other written communications by the Monitor or the Company
1059
+ directed to the Commission staff shall be transmitted to Tracy L. Price, FCPA Unit, Deputy Chief,
1060
+ Division of Enforcement, U.S. Securities and Exchange Commission, 100 F Street NE,
1061
+ Washington D.C. 20549.
1062
+
1063
+
1064
+
raw/aaer/2019/AAER-4034.txt ADDED
@@ -0,0 +1,151 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+ UNITED STATES OF AMERICA
4
+ Before the
5
+ SECURITIES AND EXCHANGE COMMISSION
6
+
7
+ SECURITIES EXCHANGE ACT OF 1934
8
+ Release No. 85478 / April 1, 2019
9
+
10
+ ACCOUNTING AND AUDITING ENFORCEMENT
11
+ Release No. 4034 / April 1, 2019
12
+
13
+ ADMINISTRATIVE PROCEEDING
14
+ File No. 3-18769
15
+
16
+
17
+ In the Matter of
18
+
19
+ JENNIFER F. WOLF, CPA,
20
+
21
+ Respondent.
22
+
23
+
24
+ ORDER IMPOSING REMEDIAL
25
+ SANCTIONS PURSUANT TO RULE
26
+ 102(e) OF THE COMMISSION’S RULES
27
+ OF PRACTICE
28
+
29
+ I.
30
+
31
+ The Securities and Exchange Commission (“Commission”) instituted these public
32
+ proceedings against Jennifer F. Wolf (“Respondent” or “Doe”) pursuant to Rule 102(e)(3)(i) of
33
+ the Commission’s Rules of Practice.1
34
+
35
+ II.
36
+
37
+ Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission
38
+ has determined to accept. Solely for the purpose of these proceedings and any other proceedings
39
+ brought by or on behalf of the Commission, or to which the Commission is a party, and without
40
+ admitting or denying the findings herein, except as to the Commission’s jurisdiction over her and
41
+ the subject matter of these proceedings, and the findings contained in Section III. below, which
42
+ are admitted, Respondent consents to the entry of this Order Imposing Remedial Sanctions
43
+ (“Order”), as set forth below.
44
+
45
+
46
+
47
+ 1 Rule 102(e)(3)(i) provides, in relevant part, that:
48
+
49
+ The Commission, with due regard to the public interest and without preliminary hearing,
50
+ may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has
51
+ been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his
52
+ or her misconduct in an action brought by the Commission, from violating or aiding and abetting
53
+ the violation of any provision of the Federal securities laws or of the rules and regulations
54
+ thereunder.
55
+
56
+
57
+ 2
58
+ III.
59
+
60
+ On the basis of this Order and Respondent’s Offer, the Commission finds that:
61
+
62
+ 1. Respondent Jennifer F. Wolf, 54, is and, at all relevant times, was a certified
63
+ public accountant in the State of California, and is the former Acting Controller of Logitech
64
+ International, S.A. (“Logitech”).
65
+
66
+ 2. On April 18, 2016, the Commission filed a complaint against Wolf in the United
67
+ States District Court for the Northern District of California, entitled Securities and Exchange v.
68
+ Commission v. Bardman, et al., No. 15-cv-02023-JST (N.D. Cal.) (the “District Court Action”).
69
+ The complaint alleged, among other things, that Wolf’s conduct resulted in Logitech’s filing a
70
+ false and misleading Form 10-K for the fiscal year ended March 31, 2011 based on Logitech’s
71
+ failure to record an inventory reserve for its Revue product.
72
+
73
+ 3. On September 6, 2018, the Court entered a consent final judgment against Wolf
74
+ (the “Final Judgment”) that, inter alia, permanently enjoined her from future violations of
75
+ Section 17(a)(3) of the Securities Act of 1933 and Rule 13b2-1 of the Securities and Exchange
76
+ Act of 1934.
77
+
78
+ IV.
79
+
80
+ In view of the foregoing, the Commission deems it appropriate and in the public interest
81
+ to impose the sanction agreed to in Respondent’s Offer.
82
+
83
+ Accordingly, it is hereby ORDERED, effective immediately, that:
84
+
85
+ A. Respondent is suspended from appearing or practicing before the Commission as an
86
+ accountant.
87
+
88
+ B. After one year from the date of this order, Respondent may request that the
89
+ Commission consider her reinstatement by submitting an application (attention: Office of the Chief
90
+ Accountant) to resume appearing or practicing before the Commission as:
91
+
92
+ 1. a preparer or reviewer, or a person responsible for the preparation or
93
+ review, of any public company’s financial statements that are filed with the Commission (other
94
+ than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the
95
+ Securities Exchange Act of 1934). Such an application must satisfy the Commission that
96
+ Respondent’s work in her practice before the Commission as an accountant will be reviewed
97
+ either by the independent audit committee of the public company for which she works or in some
98
+ other acceptable manner, as long as she practices before the Commission in this capacity; and/or
99
+
100
+ 2. a preparer or reviewer, or a person responsible for the preparation or
101
+ review, of any public company’s financial statements that are filed with the Commission as a
102
+ member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act
103
+ of 1934. Such an application will be considered on a facts and circumstances basis with
104
+
105
+
106
+ 3
107
+ respect to such membership, and the applicant’s burden of demonstrating good cause for
108
+ reinstatement will be particularly high given the role of the audit committee in financial and
109
+ accounting matters; and/or
110
+
111
+ 3. an independent accountant.
112
+
113
+ Such an application must satisfy the Commission that:
114
+
115
+ (a) Respondent, or the public accounting firm with which she is
116
+ associated, is registered with the Public Company Accounting Oversight Board (“Board”) in
117
+ accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective;
118
+
119
+ (b) Respondent, or the registered public accounting firm with which
120
+ she is associated, has been inspected by the Board and that inspection did not identify any
121
+ criticisms of or potential defects in the Respondent’s or the firm’s quality control system that
122
+ would indicate that the respondent will not receive appropriate supervision;
123
+ (c) Respondent has resolved all disciplinary issues with the Board, and
124
+ has complied with all terms and conditions of any sanctions imposed by the Board (other than
125
+ reinstatement by the Commission); and
126
+
127
+ (d) Respondent acknowledges her responsibility, as long as she
128
+ appears or practices before the Commission as an independent accountant, to comply with all
129
+ requirements of the Commission and the Board, including, but not limited to, all requirements
130
+ relating to registration, inspections, concurring partner reviews, and quality control standards.
131
+
132
+ C. The Commission will consider an application by Respondent to resume appearing
133
+ or practicing before the Commission provided that her state CPA license is current and she has
134
+ resolved all other disciplinary issues with the applicable state boards of accountancy. However,
135
+ if state licensure is dependent on reinstatement by the Commission, the Commission will
136
+ consider an application on its other merits. The Commission’s review may include consideration
137
+ of, in addition to the matters referenced above, any other matters relating to Respondent’s
138
+ character, integrity, professional conduct, or qualifications to appear or practice before the
139
+ Commission as an accountant. Whether an application demonstrates good cause will be
140
+ considered on a facts and circumstances basis with due regard for protecting the integrity of the
141
+ Commission’s processes.
142
+
143
+ By the Commission.
144
+
145
+
146
+
147
+ Vanessa A. Countryman
148
+ Acting Secretary
149
+
150
+
151
+
raw/aaer/2019/AAER-4035.txt ADDED
@@ -0,0 +1,109 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES EXCHANGE ACT OF 1934
6
+ Release No. 85483 / April 2, 2019
7
+ ACCOUNTING AND AUDITING ENFORCEMENT
8
+ Release No. 4035 / April 2, 2019
9
+ ADMINISTRATIVE PROCEEDING
10
+ File No. 3-13447
11
+
12
+ In the Matter of
13
+ Kevin E. Brooks, CPA
14
+
15
+ :
16
+ :
17
+ :
18
+ :
19
+ :
20
+ :
21
+ ORDER GRANTING APPLICATION FOR
22
+ REINSTATEMENT TO APPEAR AND PRACTICE
23
+ BEFORE THE COMMISSION AS AN ACCOUNTANT
24
+ RESPONSIBLE FOR THE PREPARATION OR
25
+ REVIEW OF FINANCIAL STATEMENTS REQUIRED
26
+ TO BE FILED WITH THE COMMISSION
27
+
28
+ On April 17, 2009, Kevin E. Brooks, CPA (“Brooks”) was suspended from appearing or
29
+ practicing before the Commission as an accountant as a result of settled public administrative
30
+ proceedings instituted by the Commission against him pursuant to Rule 102(e)(3) of the
31
+ Commission’s Rules of Practice.1 This order is issued in response to Brooks’ application for
32
+ reinstatement to appear and practice before the Commission as an accountant responsible for the
33
+ preparation or review of financial statements required to be filed with the Commission.
34
+ The Commission found that Brooks had been permanently enjoined by a United States
35
+ District Court from future violations of Section 17(a)(2) and (3) of the Securities Act of 1933 and
36
+ Sections 13(b)(5) and 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules
37
+ 13b2-1, 13b2-2, and 16a-3 thereunder, and aiding and abetting violations of Sections 13(a),
38
+ 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13
39
+ thereunder in an action brought by the Commission. In its complaint in the injunctive action, the
40
+ Commission alleged that that Quest Software, Inc. (“Quest”), in part through the misconduct of
41
+ Brooks, misstated its financial statements by failing to report compensation expense associated
42
+ with stock options granted in-the-money through undisclosed backdating of grant dates from
43
+ 1999 through 2001. The complaint also alleged that Brooks failed to ensure that the stock option
44
+ grants at Quest were properly accounted for and disclosed. The complaint further alleged that
45
+ Brooks caused misrepresentations to be made to Quest’s auditors by stating in management
46
+
47
+ 1 See Accounting and Auditing Enforcement Release No. 2964 dated April 17, 2009. Brooks was permitted,
48
+ pursuant to the order, to apply for reinstatement after five years upon making certain showings.
49
+
50
+ 2
51
+ representation letters that all stock options were made with an exercise price equal to the fair
52
+ market value of Quest stock on the date of grant.
53
+
54
+ In his capacity as a preparer or reviewer, or as a person responsible for the preparation or
55
+ review, of financial statements of a public company to be filed with the Commission, Brooks
56
+ attests that he will undertake to have his work reviewed by the independent audit committee of
57
+ any company for which he works, or in some other manner acceptable to the Commission, while
58
+ practicing before the Commission in this capacity. Brooks is not, at this time, seeking to appear
59
+ or practice before the Commission as an independent accountant. If he should wish to resume
60
+ appearing and practicing before the Commission as an independent accountant, he will be
61
+ required to submit an application to the Commission showing that he has complied and will
62
+ comply with the terms of the original suspension order in this regard. Therefore, Brooks’
63
+ suspension from practice before the Commission as an independent accountant continues in
64
+ effect until the Commission determines that a sufficient showing has been made in this regard in
65
+ accordance with the terms of the original suspension order.
66
+
67
+ Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for
68
+ reinstatement, and provides that the Commission may reinstate the privilege to appear and
69
+ practice before the Commission “for good cause shown.”2 This “good cause” determination is
70
+ necessarily highly fact specific.
71
+
72
+ On the basis of information supplied, representations made, and undertakings agreed to
73
+ by Brooks, it appears that he has complied with the terms of the April 17, 2009 order suspending
74
+ him from appearing or practicing before the Commission as an accountant, that no information
75
+ has come to the attention of the Commission relating to his character, integrity, professional
76
+ conduct or qualifications to practice before the Commission that would be a basis for adverse
77
+ action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, and that
78
+ Brooks, by undertaking to have his work reviewed by the independent audit committee of any
79
+ company for which he works, or in some other manner acceptable to the Commission, in his
80
+ practice before the Commission as a preparer or reviewer of financial statements required to be
81
+ filed with the Commission, has shown good cause for reinstatement. Therefore, it is accordingly,
82
+
83
+
84
+
85
+
86
+
87
+
88
+
89
+
90
+
91
+ 2 Rule 102(e)(5)(i) provides:
92
+
93
+ “An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3)
94
+ of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing;
95
+ however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the
96
+ Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i).
97
+
98
+
99
+ 3
100
+ ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that
101
+ Kevin E. Brooks, CPA is hereby reinstated to appear and practice before the Commission as an
102
+ accountant responsible for the preparation or review of financial statements required to be filed
103
+ with the Commission.
104
+
105
+ By the Commission.
106
+
107
+
108
+ Vanessa A. Countryman
109
+ Acting Secretary
raw/aaer/2019/AAER-4036.txt ADDED
@@ -0,0 +1,79 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+ UNITED STATES OF AMERICA
4
+ Before the
5
+ SECURITIES AND EXCHANGE COMMISSION
6
+
7
+ SECURITIES EXCHANGE ACT OF 1934
8
+ Release No. 85496 / April 3, 2019
9
+
10
+ ACCOUNTING AND AUDITING ENFORCEMENT
11
+ Release No. 4036 / April 3, 2019
12
+
13
+ ADMINISTRATIVE PROCEEDING
14
+ File No. 3-19130
15
+ ______________________________
16
+ :
17
+ In the Matter of :
18
+ : ORDER OF SUSPENSION PURSUANT
19
+ EVAN R. KITA, CPA, : TO RULE 102(e)(2) OF THE
20
+ : COMMISSION’S RULES OF PRACTICE
21
+ Respondent. :
22
+ ______________________________:
23
+
24
+
25
+ I.
26
+
27
+ The Securities and Exchange Commission deems it appropriate to issue an order of
28
+ forthwith suspension of Evan R. Kita (“Kita”) pursuant to Rule 102(e)(2) of the Commission’s
29
+ Rules of Practice [17 C.F.R. § 201.102(e)(2)].1
30
+
31
+ II.
32
+
33
+ The Commission finds that:
34
+
35
+ 1. Kita is a certified public accountant in Pennsylvania.
36
+
37
+ 2. On September 6, 2018, a judgment of conviction was entered against Kita in
38
+ United States v. Evan Kita, 3:17-cr-00347-MAS in the United States District Court for the
39
+ District of New Jersey, finding him guilty of conspiracy to commit securities fraud, in violation
40
+ of 18 U.S.C. § 371, and securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff and 17
41
+ C.F.R. §§ 240.10b-5 and 240.10b5-2.
42
+
43
+
44
+ 1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a
45
+ misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the
46
+ Commission.”
47
+
48
+
49
+
50
+
51
+ 2
52
+
53
+
54
+ 3. As a result of this conviction, Kita was sentenced to 6 months imprisonment in a
55
+ federal penitentiary, and two years of supervised release with six months of location monitoring.
56
+ In addition, Kita was ordered to forfeit $8,920 and pay a fine of $5,000.
57
+
58
+
59
+ III.
60
+
61
+ In view of the foregoing, the Commission finds that Kita has been convicted of a felony
62
+ within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice.
63
+
64
+ Accordingly, it is ORDERED, that Evan R. Kita is forthwith suspended from appearing
65
+ or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of
66
+ Practice.
67
+
68
+ By the Commission.
69
+
70
+
71
+
72
+ Vanessa A. Countryman
73
+ Acting Secretary
74
+
75
+
76
+
77
+
78
+
79
+
raw/aaer/2019/AAER-4037.txt ADDED
@@ -0,0 +1,747 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 85518 / April 5, 2019
8
+
9
+ ACCOUNTING AND AUDITING ENFORCEMENT
10
+ Release No. 4037 / April 5, 2019
11
+
12
+ ADMINISTRATIVE PROCEEDING
13
+ File No. 3-19132
14
+
15
+
16
+
17
+
18
+
19
+ In the Matter of
20
+
21
+ KLJ & Associates, LLP, Kent
22
+ L. Jensen, CPA, and Ronald A.
23
+ Burgmeier, CPA
24
+
25
+ Respondents.
26
+
27
+
28
+
29
+
30
+ ORDER INSTITUTING PUBLIC
31
+ ADMINISTRATIVE PROCEEDINGS
32
+ PURSUANT TO SECTION 4C OF THE
33
+ SECURITIES EXCHANGE ACT OF 1934
34
+ AND RULE 102(e) OF THE
35
+ COMMISSION’S RULES OF PRACTICE,
36
+ MAKING FINDINGS, AND IMPOSING
37
+ REMEDIAL SANCTIONS
38
+
39
+
40
+ I.
41
+
42
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
43
+ administrative proceedings be, and hereby are, instituted against KLJ & Associates, LLP (“KLJ”),
44
+ Kent L. Jensen, CPA (“Jensen”), and Ronald A. Burgmeier, CPA (“Burgmeier”) (collectively,
45
+ “Respondents”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”)
46
+
47
+ 1 Section 4C provides, in relevant part, that:
48
+
49
+ The Commission may censure any person, or deny, temporarily or permanently, to any person the
50
+ privilege of appearing or practicing before the Commission in any way, if that person is found . . .
51
+ (1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or
52
+ integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully
53
+ violated, or willfully aided and abetted the violation of, any provision of the securities laws or the
54
+ rules and regulations issued thereunder.
55
+
56
+
57
+ 2
58
+
59
+ and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2
60
+ II.
61
+
62
+ In anticipation of the institution of these proceedings, each Respondent has submitted an
63
+ Offer of Settlement (the “Offers”) which the Commission has determined to accept. Solely for
64
+ the purpose of these proceedings and any other proceedings brought by or on behalf of the
65
+ Commission, or to which the Commission is a party, and without admitting or denying the
66
+ findings herein, except as to the Commission’s jurisdiction over them and the subject matter of
67
+ these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting
68
+ Administrative Proceedings Pursuant to Section 4C of the Securities Exchange Act of 1934 and
69
+ Rule 102(e) of the Commission’s Rules of Practice, Making Findings and Imposing Remedial
70
+ Sanctions (“Order”), as set forth below.
71
+
72
+ III.
73
+
74
+ On the basis of this Order and Respondents’ Offers, the Commission finds that:
75
+
76
+ Summary
77
+
78
+ 1. This matter concerns Respondents’ multiple failures to comply with Public Company
79
+ Accounting Oversight Board (“PCAOB”) standards in connection with ten audits and 11 interim
80
+ reviews – for the years ended June 30, 2012 through December 31, 2015 and for the periods
81
+ ended September 30, 2014 through March 31, 2016, respectively, (collectively, the “relevant
82
+ period”) – for five issuer clients.3
83
+
84
+ 2. Specifically, in connection with their work on audits and interim reviews referenced
85
+ herein during the relevant period, KLJ and Jensen failed to: (i) obtain sufficient appropriate
86
+ evidence to provide a reasonable basis for KLJ’s audit reports, properly evaluate management’s
87
+ accounting estimates, and adequately document the audit procedures performed; (ii) document
88
+ required communications with the issuers’ audit committees; (iii) document analytical
89
+ procedures for reviews of interim financial information; (iv) obtain written representations from
90
+ management; (v) prepare engagement completion documents; and (vi) exercise due professional
91
+ care and professional skepticism. Moreover, Burgmeier failed to (i) comply with the
92
+
93
+ 2 Rule 102(e)(1)(ii) provides, in pertinent part, that:
94
+
95
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or
96
+ practicing before it . . . to any person who is found . . . to have engaged in unethical or improper
97
+ professional conduct.
98
+
99
+ 3 References to PCAOB auditing standards refer to the standards in effect at the time of the conduct
100
+ described herein.
101
+
102
+
103
+ 3
104
+
105
+ requirements for engagement quality reviews (“EQR”) and (ii) exercise due professional care
106
+ and professional skepticism.
107
+
108
+ 3. By failing to conduct audits and interim reviews in accordance with PCAOB standards,
109
+ Respondents engaged in improper professional conduct.
110
+
111
+ Respondents
112
+
113
+ 4. KLJ & Associates, LLP is a Minnesota limited liability partnership with two CPA
114
+ partners and locations in Edina, Minnesota and West Chicago, Illinois. KLJ was registered with
115
+ the PCAOB until December 2017, when it voluntarily withdrew its registration.
116
+ 5. Kent L. Jensen, age 47, holds a CPA license in Illinois and was licensed as a CPA in
117
+ Minnesota until December 31, 2017. He is the managing partner and 60% owner of KLJ and was
118
+ the leader of the firm’s SEC audit practice until late 2017. Jensen was the Engagement Partner on
119
+ all of the audits and interim reviews, and the primary preparer of the audit work papers, referenced
120
+ herein.
121
+
122
+ 6. Ronald A. Burgmeier, age 58, holds a Minnesota CPA license. He joined KLJ in 2013
123
+ and is the firm’s minority partner, owning a 40% share of the partnership. Burgmeier served as the
124
+ EQR partner for all of the audits and reviews referenced herein.
125
+
126
+ Other Relevant Entities
127
+
128
+ 7. Issuer A is a Nevada corporation with its principal place of business in Washington
129
+ State. Issuer A’s business includes the sale of lingerie and sexual health and wellness products.
130
+ From May 14, 2014 through December 31, 2014, Issuer A had a reporting obligation under
131
+ Section 15(d) of the Exchange Act. Issuer A was quoted on the Over the Counter market
132
+ (“OTC”) until November 2017. Relevant to this Order, KLJ audited Issuer A’s financial
133
+ statements and notes to the financial statements (collectively, “financial statements”) for the
134
+ years ended December 31, 2014 and 2015, which were included in Issuer A’s Form 10-K for the
135
+ year ended December 31, 2015. KLJ also performed reviews of interim financial information for
136
+ the periods ended March 31, 2015, June 30, 2015, September 30, 2015, and March 31, 2016,
137
+ included in Forms 10-Q.4
138
+
139
+ 8. Issuer B is a Nevada corporation with its principal place of business in Ontario,
140
+ Canada. Issuer B’s business includes the sale of pharmaceutical and natural health products.
141
+ Issuer B has never had a reporting obligation. Issuer B was quoted on the OTC until June 2017.
142
+ Relevant to this Order, KLJ audited Issuer B’s financial statements for the years ended
143
+
144
+ 4 “Periods ended” represents the three months and year-to-date periods that end on the respective financial
145
+ statement date. For example, the period ended June 30, 2015 would represent the financial results for the three
146
+ months and six months ended on June 30, 2015.
147
+
148
+ 4
149
+
150
+ December 31, 2013 and 2014, and performed a review of interim financial information for the
151
+ three and six months ended June 30, 2015. The annual financial statements and interim financial
152
+ information KLJ audited and reviewed were included in Forms S-1 and S-1/A, filed with the
153
+ Commission, which never became effective.
154
+
155
+ 9. Issuer C is a Texas corporation with its principal place of business in Texas. Issuer C’s
156
+ business includes the sale of investment research. Issuer C had a reporting obligation under
157
+ Section 15(d) of the Exchange Act starting on June 17, 2015. Relevant to this Order, KLJ
158
+ audited Issuer C’s financial statements for the years ended December 31, 2013 and 2014, and
159
+ performed the reviews of interim financial information for the three and nine months ended
160
+ September 30, 2014. These annual financial statements and interim financial information were
161
+ included in Forms S-1, which became effective June 17, 2015.
162
+
163
+ 10. Issuer D is a Delaware corporation with its principal place of business in Nebraska.
164
+ Issuer D’s business includes the retail sale of cellular and consumer finance services. Issuer D’s
165
+ stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and it
166
+ has a reporting obligation pursuant to Section 13(a) of the Exchange Act. It is quoted on the
167
+ OTC. Relevant to this Order, KLJ performed reviews of Issuer D’s interim financial information
168
+ that was included in the Forms 10-Q for the periods ended June 30, 2014, September 30, 2014,
169
+ March 31, 2015, June 30, 2015, and September 30, 2015.
170
+
171
+ 11. Issuer E is a Nevada corporation with its principal place of business in Nevada. Issuer
172
+ E is a development stage company with no operations that purportedly intends to acquire assets
173
+ or shares of other entities. Issuer E had a reporting obligation under Section 15(d) of the
174
+ Exchange Act from August 12, 2010 through June 30, 2011. Relevant to this Order, KLJ audited
175
+ Issuer E’s financial statements for the years ended June 30, 2012 and 2013, which were included
176
+ in Forms 10-K for those years.
177
+ Facts
178
+
179
+ A. Failure to Obtain Sufficient Appropriate Audit Evidence to Support the Audit
180
+ Opinion, Properly Evaluate the Accounting Estimates Made by Management,
181
+ Properly Audit Fair Value Measurements, and Adequately Document the Audit
182
+ Procedures Performed (AS No. 15, AU § 342, AU § 328 and AS No. 3)
183
+ 12. PCAOB Auditing Standard No. 15, Audit Evidence (“AS No. 15”), requires that the
184
+ auditor plan and perform audit procedures to obtain sufficient appropriate audit evidence to
185
+ provide a reasonable basis for his or her opinion. When using the information provided by an
186
+ issuer as audit evidence, the auditor should evaluate the evidence by testing its accuracy and
187
+
188
+ 5
189
+
190
+ completeness and evaluating whether it is sufficiently precise and detailed for the purposes of the
191
+ audit.5
192
+ 13. Pursuant to PCAOB Auditing Standard AU § 342.07, Auditing Accounting Estimates,
193
+ the auditor’s objective when evaluating accounting estimates is to obtain sufficient appropriate
194
+ evidential matter to provide reasonable assurance that all accounting estimates that could be
195
+ material to the financial statements have been developed, those accounting estimates are
196
+ reasonable under the circumstances, the accounting estimates are presented in conformity with
197
+ applicable accounting principles, and are properly disclosed.
198
+ 14. PCAOB Auditing Standard AU § 328, Auditing Fair Value Measurements and
199
+ Disclosures, states that an auditor should obtain sufficient appropriate audit evidence to provide
200
+ reasonable assurance that fair value measurements and disclosures are in conformity with
201
+ GAAP. The auditor should test the data used to develop the fair value measurements and
202
+ disclosures and evaluate whether the fair value measurements have been properly determined
203
+ from such data and management’s assumptions. Specifically, the auditor evaluates whether the
204
+ data on which the fair value measurements are based, including the data used in the work of a
205
+ specialist, is accurate, complete, and relevant; and whether fair value measurements have been
206
+ properly determined using such data and management’s assumptions.6
207
+ 15. PCAOB Auditing Standard No. 3, Audit Documentation (“AS No. 3”), requires an
208
+ auditor to prepare and retain documentation that provides a written record of the basis for the
209
+ auditors’ conclusions. Audit documentation must clearly demonstrate that the work was in fact
210
+ performed. Among other items, the audit documentation must contain sufficient information to
211
+ enable an experienced auditor, having no previous connection with the engagement, to
212
+ understand the nature, timing, extent, and results of the procedures performed, evidence
213
+ obtained, and conclusions reached. Audit documentation must also contain sufficient
214
+ information to enable an experienced auditor, having no previous connection with the
215
+ engagement, to determine, among other things, the person who reviewed the work and the date
216
+ of such review.7 The following examples demonstrate Respondents’ violations of these auditing
217
+ standards.
218
+ 16. Jensen was KLJ’s Engagement Partner for each audit referenced herein, and in many
219
+ instances performed the audit work himself. The PCAOB defines the engagement partner as the
220
+ member of the engagement team with primary responsibility for the audit.8 Accordingly, the
221
+ engagement partner is responsible for, among other things, compliance with PCAOB standards
222
+ in connection with the audit.
223
+
224
+ 5 AS No. 15 at .4 and .10.
225
+ 6 AU § 328 at .03, and .39.
226
+ 7 AS No. 3 at .1, .5, and .6.
227
+ 8 AS No. 10.
228
+
229
+ 6
230
+
231
+ i. Issuer A Audit for the Year Ended December 31, 2014
232
+ 17. As reflected in the audit work papers for the audit of Issuer A’s 2014 financial
233
+ statements included in its Form 10-K for the year ended December 31, 2015, Jensen and KLJ did
234
+ not obtain sufficient appropriate audit evidence or document procedures performed for cost of
235
+ goods sold totaling approximately $13.7 million or for selling, general and administrative
236
+ expenses totaling approximately $21 million. These expenses comprised approximately 94% of
237
+ the company’s expenses included in the “Income (loss) from operations” line in the Consolidated
238
+ Statement of Operations. Although the work papers included an audit program with suggested
239
+ auditing procedures for these expenses, it was not completed. In fact, for the majority of the
240
+ procedures listed in the audit program, there is no evidence in the work papers that such audit
241
+ work was performed.
242
+ ii. Issuer A Audit for the Year Ended December 31, 2015
243
+ 18. Similarly, Jensen and KLJ’s audit work papers for the audit of Issuer A’s 2015
244
+ financial statements (included in its Form 10-K for the year ended December 31, 2015) also
245
+ failed to include any evidence or documentation of the auditing procedures performed
246
+ concerning cost of goods sold totaling approximately $14.8 million and selling, general and
247
+ administrative expenses totaling approximately $21 million. As with the prior year’s audit, the
248
+ work papers included an audit program with suggested auditing procedures for these expenses,
249
+ but the program was not completed and there is no other evidence that such audit work was
250
+ performed. In addition, the financial statement included approximately $4.3 million in
251
+ depreciation and amortization. Together, these expenses comprised approximately 50% of the
252
+ company’s expenses included in the “Income (Loss) from operations” line in the Consolidated
253
+ Statement of Operations. Yet, the auditing procedures concerning these expenses consisted
254
+ solely of obtaining a supporting schedule from Issuer A and agreeing it to Issuer A’s accounting
255
+ records. Jensen and KLJ failed to obtain sufficient appropriate audit evidence to validate these
256
+ expenses.
257
+ 19. During 2015, Issuer A also recorded a goodwill impairment of approximately $40.6
258
+ million, which reduced the goodwill by 100%. Prior to the impairment, goodwill represented
259
+ approximately 83% of Issuer A’s assets. The work papers, however, included an analysis
260
+ prepared by a third party valuation specialist and a memorandum prepared by Jensen, which both
261
+ concluded that no goodwill impairment was necessary. Jensen documented his preparation of
262
+ these work papers and, therefore, was aware of the evidence that undermined the validity of the
263
+ goodwill impairment. Yet, the work papers did not include any documentation demonstrating
264
+ that Jensen performed any auditing procedures concerning Issuer A’s decision to impair
265
+ goodwill.
266
+ iii. Issuer B Audit for the Year Ended December 31, 2013
267
+ 20. As reflected in the audit work papers for the audit of Issuer B’s 2013 financial
268
+ statements, Jensen and KLJ did not obtain sufficient appropriate audit evidence or document
269
+
270
+ 7
271
+
272
+ auditing procedures concerning two approximately $3.2 million expenses; one related to the
273
+ “Excess purchase price over fair value of assets acquired” (“Excess Loss”) and another related to
274
+ the extinguishment of debt. Together, these expenses comprised approximately 91% of the
275
+ company’s net loss presented in the 2013 financial statements.
276
+ 21. The Excess Loss related to an asset purchase agreement whereby Issuer B transferred
277
+ cash and stock valued at approximately $3.2 million to a third party and received inventory and
278
+ intangible assets valued at approximately $60,000 in return. Issuer B recorded an expense for
279
+ the value of the cash and stock that exceeded the value of the assets received. Despite the
280
+ significance of the loss, Jensen performed no auditing procedures in connection with this
281
+ expense.
282
+ 22. With respect to the extinguishment of debt, Issuer B issued stock valued at $3.2 million
283
+ to a debt holder to extinguish a $4,000 debt, which resulted in an expense of approximately $3.2
284
+ million. As with the Excess Loss, Jensen performed no auditing procedures in connection with
285
+ this expense.
286
+ iv. Issuer C Audit for the Year Ended December 31, 2013 and Subsequent
287
+ Restatement Audit
288
+ 23. In 2013, Issuer C issued shares – valued at approximately $20.5 million – in exchange
289
+ for “advisory services.” The company valued the shares issued based on the proposed public
290
+ stock offering price of $0.25 per share, and the audit documentation described the services as,
291
+ among other things, “marketing, business development and consulting.”
292
+ 24. At the time the stock was issued, however, Issuer C had total assets of $1,523 and total
293
+ revenues of $29 for the year ended December 31, 2013, while a $0.25 share price would have
294
+ valued Issuer C at approximately $400 million.
295
+ 25. In an equity transaction with nonemployees, however, Generally Accepted Accounting
296
+ Principles (“GAAP”) require that the transaction be measured at the fair value of the
297
+ consideration received or the fair value of the equity instrument issued, whichever value is more
298
+ readily determinable.9 In turn, PCAOB auditing standards require the auditor to obtain sufficient
299
+ appropriate audit evidence to provide reasonable assurance that fair value measurements and
300
+ disclosures were in conformity with GAAP.
301
+ 26. Despite the large disparity between Issuer C’s book value and the $400 million value
302
+ indicated by a $0.25 share price, Jensen performed no audit procedures to test the data used to
303
+ develop the $0.25 share price. On the contrary, information in the work papers, which were
304
+ prepared by Jensen and reviewed by Burgmeier, called into question the reliability of using the
305
+ proposed stock offering price as the fair value, stating that a “readily determinable market price
306
+
307
+ 9 ASC 505 Equity at 505-50-30.
308
+
309
+ 8
310
+
311
+ cannot be determined.” Accordingly, there was not sufficient evidence in the work papers to
312
+ support Jensen’s conclusions regarding the valuation.
313
+ 27. Ultimately, Issuer C restated its financial statements after receiving multiple comments
314
+ from the SEC’s Division of Corporation Finance and determining that use of the proposed share
315
+ price for the transaction as the fair value was incorrect. Specifically, after estimating the value of
316
+ the services provided, Issuer C reduced the value attributed to the shares issued by $20.3 million,
317
+ or 99% of its original value.
318
+ 28. Despite the fact that Issuer C restated its financial statements for the reasons discussed
319
+ above, when Jensen and KLJ audited the restated financial statements, they failed to comply with
320
+ PCAOB standards because they did not document the audit procedures performed in connection
321
+ with the restatement.
322
+ B. Failure to Document Communications With the Audit Committees (AS No. 16)
323
+ 29. PCAOB Auditing Standard No. 16, Communications with Audit Committees (“AS No.
324
+ 16”), requires the auditor to communicate with an engagement client’s audit committee, or if no
325
+ such committee exists, the entire board of directors of the company, to obtain information
326
+ relevant to the audit and to provide certain information regarding the conduct of an audit. The
327
+ auditor must document these communications with the audit committee in the work papers and
328
+ describe whether they were oral or in writing.10
329
+ 30. Jensen and KLJ did not document in the work papers the requisite communications with
330
+ the boards of directors for the following audits: Issuer A, for the years ended December 31,
331
+ 2014 and 2015; Issuer B, for the years ended December 31, 2013 and 2014; Issuer C, for the
332
+ years ended December 31, 2013 and 2014; and Issuer E, for the years ended June 30, 2012 and
333
+ 2013.11 Jensen completed audit checklists, which Burgmeier reviewed, indicating that KLJ
334
+ communicated with the audit committees for Issuers A, B, and E, and incorrectly stated that the
335
+ communications and the method of communication had been documented in the work papers.
336
+ C. Failure to Document Analytical Procedures for Reviews of Interim Financial
337
+ Information (AU § 722)
338
+ 31. PCAOB Auditing Standard AU § 722, Interim Financial Information, states that an
339
+ auditor should apply analytical procedures during a review of interim financial information to
340
+ identify, and provide a basis for inquiry about, items that appear to be unusual and may indicate
341
+
342
+ 10 AS No. 16 at .01 and .25.
343
+ 11 The applicable PCAOB standard for KLJ’s audit of Issuer E was AU 380 because AS No. 16 was effective
344
+ for audits of fiscal years beginning on or after Dec. 15, 2012. AU 380.03 stated that audit committee
345
+ communications may be oral or written, but required the auditor to document the communication in the work pape rs
346
+ if the communication was oral.
347
+
348
+ 9
349
+
350
+ a material misstatement. These analytical procedures should include “comparing the quarterly
351
+ interim financial information with comparable information for the immediately preceding interim
352
+ period and the quarterly and year-to-date interim financial information with the corresponding
353
+ period(s) in the previous year, giving consideration to knowledge about changes in the entity’s
354
+ business and specific transactions.”12 Further an accountant should prepare documentation in
355
+ connection with a review of interim financial information, the form and content of which should
356
+ be designed to meet the circumstances of the particular engagement.13
357
+ 32. Jensen and KLJ did not document the analytical procedures performed for: Issuer A,
358
+ for the periods ended March 31, 2015, June 30, 2015, September 30, 2015, and March 31, 2016;
359
+ Issuer D, for the periods ended June 30, 2014, September 30, 2014, June 30, 2015, and
360
+ September 30, 2015. Although Jensen and KLJ’s work papers contained completed checklists
361
+ for these interim reviews, that documentation was insufficient to “enable members of the
362
+ engagement team with supervision and review responsibilities to understand the nature, timing,
363
+ extent and results of the review procedures performed.”14 Issuer A’s and Issuer D’s interim
364
+ review work papers, for example, only contained an interim review checklist, initialed and dated
365
+ by Jensen, indicating that the analytical procedures had been performed and documented.
366
+ D. Failure to Obtain Written Representations from Management (AU § 333 and AU §
367
+ 722)
368
+ 33. PCAOB Standard AU § 333, Management Representations, requires an auditor to
369
+ obtain written representations from management for all financial statements and periods covered
370
+ by the auditor’s report.15 The representations should address, among other things: financial
371
+ statements; completeness of the information; recognition, measurement and disclosure; and
372
+ subsequent events.16 Similarly, AU § 722, Interim Financial Information, requires auditors to
373
+ obtain written representations from management for all interim financial information presented
374
+ and for all periods covered by the auditor’s review.17
375
+ 34. Jensen and KLJ’s work papers for the audit of Issuer C’s year ended December 31,
376
+ 2013, and the subsequent restatement of that year, however, did not include a management
377
+ representation letter.
378
+ 35. Jensen and KLJ’s work papers for the interim review of Issuer C’s three and nine
379
+ months ended September 30, 2014, were similarly deficient. Despite the fact that no
380
+
381
+ 12 AU § 722 at .16.
382
+ 13 AU § 722 at .51.
383
+ 14 AU § 722 at .52.
384
+ 15 AU § 333 at .05.
385
+ 16 AU § 333 at .06.
386
+ 17 AU § 722 at .24.
387
+
388
+ 10
389
+
390
+ management representation letter was included in the work papers for this interim review, Jensen
391
+ completed, and Burgmeier reviewed, a checklist indicating that Jensen had obtained and
392
+ reviewed the management representation letter.
393
+ E. Failure to Exercise Due Professional Care and Properly Respond to the Risks of
394
+ Material Misstatement (AU § 230 and AS No. 13)
395
+ 36. PCAOB standards require auditors to exercise due professional care in the planning and
396
+ performance of audits and interim reviews.18 Due professional care requires the auditor to
397
+ exercise professional skepticism, which is an attitude that includes a questioning mind and a
398
+ critical assessment of audit evidence.19 Additionally, in performing audits the auditor’s
399
+ responses to the assessed risks of material misstatement, particularly fraud risks, should involve
400
+ the application of professional skepticism in gathering and evaluating audit evidence. Examples
401
+ of the application of professional skepticism in response to the assessed fraud risks include
402
+ “obtaining sufficient appropriate evidence to corroborate management’s explanations or
403
+ representations concerning important matters, such as through third-party confirmation, use of a
404
+ specialist engaged or employed by the auditor, or examination of documentation from
405
+ independent sources.”20
406
+ 37. In connection with the audits and interim reviews described in this Order, and as
407
+ evidenced by the repeated audit deficiencies noted above, Jensen and KLJ failed to exercise due
408
+ professional care. They also failed to perform critical assessments of audit and interim review
409
+ evidence. In particular, for multiple audits and interim reviews, Jensen and KLJ failed to: (i)
410
+ obtain sufficient appropriate evidence to support the conclusions reached by Jensen and his
411
+ engagement teams; (ii) obtain sufficient appropriate audit evidence for significant financial
412
+ statement balances and transactions; (iii) document that KLJ engaged in the requisite
413
+ communications with certain issuers’ audit committees; (iv) document the analytical procedures
414
+ Jensen used for an interim review; (v) obtain written representations from management; or (vi)
415
+ prepare engagement completion documents.
416
+ F. Failure to Prepare Engagement Completion Documents (AS No. 3)
417
+ 38. For each engagement, PCAOB auditing standard AS No. 3 (“AS No. 3”) requires an
418
+ auditor to prepare an engagement completion document that identifies all the significant findings
419
+ or issues from the engagement.21 AS No. 3 defines “significant findings or issues” as substantive
420
+
421
+ 18 AU § 230.01, AU § 722.01.
422
+ 19 AU § 230.07.
423
+ 20 AS No. 13 at .7.
424
+ 21 AS No. 3 at .13.
425
+
426
+ 11
427
+
428
+ matters that are important to the procedures performed, evidence obtained, or conclusions
429
+ reached during an engagement.22
430
+ 39. Jensen and KLJ’s work papers indicate that Jensen identified significant risks while
431
+ performing the following audits: Issuer A, for the years ended December 31, 2014 and 2015;
432
+ and Issuer B, for the year ended December 31, 2013. In particular, the work papers for the Issuer
433
+ A audits reflect that revenue recognition and lack of segregation of duties represented significant
434
+ risks, while the work papers for the Issuer B audit reflect a significant risk relating to
435
+ management’s ability to override controls. Despite identifying these audit risks, Jensen did not
436
+ prepare engagement completion documents which would have enabled a reviewer to understand
437
+ the significant risks associated with these audits and the results of the auditing procedures
438
+ performed in response to those risks.
439
+ G. Failure to Comply with Engagement Quality Review Requirements (AS No. 7)
440
+ 40. PCAOB Auditing Standard No. 7, Engagement Quality Review (“AS 7”), requires an
441
+ engagement quality review and concurring approval of issuance for each annual audit and
442
+ interim review. The engagement quality reviewer should, among other things, evaluate the
443
+ significant judgments made by the engagement team and the related conclusions it reached in
444
+ forming the overall conclusion on the engagement. To the extent necessary to properly evaluate
445
+ these judgments and conclusions, the engagement quality reviewer should hold discussions with
446
+ the engagement partner and review documentation. The engagement quality reviewer should
447
+ also review the engagement completion document. The engagement quality review
448
+ documentation should contain sufficient information to enable an experienced auditor, having no
449
+ previous connection with the engagement, to understand the procedures performed by the
450
+ engagement quality reviewer and include information that identifies: (i) the engagement quality
451
+ reviewer; (ii) the documents reviewed by the engagement quality reviewer; and (iii) the date the
452
+ engagement quality reviewer provided concurring approval of issuance. Documentation of the
453
+ engagement quality review should be included in the engagement documentation.23
454
+ 41. Moreover, AS No. 7 provides that the engagement quality reviewer may provide
455
+ concurring approval of issuance only if, after performing the engagement quality review with
456
+ due professional care, he or she is not aware of a significant engagement deficiency.24 In
457
+ addition to the factors identified in paragraph 36 above, due professional care entails possessing
458
+ the degree of skill commonly possessed by other auditors and exercising it with reasonable care
459
+ and diligence.25
460
+
461
+ 22 AS No. 3 at .12.
462
+ 23 AS No. 7 at .01, .9, 10e, and .19-.20.
463
+ 24 AS No. 7 at .12.
464
+ 25 AU § 230 Due Professional Care in the Performance of Work at .03-.05.
465
+
466
+ 12
467
+
468
+ 42. As noted, Burgmeier served as the engagement quality reviewer for all of the audits and
469
+ interim reviews described above and had access to all of the documents in the associated work
470
+ papers.
471
+ 43. Burgmeier did not perform an engagement quality review as required by AS 7 for the
472
+ following engagements: Issuer B annual audit for the year ended December 31, 2013, and Issuer
473
+ B restatement audit for the year ended December 31, 2013; four interim reviews for periods
474
+ ended in 2015 and 2016 for Issuer A; and Issuer D interim review for the period ended March
475
+ 31, 2015.26
476
+ 44. In particular, Burgmeier did not evaluate the significant judgments made by Jensen and
477
+ his engagement teams and the related conclusions they reached in forming the overall
478
+ conclusions regarding the engagements. Additionally, there is no evidence in the work papers
479
+ that Burgmeier discussed the engagements with Jensen or reviewed audit or interim review
480
+ documentation for those engagements.
481
+ 45. In connection with two other annual audits,27 although there is some limited evidence
482
+ that Burgmeier conducted engagement quality reviews, the audit work papers did not indicate the
483
+ inquiries he made of Jensen and his engagement teams, the procedures he performed, or whether
484
+ he held discussions with the engagement teams to evaluate the significant judgments they made
485
+ related to engagement planning and their assessment of, and audit responses to, significant risks.
486
+ 46. First, in connection with his review of the audits and interim reviews described above in
487
+ Section III.B., Burgmeier completed engagement quality review checklists indicating that he
488
+ evaluated whether Jensen had communicated appropriate information to the issuers’ audit
489
+ committees on a timely basis. But, Burgmeier did not perform this procedure because the work
490
+ papers he reviewed for those engagements contained no evidence that any such communications
491
+ had been made and no other evidence indicates he performed such review.
492
+ 47. In addition, on the audits and interim reviews described above in Section III.E.,
493
+ Burgmeier provided his concurring approval of issuance after indicating that he had reviewed
494
+ Jensen’s engagement completion documents for certain audits. But, the work papers for those
495
+ engagements contained no such documents and no other evidence indicates he performed such
496
+ review.
497
+ 48. Finally, the work papers for the audits and interim reviews described above also
498
+ demonstrate that Burgmeier, like Jensen, failed to exercise due professional care in conducting
499
+ his engagement quality reviews. In particular, in the above noted engagements, Burgmeier
500
+ indicated that he reviewed documents that were not part of the work paper file and no other
501
+
502
+ 26 This auditing standards violation existed for the Issuer D interim review for the period ended March 31,
503
+ 2015, which was not discussed above.
504
+ 27 The annual audits for Issuer A for the year ended December 31, 2015, and for Issuer C for the year ended
505
+ December 31, 2013.
506
+
507
+ 13
508
+
509
+ evidence indicates he performed such review in the following areas: (i) documentation that KLJ
510
+ engaged in the requisite communications with certain issuers’ audit committees; (ii)
511
+ documentation that analytical procedures had been completed for the interim reviews; (iii)
512
+ written representations from management; and (iv) engagement completion documents.
513
+
514
+ Violations
515
+ 49. Based on the foregoing, Respondents engaged in improper professional conduct within
516
+ the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s
517
+ Rules of Practice. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) provide, in pertinent
518
+ part, that the Commission may censure or deny, temporarily or permanently, the privilege of
519
+ appearing or practicing before the Commission to any person who is found by the Commission to
520
+ have engaged in improper professional conduct. Section 4C(b) and Rule 102(e)(1)(iv) define
521
+ improper professional conduct with respect to persons licensed to practice as accountants.
522
+ 50. Under Section 4C(b) and Rule 102(e)(1)(iv)(B), the term “improper professional
523
+ conduct” means negligent conduct in the form of:
524
+ (1) A single instance of highly unreasonable conduct that results in a violation of
525
+ applicable professional standards in circumstances in which an accountant, a
526
+ registered public accounting firm, or associated person knows, or should know,
527
+ that heightened scrutiny is warranted.
528
+ (2) Repeated instances of unreasonable conduct, each resulting in a violation of
529
+ applicable professional standards, that indicate a lack of competence to practice
530
+ before the Commission.
531
+ 51. Respondents’ failures to abide by PCAOB standards in the audits and reviews described
532
+ above constitute repeated instances of unreasonable conduct.
533
+ Findings
534
+ 52. Based on the foregoing, the Commission finds that Respondents engaged in improper
535
+ professional conduct within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(ii)
536
+ of the Commission’s Rules of Practice.
537
+ IV.
538
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
539
+ agreed to in Respondents’ Offers.
540
+ Accordingly, it is hereby ORDERED, effective immediately, that:
541
+
542
+ 14
543
+
544
+ A. Jensen and Burgmeier are denied the privilege of appearing or practicing before the
545
+ Commission as accountants.
546
+
547
+ i. After five years from the date of this order, Jensen may request that the Commission
548
+ consider his reinstatement by submitting an application (attention: Office of the Chief
549
+ Accountant) to resume appearing or practicing before the Commission as:
550
+
551
+ 1. a preparer or reviewer, or a person responsible for the preparation or review, of any
552
+ public company’s financial statements that are filed with the Commission (other than as
553
+ a member of an audit committee, as that term is defined in Section 3(a)(58) of the
554
+ Securities Exchange Act of 1934). Such an application must satisfy the Commission
555
+ that Jensen’s work in his practice before the Commission as an accountant will be
556
+ reviewed either by the independent audit committee of the public company for which
557
+ he works or in some other acceptable manner, as long as he practices before the
558
+ Commission in this capacity; and/or
559
+
560
+ 2. a preparer or reviewer, or a person responsible for the preparation or review, of
561
+ any public company’s financial statements that are filed with the Commission as
562
+ a member of an audit committee, as that term is defined in Section 3(a)(58) of the
563
+ Securities Exchange Act of 1934. Such an application will be considered on a
564
+ facts and circumstances basis with respect to such membership, and the
565
+ applicant’s burden of demonstrating good cause for reinstatement will be
566
+ particularly high given the role of the audit committee in financial and accounting
567
+ matters; and/or
568
+ 3. an independent accountant.
569
+
570
+ (a) Such an application must satisfy the Commission that:
571
+
572
+ i. Jensen, or the public accounting firm with which he is associated, is
573
+ registered with the Public Company Accounting Oversight Board
574
+ (“Board”) in accordance with the Sarbanes-Oxley Act of 2002, and such
575
+ registration continues to be effective;
576
+
577
+ ii. Jensen, or the registered public accounting firm with which he is
578
+ associated, has been inspected by the Board and that inspection did not
579
+ identify any criticisms of or potential defects in the respondent’s or the
580
+ firm’s quality control system that would indicate that Jensen will not
581
+ receive appropriate supervision;
582
+
583
+ iii. Jensen has resolved all disciplinary issues with the Board, and has
584
+ complied with all terms and conditions of any sanctions imposed by the
585
+ Board (other than reinstatement by the Commission); and
586
+
587
+
588
+ 15
589
+
590
+ iv. Jensen acknowledges his responsibility, as long as he appears or
591
+ practices before the Commission as an independent accountant, to
592
+ comply with all requirements of the Commission and the Board,
593
+ including, but not limited to, all requirements relating to registration,
594
+ inspections, concurring partner reviews and quality control standards.
595
+
596
+ 4. The Commission will consider an application by Jensen to resume appearing or
597
+ practicing before the Commission provided that his state CPA license is current
598
+ and he has resolved all other disciplinary issues with the applicable state boards
599
+ of accountancy. However, if state licensure is dependent on reinstatement by the
600
+ Commission, the Commission will consider an application on its other merits.
601
+ The Commission’s review may include consideration of, in addition to the
602
+ matters referenced above, any other matters relating to Jensen’s character,
603
+ integrity professional conduct, or qualifications to appear or practice before the
604
+ Commission as an accountant. Whether an application demonstrates good cause
605
+ will be considered on a facts and circumstances basis with due regard for
606
+ protecting the integrity of the Commission’s processes.
607
+
608
+ ii. After five years from the date of this order, Burgmeier may request that the Commission
609
+ consider his reinstatement by submitting an application (attention: Office of the Chief
610
+ Accountant) to resume appearing or practicing before the Commission as:
611
+
612
+ 1. a preparer or reviewer, or a person responsible for the preparation or review, of any
613
+ public company’s financial statements that are filed with the Commission (other
614
+ than as a member of an audit committee, as that term is defined in Section 3(a)(58)
615
+ of the Securities Exchange Act of 1934). Such an application must satisfy the
616
+ Commission that Burgmeier’s work in his practice before the Commission as an
617
+ accountant will be reviewed either by the independent audit committee of the public
618
+ company for which he works or in some other acceptable manner, as long as he
619
+ practices before the Commission in this capacity; and/or
620
+
621
+ 2. a preparer or reviewer, or a person responsible for the preparation or review, of any
622
+ public company’s financial statements that are filed with the Commission as a
623
+ member of an audit committee, as that term is defined in Section 3(a)(58) of the
624
+ Securities Exchange Act of 1934. Such an application will be considered on a facts
625
+ and circumstances basis with respect to such membership, and the applicant’s
626
+ burden of demonstrating good cause for reinstatement will be particularly high given
627
+ the role of the audit committee in financial and accounting matters; and/or
628
+
629
+ 3. an independent accountant.
630
+
631
+ (a) Such an application must satisfy the Commission that:
632
+
633
+ 16
634
+
635
+ i. Burgmeier, or the public accounting firm with which he is associated,
636
+ is registered with the Public Company Accounting Oversight Board
637
+ (“Board”) in accordance with the Sarbanes-Oxley Act of 2002, and
638
+ such registration continues to be effective;
639
+ ii. Burgmeier, or the registered public accounting firm with which he is
640
+ associated, has been inspected by the Board and that inspection did not
641
+ identify any criticisms of or potential defects in the respondent’s or the
642
+ firm’s quality control system that would indicate that Burgmeier will
643
+ not receive appropriate supervision;
644
+ iii. Burgmeier has resolved all disciplinary issues with the Board, and has
645
+ complied with all terms and conditions of any sanctions imposed by
646
+ the Board (other than reinstatement by the Commission); and
647
+ iv. Burgmeier acknowledges his responsibility, as long as he appears or
648
+ practices before the Commission as an independent accountant, to
649
+ comply with all requirements of the Commission and the Board,
650
+ including, but not limited to, all requirements relating to registration,
651
+ inspections, concurring partner reviews and quality control standards.
652
+
653
+ 4. The Commission will consider an application by Burgmeier to resume appearing
654
+ or practicing before the Commission provided that his state CPA license is current
655
+ and he has resolved all other disciplinary issues with the applicable state boards of
656
+ accountancy. However, if state licensure is dependent on reinstatement by the
657
+ Commission, the Commission will consider an application on its other merits.
658
+ The Commission’s review may include consideration of, in addition to the matters
659
+ referenced above, any other matters relating to Burgmeier’s character, integrity
660
+ professional conduct, or qualifications to appear or practice before the
661
+ Commission as an accountant. Whether an application demonstrates good cause
662
+ will be considered on a facts and circumstances basis with due regard for
663
+ protecting the integrity of the Commission’s processes.
664
+
665
+ B. KLJ is denied the privilege of appearing or practicing before the Commission as an
666
+ accountant.
667
+
668
+ i. After five years from the date of this order, KLJ may request that the Commission consider
669
+ its reinstatement by submitting an application (attention: Office of the Chief Accountant) to
670
+ resume appearing or practicing before the Commission as:
671
+
672
+ 1. a preparer or reviewer, or a person responsible for the preparation or review, of any
673
+ public company’s financial statements that are filed with the Commission (other than as
674
+ a member of an audit committee, as that term is defined in Section 3(a)(58) of the
675
+
676
+ 17
677
+
678
+ Securities Exchange Act of 1934). Such an application must satisfy the Commission
679
+ that KLJ’s work in its practice before the Commission as an accountant will be reviewed
680
+ either by the independent audit committee of the public company for which it works or
681
+ in some other acceptable manner, as long as it practices before the Commission in this
682
+ capacity; and/or
683
+
684
+ 2. an independent accountant.
685
+
686
+ (a) Such an application must satisfy the Commission that:
687
+
688
+ i. KLJ is registered with the PCAOB in accordance with the Sarbanes-
689
+ Oxley Act of 2002, and such registration continues to be effective.
690
+ However, if registration with the PCAOB is dependent upon
691
+ reinstatement by the Commission, the Commission will consider the
692
+ application on its other merits;
693
+
694
+ ii. KLJ has hired an independent CPA consultant (“consultant”), who is
695
+ not unacceptable to staff of the Commission and is affiliated with a
696
+ public accounting firm registered with the Board, that has conducted a
697
+ review of KLJ’s quality control system and submitted to the staff of the
698
+ Commission a report that describes the review conducted and
699
+ procedures performed, and represents that the review did not identify
700
+ any criticisms of or potential defects in the firm’s quality control system
701
+ that would indicate that any of KLJ’s employees will not receive
702
+ appropriate supervision. KLJ agrees to require the consultant, if and
703
+ when retained, to enter into an agreement that provides that for the
704
+ period of review and for a period of two years from the completion of
705
+ the review, the consultant shall not enter into any employment,
706
+ consultant, attorney-client, auditing or other professional relationship
707
+ with KLJ, or any of its present or former affiliates, directors, officers,
708
+ employees or agents acting in their capacity. The agreement will also
709
+ provide that the consultant will require that any firm with which he/she
710
+ is affiliated or of which he/she is a member shall not, without prior
711
+ written consent of the staff, enter into any employment, consultant,
712
+ attorney-client, auditing or other professional relationship with KLJ, or
713
+ any of its present or former affiliates, directors, employees, or agents
714
+ acting in their capacity as such for a period of two years after the
715
+ review;
716
+
717
+ iii. KLJ has resolved all disciplinary issues with the PCAOB, and has
718
+ complied with all terms and conditions of any sanctions imposed by the
719
+ PCAOB (other than reinstatement by the Commission); and
720
+
721
+
722
+ 18
723
+
724
+ iv. KLJ acknowledges its responsibility, as long as it appears or practices
725
+ before the Commission as an independent accountant, to comply with
726
+ all requirements of the Commission and the PCAOB, including, but not
727
+ limited to, all requirements relating to registration, inspections,
728
+ engagement quality reviews and quality control standards.
729
+
730
+ 3. The Commission will consider an application by KLJ to resume appearing or practicing
731
+ before the Commission provided that its state CPA license is current and it has resolved
732
+ any disciplinary issues with the applicable state boards of accountancy. However, if state
733
+ licensure is dependent on reinstatement by the Commission, the Commission will
734
+ consider an application on its other merits. The Commission’s review may include
735
+ consideration of, in addition to the matters referenced above, any other matter relating to
736
+ KLJ’s character, integrity, professional conduct, or qualifications to appear before the
737
+ Commission as an accountant. Whether an application demonstrates good cause will be
738
+ considered on a facts and circumstances basis with due regard for protecting the
739
+ integrity of the Commission’s processes.
740
+
741
+
742
+ By the Commission.
743
+
744
+ Vanessa A. Countryman
745
+ Acting Secretary
746
+
747
+
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+ SEC Settles Insider Trading Charges Against Pharma Company Accountant, Three Others
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+ Litigation Release No. 24441 / April 4, 2019
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+ Securities and Exchange Commission v. Evan R. Kita, et al. , Civil Action No. 17-06603 (D. NJ., filed August 31, 2017)
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+ On March 19, 2019, the Securities and Exchange Commission obtained final judgments against a pharmaceutical company accountant and three tippees in an insider trading scheme.
1139
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+ The SEC charged Evan R. Kita, Daniel Perez, Richard Yu, and Chiang Yu on August 31, 2017, alleging that Kita, a CPA and former accountant at Celator Pharmaceuticals Inc., provided confidential information about the company to Perez and Richard Yu, who purchased Celator stock based on Kita's tips and agreed to share their trading profits with Kita. The SEC further alleged that Richard Yu passed the tips to his father, Chiang Yu, who also traded. According to the complaint, to avoid detection, Kita communicated with Perez and Richard Yu through an encrypted smartphone application.
1141
+
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+ In parallel criminal actions brought by the U.S. Attorney's Office for the District of New Jersey, Kita, Perez, Richard Yu, and Chiang Yu each pled guilty to criminal charges and were ordered or agreed to forfeit their ill-gotten gains. Kita was sentenced to six months of incarceration. Perez, Richard Yu, and Chiang Yu were sentenced to probation.
1143
+
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+ The final judgments permanently enjoin Kita, Perez, Richard Yu, and Chiang Yu from violating the antifraud provisions of Sections 10(b) and 14(e) of the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder, and order them to pay a combined total of $442,006 in disgorgement and prejudgment interest. The judgments provide that the disgorgement and prejudgment interest are deemed satisfied by forfeiture ordered or paid in the parallel criminal cases. In a separate administrative proceeding, the SEC issued an order permanently suspending Kita from appearing and practicing before the SEC as an accountant. The order prohibits Kita from participating in the financial reporting or audits of public companies.
1145
+
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+ The SEC's investigation was conducted by David W. Snyder and John S. Rymas and supervised by Assunta Vivolo, Kelly L. Gibson, and Joseph G. Sansone, Chief of the Market Abuse Unit. The litigation was led by Jennifer Chun Barry. The SEC appreciates the assistance of the U.S. Attorney's Office for the District of New Jersey, the Federal Bureau of Investigation, and the Financial Industry Regulatory Authority.
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raw/aaer/2019/AAER-4039.txt ADDED
@@ -0,0 +1,116 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES ACT OF 1933
6
+ Release No. 10627 / April 10, 2019
7
+
8
+ SECURITIES EXCHANGE ACT OF 1934
9
+ Release No. 85582 / April 10, 2019
10
+
11
+ ACCOUNTING AND AUDITING ENFORCEMENT
12
+ Release No. 4039 / April 10, 2019
13
+
14
+ ADMINISTRATIVE PROCEEDING
15
+ File No. 3-19137
16
+
17
+
18
+ In the Matter of
19
+
20
+ ADAM C. DERBYSHIRE,
21
+
22
+ Respondent.
23
+ ORDER INSTITUTING PUBLIC
24
+ ADMINISTRATIVE PROCEEDINGS
25
+ PURSUANT TO RULE 102(e) OF THE
26
+ COMMISSION’S RULES OF PRACTICE,
27
+ MAKING FINDINGS, AND IMPOSING
28
+ REMEDIAL SANCTIONS
29
+
30
+ I.
31
+
32
+ The Securities and Exchange Commission (“Commission”) deems it appropriate and in the
33
+ public interest that public administrative proceedings be, and hereby are, instituted against Adam
34
+ C. Derbyshire (“Respondent”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of
35
+ Practice.1
36
+
37
+ II.
38
+
39
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
40
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
41
+ purpose of these proceedings and any other proceedings brought by or on be half of the
42
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
43
+ herein, except as to the Commission’s jurisdiction over him and the subject matter of these
44
+ proceedings, and the findings contained in Section III. 3 below, which are admitted, Respondent
45
+
46
+ 1 Rule 102(e)(3)(i) provides, in relevant part, that:
47
+
48
+ The Commission, with due regard to the public interest and without preliminary hearing, may, by order,
49
+ temporarily suspend from appearing or practicing before it any attorney, accountant, engineer, or other
50
+ professional or expert who has been by name . . . [p]ermanently enjoined by any court of competent
51
+ jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or
52
+ aiding and abetting the violation of any provision of the Federal securities laws or of the rules and
53
+ regulations thereunder.
54
+ 2
55
+ consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule
56
+ 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
57
+ Sanctions (“Order”), as set forth below.
58
+ III.
59
+ On the basis of this Order and Respondent’s Offer, the Commission finds that:
60
+ 1. Derbyshire, age 53, of Raleigh, North Carolina, was the Chief Financial Officer and
61
+ Executive Vice President for Finance and Administration of Salix Pharmaceuticals, Ltd. (“Salix”)
62
+ from the time he joined the company in 2000 until his resignation in 2014. Derbyshire obtained a
63
+ Bachelor’s degree in marketing from the University of North Carolina, Wilmington in 1988 and a
64
+ Master of Business Administrati on from the University of North Carolina, Charlotte in 1990.
65
+ Derbyshire is not and has not been licensed as a certified public accountant. He resigned from Salix
66
+ on November 5, 2014, and is currently unemployed.
67
+ 2. Salix is a Delaware that specializes in licensing, developing, and marketing
68
+ pharmaceutical products for the treatment of gastrointestinal diseases. From 2001 to 2015, Salix
69
+ was headquartered in Raleigh, North Carolina. Prior to being headquartered in Raleigh, it was
70
+ headquartered in Palo Alto, California. During the relevant time period, Salix’s common stock
71
+ was registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of
72
+ 1934 (“Exchange Act”) and traded on the NASDAQ Stock Market, LLC under the symbol
73
+ “SLXP.” On April 1, 2015, Valeant Pharmaceuticals International, Inc. (n/k/a Bausch Health
74
+ Companies Inc.) acquired Salix.
75
+
76
+ 3. On April 4, 2019 , the U.S. District Court for the Southern District of New York
77
+ entered a Final Judgment by consent against Derbyshire, p ermanently enjoining him from
78
+ violations of Section 17(a)(2) of the Securities Act of 1933, Section 10(b) of the Exchange Act ,
79
+ and Rule 10b -5(b) thereunder, and from aiding and abetting violations of S ection 13(a) of the
80
+ Exchange Act and Exchange Act Rule 13a-13. Securities and Exchange Commission v. Adam C.
81
+ Derbyshire, Civil Action Number 1:17-cv-08891-ALC, in the United States District Court for the
82
+ Southern District of New York. Derbyshire was ordered to pay $494,836.13 in disgorgement of
83
+ ill-gotten gains, plus $63,698.25 in prejudgment interest thereon, and a civil penalty in the amount
84
+ of $494,836.13. He was also barred from serving as an officer or director of a public company for
85
+ a period of five years from entry of the Final Judgment.
86
+ 4. Among other things, the Commission’s Complaint alleged that, from May 2013
87
+ through August 2014, Derbyshire knowingly or recklessly made material misrepresentations,
88
+ concerning the amount of Salix products held in inventory by Salix’s wholesaler customers, during
89
+ Salix’s quarterly earnings calls. The Complaint further alleged that Derbyshire knowingly or
90
+ recklessly omitted material information from Salix’s quarterly Reports on Form 10-Q for the first
91
+ and second quarters of 2014. The Complaint also alleges that Derbyshire knowingly or recklessly
92
+ provided substantial assistance to Salix in its failure to file truthful and correct quarterly reports for
93
+ the first and second quarters of 2014 with the Commission.
94
+
95
+ IV.
96
+
97
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to
98
+ impose the sanction agreed to in Respondent Derbyshire’s Offer.
99
+ 3
100
+
101
+ Accordingly, it is hereby ORDERED, effective immediately, that:
102
+
103
+ A. Derbyshire is suspended from appearing or practicing before the Commission as an
104
+ accountant.
105
+
106
+ B. After five (5) years from the date of this order, Derbyshire may request that the
107
+ Commission consider his reinstatement by submitting an application (attention: Office of the
108
+ Chief Accountant) to resume appearing or practicing before the Commission as an accountant.
109
+
110
+ By the Commission.
111
+
112
+
113
+ Vanessa Countryman
114
+ Acting Secretary
115
+
116
+
raw/aaer/2019/AAER-4040.txt ADDED
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1
+ UNITED STATES OF AMERICA
2
+ before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 85630 / April 11, 2019
8
+
9
+ INVESTMENT ADVISERS ACT OF 1940
10
+ Release No. 5222 / April 11, 2019
11
+
12
+ ACCOUNTING AND AUDITING ENFORCEMENT
13
+ Release No. 4040 / April 11, 2019
14
+
15
+ Admin. Proc. File Nos. 3-18789, 3-18790
16
+
17
+
18
+ In the Matters of
19
+ KAREN BRUTON and
20
+ HOPE ADVISORS, LLC
21
+
22
+
23
+
24
+
25
+
26
+
27
+ ORDER REGARDING FURTHER PROCEEDINGS
28
+ On September 19, 2018, in a proceeding under our Rule of Practice 102(e)(3) (“Bruton
29
+ I”), we issued an order temporarily suspending Karen Bruton from appearing or practicing before
30
+ the Commission.1 That suspension was based on a final judgment entered against Bruton in
31
+ federal district court permanently enjoining her from violating Sections 206(1), (2), and (4) of
32
+ the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.2 Bruton filed a petition to
33
+ lift her temporary suspension under Rule of Practice 102(e)(3)(ii);3 we denied that petition and
34
+ set the matter down for a hearing in accordance with Rule of Practice 102(e)(3)(iii).4
35
+
36
+ 1 Karen Bruton, CPA, Exchange Act Release No. 84198, 2018 WL 4488869 (Sept. 19,
37
+ 2018); see 17 C.F.R. § 201.102(e)(3)(i)(A) (authorizing us to temporarily suspend an accountant
38
+ subject to such an injunction from appearing or practicing before the Commission).
39
+ 2 Bruton, 2018 WL 4488869, at *1; see SEC v. Hope Advisors, LLC, et al., No. 1:16-cv-
40
+ 1752-LMM (N.D. Ga. Sept. 13, 2018), ECF No. 132.
41
+ 3 17 C.F.R. § 201.102(e)(3)(ii).
42
+ 4 Karen Bruton, Exchange Act Release No. 84627, 2018 WL 6061351 (Nov. 19, 2018); see
43
+ 17 C.F.R. § 201.102(e)(3)(iii).
44
+ 2
45
+ On September 19, 2018, we separately issued an order instituting proceedings under
46
+ Advisers Act Section 203(e) and (f) against Bruton and Hope Advisors, LLC (“Hope”).5 In that
47
+ “follow-on” proceeding (“Bruton II”), we ordered a hearing to determine what, if any remedial
48
+ action was appropriate against Bruton and Hope given that the Division of Enforcement alleged a
49
+ federal court had permanently enjoined them from violating the federal securities laws.6
50
+ In Bruton I and Bruton II, we directed that each proceeding be set down for a hearing
51
+ before the Commission and specified procedures for the conduct of that hearing. We directed the
52
+ parties to “conduct a prehearing conference” and to “file a statement with the Office of the
53
+ Secretary advising the Commission of any agreements reached at said conference.”
54
+ On January 31, 2019, the parties submitted their joint statement about their prehearing
55
+ conference. The parties stated that they had agreed: (1) that we should consolidate the
56
+ proceedings in Bruton I and Bruton II “for purposes of dispositive motions and any hearings that
57
+ may be required”; (2) that these cases should “be assigned to an administrative law judge”
58
+ (“ALJ”), subject to the respondents’ waiver of defenses “based on any alleged or actual defect in
59
+ the appointment or removal protections of any [ALJ] assigned to this matter”;7 (3) that “an
60
+ evidentiary hearing is unnecessary” and that these proceedings should “be decided by way of
61
+ dispositive motions” and any additional supporting “documentary evidence and declarations”;
62
+ and (4) that we or the ALJ should issue a specific briefing schedule for dispositive motions.
63
+ We begin with the parties’ request that we consolidate these proceedings. Our Rule of
64
+ Practice 201(a) provides that we may consolidate “proceedings involving a common question of
65
+ law or fact . . . for hearing of any or all the matters at issue in such proceedings.”8 Both
66
+ proceedings involve common questions of law and fact arising from the effect, if any, of a
67
+ permanent injunction entered against Bruton and Hope. While not bound by the parties’
68
+ agreement,9 we agree that litigating the two proceedings together on a consolidated basis would
69
+ promote efficiency. We conclude it is appropriate to consolidate these proceedings for purposes
70
+ of any dispositive motions and any hearings that may be required in this case.
71
+ We turn next to the parties’ request that these proceedings be decided by way of
72
+ dispositive motions because “an evidentiary hearing is unnecessary.” We agree that these cases
73
+
74
+ 5 Karen Bruton, CPA and Hope Advisors, LLC, Advisers Act Release No. 5038, 2018 WL
75
+ 4488879 (Sept. 19, 2018).
76
+ 6 Id. at *1.
77
+ 7 Cf. Lucia v. SEC, 138 S. Ct. 2044, 2049-50 & n.1 (2018) (holding that the Commission’s
78
+ ALJs are inferior officers for purposes of the Appointments Clause of Article II of the
79
+ Constitution, and declining to reach “whether the statutory restrictions on removing the
80
+ Commission’s ALJs are constitutional”).
81
+ 8 17 C.F.R. § 201.201(a).
82
+ 9 See, e.g., Sanford’s Estate v. CIR, 308 U.S. 39, 51 (1939); NLRB Union, Local 6 v.
83
+ FLRA, 842 F.2d 483, 485 n.6 (D.C. Cir. 1988); see ABN AMRO Clearing Chicago LLC,
84
+ Exchange Act Release No. 83849, 2018 WL 3869452, at *2 (Aug. 15, 2018) (Commission is
85
+ “not bound by the parties’ stipulation as to a deferential standard of review”).
86
+ 3
87
+ may be appropriate for summary disposition.10 The parties shall have an opportunity to submit
88
+ motions for summary disposition along with supporting declarations and documentary
89
+ evidence.11 Although the parties also agree that, in their view, “an evidentiary hearing is
90
+ unnecessary” and that the ALJ “and ultimately the Commission” may “resolve any apparent
91
+ conflicts in the evidence without an evidentiary hearing,” that determination is best made after
92
+ summary disposition briefing. The parties may well be correct that an evidentiary hearing is
93
+ unnecessary, but it would be premature to make that determination at this time.
94
+ Finally, we turn to the parties’ request that we set this matter down before an
95
+ Administrative Law Judge. Bruton and Hall state that they make their request:
96
+ “while knowingly and voluntarily agreeing that they will not
97
+ initiate or raise a defense to the [proceedings] or orders that may be
98
+ issued during or at the conclusion of the [proceedings] based on
99
+ any alleged or actual defect in the appointment or removal
100
+ protections of any Administrative Law Judge assigned to this
101
+ matter.”
102
+ Bruton and Hall also specify that their waiver of these defenses “applies in any forum, including
103
+ proceedings before the Administrative Law Judge, the Commission, or any court.” Under the
104
+ circumstances, we grant the parties’ request to set this matter down for a hearing before an ALJ.
105
+ We also find under Rule of Practice 100(c) that it would serve the interests of justice and
106
+ not result in prejudice to any party to specify further procedures before an ALJ in this matter.12
107
+ Accordingly, IT IS ORDERED that these proceedings are consolidated under the caption
108
+ above for purposes of any motions for summary disposition and hearings that may be required.
109
+ IT IS FURTHER ORDERED that this consolidated proceeding be presided over by a
110
+ hearing officer who shall be an Administrative Law Judge in accordance with Rule of Practice
111
+ 110.13 The Chief Administrative Law Judge shall by rotation to the extent practicable designate
112
+ an ALJ to be the presiding hearing officer.14 The assigned ALJ shall hold a prehearing
113
+
114
+ 10 See, e.g., Amendments to the Commission’s Rules of Practice, Exchange Act Release No.
115
+ 78319, 2016 WL 3853756, at *22 (July 13, 2016) (explaining that “summary disposition is
116
+ typically appropriate” in follow-on proceedings “because the issues to be decided are narrowly
117
+ focused and the facts not genuinely in dispute”); cf. Michael Pattison, CPA, Exchange Act
118
+ Release No. 67900, 2012 WL 4320146, at *7 (Sept. 20, 2012) (reasoning that proceedings under
119
+ Rule 102(e)(3)(1)(A) based on a predicate injunction are analogous to follow-on proceedings).
120
+ 11 17 C.F.R. § 201.250(b) (discussing motions for summary disposition).
121
+ 12 Rule of Practice 100(c), 17 C.F.R. § 201.100(c). To the extent they are conflicting, the
122
+ procedures specified in this order supersede those specified in the Bruton I order denying the
123
+ petition to lift the suspension or in the Bruton II order instituting proceedings.
124
+ 13 17 C.F.R. § 201.110.
125
+ 14 17 C.F.R. § 200.30-10(a)(2).
126
+ 4
127
+ conference under Rule of Practice 221 to address the parties’ request for a briefing schedule on
128
+ any summary disposition motions, in addition to any other matters appropriate for consideration
129
+ and action under that Rule.15 The assigned ALJ shall exercise the full powers conferred by the
130
+ Commission’s Rules of Practice and the Administrative Procedure Act.16
131
+ Attention is called to Rule of Practice 151(b) and (c), providing that when, as here, the
132
+ Commission has assigned a case to a hearing officer, all papers shall be filed with the Office of
133
+ the Secretary (with a copy provided to the hearing officer) and that all motions, objections, or
134
+ applications shall be directed to and decided by the presiding hearing officer.17 This includes,
135
+ without limitation, filings under Rules of Practice 210, 221, 222, 230, 231, 232, 233, and 250.18
136
+ IT IS FURTHER ORDERED that the ALJ shall issue an initial decision no later than 75
137
+ days from the occurrence of one of the following events: (A) the completion of briefing on a
138
+ motion pursuant to Rule of Practice 250;19 (B) the completion of post-hearing briefing should the
139
+ ALJ determine after review of the motions pursuant to Rule 250 that a public evidentiary hearing
140
+ is necessary;20 or (C) the determination by the hearing officer that a party is deemed to be in
141
+ default under Rule of Practice 155 and no public hearing is necessary.21 This proceeding shall be
142
+ deemed to be one under the 75-day timeframe specified in Rule of Practice 360(a)(2)(i) for the
143
+ purposes of applying Rules of Practice 233 and 250.22
144
+ IT IS FURTHER ORDERED that the initial decision be issued on the basis of the record
145
+ before the hearing officer, as defined by Rule of Practice 350,23 and that the record index shall be
146
+ prepared and certified in accordance with Rule of Practice 351.24
147
+
148
+ 15 17 C.F.R. § 201.221. The parties’ January 31 joint statement proposed a briefing
149
+ schedule for motions for summary disposition. The parties may renew their request for a
150
+ briefing schedule on summary disposition before the ALJ.
151
+ 16 See, e.g., Rule of Practice 111, 17 C.F.R. § 201.111; 5 U.S.C. § 556.
152
+ 17 17 C.F.R. § 201.151(b)-(c).
153
+ 18 17 C.F.R. §§ 201.210, 221, 222, 230, 231, 232, 233, 250.
154
+ 19 17 C.F.R. § 201.250.
155
+ 20 Because Bruton I and Bruton II were both set down for a hearing before the Commission,
156
+ Rule of Practice 360(a)(2)(ii)’s requirement to issue an order scheduling a hearing within a
157
+ specified time from service of the OIP did not apply. In the event that the hearing officer
158
+ determines after reviewing the summary disposition motions that an evidentiary hearing is
159
+ necessary, (A) that Rule will apply with a trigger date of the completion of briefing rather than
160
+ service of the OIP, and (B) the hearing officer will have authority to consider and take action
161
+ upon an agreement of the parties to a hearing date after the time period specified in the rule.
162
+ 21 17 C.F.R. § 201.155.
163
+ 22 17 C.F.R. §§ 201.233, .250, .360(a)(2)(i).
164
+ 23 17 C.F.R. § 201.350.
165
+ 24 17 C.F.R. § 201.351.
166
+ 5
167
+ IT IS FURTHER ORDERED that, notwithstanding the last sentence of Rule
168
+ 102(e)(3)(iii), upon issuance of an initial decision Rules of Practice 360(d), 410, and 411 shall
169
+ govern further Commission consideration of this matter.25
170
+ By the Commission.
171
+
172
+
173
+
174
+ Vanessa A. Countryman
175
+ Acting Secretary
176
+
177
+
178
+ 25 17 C.F.R. §§ 201.360(d), 410, 411. Given the parties’ request that we consolidate these
179
+ two proceedings, we find under Rule of Practice 100(c) that it would serve the interests of justice
180
+ and not result in prejudice to any party to specify that the final sentence of Rule 102(e)(3)(iii)—
181
+ which provides that the time limits set forth in Rule 540 will govern review of the hearing
182
+ officer’s initial decision in a Rule 102(e) case in which a temporary suspension has not been
183
+ lifted—shall not apply to this consolidated proceeding.
raw/aaer/2019/AAER-4041.txt ADDED
@@ -0,0 +1,760 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+
4
+ UNITED STATES OF AMERICA
5
+ Before the
6
+ SECURITIES AND EXCHANGE COMMISSION
7
+
8
+ SECURITIES ACT OF 1933
9
+ Release No. 10632 / April 22, 2019
10
+
11
+ SECURITIES EXCHANGE ACT OF 1934
12
+ Release No. 85702 / April 22, 2019
13
+
14
+ ACCOUNTING AND AUDITING ENFORCEMENT
15
+ Release No. 4041 / April 22, 2019
16
+
17
+ ADMINISTRATIVE PROCEEDING
18
+ File No. 3-19150
19
+
20
+
21
+
22
+
23
+ In the Matter of
24
+
25
+ DOV ZAIDMAN, CPA,
26
+ AND
27
+ ZBS GROUP LLP
28
+
29
+ Respondents.
30
+
31
+
32
+
33
+ ORDER INSTITUTING PUBLIC
34
+ ADMINISTRATIVE AND CEASE-
35
+ AND-DESIST PROCEEDINGS PURSUANT
36
+ TO SECTION 8A OF THE SECURITIES ACT
37
+ OF 1933, SECTIONS 4C AND 21C OF THE
38
+ SECURITIES EXCHANGE ACT OF 1934
39
+ AND RULE 102(e) OF THE COMMISSION’S
40
+ RULES OF PRACTICE, MAKING
41
+ FINDINGS, AND IMPOSING REMEDIAL
42
+ SANCTIONS AND A CEASE-AND-DESIST
43
+ ORDER
44
+
45
+
46
+ I.
47
+
48
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
49
+ administrative and cease-and-desist proceedings be, and hereby are, instituted against Dov
50
+ Zaidman, CPA (“Zaidman”) and ZBS Group LLP (“ZBS Group” or “the Firm”) (collectively
51
+ “Respondents”) pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections
52
+ 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and
53
+ 102(e)(1)(iii) of the Commission’s Rules of Practice.2
54
+
55
+ 1 Section 4C provides, in relevant part, that:
56
+
57
+ The Commission may censure any person, or deny, temporarily or permanently, to any
58
+ person the privilege of appearing or practicing before the Commission in any way, if that
59
+
60
+ 2
61
+
62
+
63
+ II.
64
+
65
+ In anticipation of the institution of these proceedings, Respondents have submitted an Offer
66
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
67
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
68
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
69
+ herein, except as to the Commission’s jurisdiction over them and the subject matter of these
70
+ proceedings, which are admitted, and except as provided herein in Section V, Respondents consent
71
+ to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings
72
+ Pursuant to Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities
73
+ Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings,
74
+ and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below.
75
+
76
+ III.
77
+
78
+ On the basis of this Order and Respondents’ Offer, the Commission finds3 that:
79
+
80
+ A. SUMMARY
81
+
82
+ These proceedings arise out of the role of Zaidman and his audit firm ZBS Group in a shell
83
+ factory scheme orchestrated by an undisclosed team of “Control Persons.” The shell companies
84
+ were undisclosed “blank check” companies (“Blank Check Companies”) and were created and
85
+
86
+ person is found . . . (1) not to possess the requisite qualifications to represent others; (2)
87
+ to be lacking in character or integrity, or to have engaged in unethical or improper
88
+ professional conduct; or (3) to have willfully violated, or willfully aided and abetted the
89
+ violation of, any provision of the securities laws or the rules and regulations issued
90
+ thereunder.
91
+
92
+ 2 Rule 102(e)(1)(ii) provides, in pertinent part, that:
93
+
94
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or
95
+ practicing before it . . . to any person who is found . . . to have engaged in unethical or
96
+ improper professional conduct.
97
+
98
+ Rule 102(e)(1)(iii) provides, in pertinent part, that:
99
+
100
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or
101
+ practicing before it . . . to any person who is found…to have willfully violated, or
102
+ willfully aided and abetted the violation of any provision of the Federal securities laws or
103
+ the rules and regulations thereunder.
104
+
105
+ 3 The findings herein are made pursuant to Respondents’ Offer of Settlement and are not binding
106
+ on any other person or entity in this or any other proceeding.
107
+
108
+ 3
109
+
110
+ designed to avoid the corresponding registration and reporting requirements applicable to blank
111
+ check companies. The Control Persons’ scheme was to create and sell the Blank Check Companies
112
+ as public companies with operations, and register offerings of their securities, without disclosing to
113
+ the public or the Commission the true purpose or control of the companies. ZBS Group performed
114
+ the audits of the financial statements of eight of the Blank Check Companies and Zaidman
115
+ authorized the issuance of the audit reports included in the corresponding Form S-1 registration
116
+ statements and periodic reports.
117
+
118
+ Each Blank Check Company followed the same path to sale. The Control Persons
119
+ incorporated the Blank Check Companies and recruited a sole officer, director, employee, and
120
+ majority shareholder (the “sole officer”) to act in name only. The Control Persons exclusively
121
+ retained and maintained all communications with a small group of outside professionals including
122
+ Zaidman and ZBS Group. The Blank Check Companies had no operations and no value other than
123
+ (i) their registration status with the Commission, and (ii) a particular capital structure – for example,
124
+ a control block of shares and float of purportedly free-trading shares solely for purposes of merger
125
+ or acquisition. The Forms S-1 and subsequent Commission filings falsely depicted the Blank Check
126
+ Companies as actively pursuing business plans, when the only plan from the onset was to be sold as
127
+ public vehicles. In participating in the audits of the financial statements of four Blank Check
128
+ Companies at issue, Zaidman and ZBS Group failed to obtain an understanding of the business of
129
+ the issuer and the role of the Control Persons.
130
+
131
+ During the course of ZBS Group’s audits of four of the Blank Check Companies, Zaidman
132
+ and ZBS Group engaged in improper professional conduct pursuant to Section 4C of the Exchange
133
+ Act and Rules 102(e)(1) of the Commission’s Rules of Practice. Specifically, during the course of
134
+ the four engagements for the audits of the financial statements of FanSport, Inc. (“FanSport”), Big
135
+ Clix Corp. (“Big Clix”), Mobile Vault, Inc. (“Mobile Vault”), and ShopEye, Inc. (“ShopEye”)
136
+ (collectively, the “Issuers”), Zaidman ignored numerous red flags. Among other things, Zaidman
137
+ failed to inquire regarding facts that contradicted each issuer’s presentation as an operating
138
+ company owned and controlled by its sole officer.
139
+
140
+ ZBS Group issued and Zaidman authorized the issuance of the audit reports containing
141
+ unqualified opinions for use in Commission filings by the Issuers, but the underlying audits failed to
142
+ comply with the auditing standards of the Public Company Accounting Oversight Board
143
+ (“PCAOB” or “Board”). Specifically, Zaidman and ZBS Group failed to comply with PCAOB
144
+ requirements relating to: (1) client acceptance and continuance; (2) obtaining a sufficient
145
+ understanding of the issuer; (3) performing sufficient procedures to identify the existence of related
146
+ party transactions that should have been disclosed in the financial statements; and (4) maintaining
147
+ sufficient audit documentation. Furthermore, ZBS Group, at the direction of Zaidman, issued audit
148
+ reports for Big Clix without obtaining an engagement quality review and concurring approval of
149
+ issuance. These audit reports allowed the Issuers to file numerous registrations statements and
150
+ periodic reports with the Commission that were materially false and misleading.
151
+
152
+
153
+ 4
154
+
155
+ B. RESPONDENTS
156
+
157
+ 1. Zaidman, age 61, of Plainview, New York, holds an active CPA license in New
158
+ York. Zaidman is a partner at ZBS Group. At all relevant times, Zaidman was the managing
159
+ partner of ZBS Group, served as the engagement partner with ultimate authority to issue the audit
160
+ reports on behalf of ZBS Group, and authorized the issuance of the audit reports for the Issuers.
161
+
162
+ 2. ZBS Group is a New York limited liability partnership located in Plainview, New
163
+ York. ZBS Group has been registered with the PCAOB since 2011. During all relevant times,
164
+ ZBS Group issued the audit reports included in the registration statements and certain periodic
165
+ reports filed with the Commission for the Issuers. ZBS Group currently has two partners with
166
+ Zaidman serving as the managing partner and the partner with ultimate authority to issue audit
167
+ reports on behalf of ZBS Group.
168
+
169
+ Relevant Entities
170
+
171
+ 3. FanSport, now known as Jade Global Holdings, Inc., was at the relevant time, a
172
+ Florida corporation with its principal place of business in Placerville, California. On April 27,
173
+ 2011, FanSport filed a Form S-1 registration statement (“Form S-1”) with the Commission which
174
+ became effective on August 12, 2011.4 During the relevant period, FanSport’s common stock was
175
+ registered with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on
176
+ the OTCBB (ticker: FPNC). ZBS Group served as FanSport’s auditor for the fiscal year ended on
177
+ March 31, 2013, and Zaidman was the engagement partner for the audit.
178
+
179
+ 4. Big Clix, now known as HydroPhi Technologies Group, Inc., was at the relevant
180
+ time, a Florida corporation with its principal place of business in Fairfax, California. On July 29,
181
+ 2010, Big Clix filed a Form S-1 with the Commission which became effective on December 7,
182
+ 2010. During the relevant period, Big Clix’s common stock was registered with the Commission
183
+ pursuant to 12(g) of the Exchange Act and was quoted on the OTC Link (f/k/a Pink Sheets) (ticker:
184
+ BLES). ZBS Group served as Big Clix’s auditor for the fiscal years ended on June 30, 2012, and
185
+ June 30, 2013, and Zaidman was the engagement partner for the audits.
186
+
187
+
188
+ 4 Each Form S-1 described herein sought to register the offer and sale of 3,000,000 common shares
189
+ in a $30,000 public offering.
190
+
191
+ 5
192
+
193
+ 5. Mobile Vault, was at the relevant time, a Florida corporation with its principal
194
+ place of business in Cameron Park, California. On June 27, 2011, Mobile Vault filed a Form S-1
195
+ registration statement with the Commission which became effective on January 25, 2012. Mobile
196
+ Vault subsequently deregistered those shares. On July 3, 2013, Mobile Vault filed a new Form S-1
197
+ which did not become effective because on April 22, 2014, the Commission issued a stop order
198
+ suspending the effectiveness of Mobile Vault’s Form S-1 pursuant to Section 8(d) of the Securities
199
+ Act. In re the Registration Statement of Mobile Vault, Inc., Securities Act Rel. No. 9576 (Apr. 22,
200
+ 2014) (Settled Order). ZBS Group served as Mobile Vault’s auditor for the fiscal years ended on
201
+ May 31, 2012, and May 31, 2013, and Zaidman was the engagement partner for the audits.
202
+
203
+ 6. ShopEye, was at the relevant time a Florida corporation with its principal place of
204
+ business in Foster City, California. On August 5, 2011, ShopEye filed a Form S-1 which became
205
+ effective on November 1, 2011. ShopEye subsequently deregistered those shares. On June 20,
206
+ 2013, ShopEye filed a new Form S-1 which became effective on September 26, 2013. On July 28,
207
+ 2014, the Commission, by delegated authority, issued a stop order suspending the effectiveness of
208
+ ShopEye’s Form S-1 pursuant to Section 8(d) of the Securities Act. In re the Registration
209
+ Statement of ShopEye, Inc., Initial Decision Rel. No. 615 (June 16, 2014), final as of July 28,
210
+ 2014, Securities Act Rel. No. 9624 (July 28, 2014). ZBS Group served as ShopEye’s auditor for
211
+ the year ended on May 31, 2013, and Zaidman was the engagement partner for the audit.
212
+
213
+ C. FACTS
214
+
215
+ (1) Background
216
+
217
+ 7. From January 2011 to October 2013, ZBS Group audited the financial statements
218
+ the Control Persons used in the Forms S-1 and periodic reports filed with the Commission for at
219
+ least eight of the Blank Check Companies, four of which were the Issuers. Zaidman served as the
220
+ engagement partner for the Firm’s audits of the eight Blank Check Companies, including the
221
+ Issuers.
222
+
223
+ 8. The Control Persons were the exclusive contacts between ZBS Group and the
224
+ Issuers. Zaidman knew that the Control Persons created the Issuers’ financial statements, provided
225
+ ZBS Group with the supporting evidence for the audits, and responded to ZBS Group’s questions
226
+ about the Issuers. Furthermore, the Control Persons were the sole points of contact for Zaidman
227
+ and ZBS Group obtaining engagement letters, management representations letters, and payment
228
+ for audit invoices.
229
+
230
+ 9. Zaidman failed meaningfully to understand the business of the Issuers and the role
231
+ of the Control Persons and the sole officers. In obtaining an understanding of the Issuers, Zaidman
232
+ did not question: (1) the dominant roles by the Control Persons with respect to the Issuers and
233
+ relied solely on the Control Persons’ oral representations that they were authorized to act on behalf
234
+ of the Issuers; (2) why the Issuers’ Forms S-1 or periodic reports were so similar as to appear
235
+ template driven even though the companies were portrayed as operating companies pursuing
236
+
237
+ 6
238
+
239
+ different business plans; and (3) why none of the Issuers made any significant progress toward
240
+ advancing their purported business plan since its incorporation, notwithstanding that the
241
+ Commission filings represented that the respective sole officer spent 25-35 hours per week
242
+ pursuing it. In failing sufficiently to understand the Issuers’ business, Zaidman failed to: (1)
243
+ identify factors that contradicted each company’s presentation as an operating company owned and
244
+ controlled by its sole officer; (2) identify risks of material misstatement related to the integrity of
245
+ the individuals involved and the company being an undisclosed blank check company; and (3)
246
+ sufficiently identify related party transactions and relevant disclosures.
247
+
248
+ 10. ZBS Group performed the Issuers’ audits described above and Zaidman authorized
249
+ the issuance of and consented to the incorporation of these audit reports in each of the Issuers’
250
+ Forms S-1 and Forms 10-K filed with the Commission. The Issuers’ audit reports stated that the
251
+ audits had been conducted “in accordance with the standards of the Public Company Accounting
252
+ Oversight Board” and that the financial statements were presented fairly, in all material respects
253
+ “in conformity with accounting principles generally accepted in the United States of America.” As
254
+ described below, however, the Issuers’ audits were not conducted in accordance with PCAOB
255
+ standards and were so deficient that they amounted to no audits at all.
256
+
257
+ (2) ZBS Group Performed Deficient Audits for the 2013 Year-End FanSport Audit,
258
+ the 2012 and 2013 Year-End Big Clix Audits, the 2012 and 2013 Year-End
259
+ Mobile Vault Audits, and the 2013 Year-End ShopEye Audit
260
+
261
+ (a) Zaidman and ZBS Group Failed to Evaluate Information Obtained
262
+ During the Client Acceptance and Retention Process that was Relevant to
263
+ Identifying Risks of Material Misstatement (AS No. 12, AS No. 13, and
264
+ AU 230)
265
+
266
+ 11. PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of Material
267
+ Misstatement, (“AS No. 12”) requires that the auditor evaluate whether information obtained
268
+ from the client acceptance and retention evaluation process or audit planning activities is
269
+ relevant to identifying risks of material misstatement.5 Risks of material misstatement identified
270
+ during those activities should be assessed in accordance with AS No. 12. (AS No. 12 at ¶ 41).
271
+
272
+ 12. PCAOB Auditing Standard No. 13, The Auditor’s Responses to the Risks of
273
+ Material Misstatement, (“AS No. 13”) requires the auditor when responding to the assessed risks
274
+ of material misstatement, particularly fraud risks, to apply professional skepticism in gathering and
275
+ evaluating audit evidence. Examples include: (a) modifying the planned audit procedures to
276
+ obtain more reliable evidence regarding relevant assertions, and (b) obtaining sufficient appropriate
277
+ evidence to corroborate management’s explanations or representations concerning important
278
+ matters. (AS No. 13 at ¶ 7).
279
+
280
+
281
+ 5 References to PCAOB auditing standards refer to the standards in effect at the relevant time.
282
+
283
+ 7
284
+
285
+ 13. PCAOB Auditing Standard AU Section 230, Due Professional Care in the
286
+ Performance of Work, (“AU 230”) states that due professional care requires the auditor to exercise
287
+ professional skepticism. Professional skepticism is an attitude that includes a questioning mind
288
+ and a critical assessment of audit evidence. AU 230 requires that the auditor neither assumes that
289
+ management is dishonest nor assumes unquestioned honesty. In exercising professional
290
+ skepticism, the auditor should not be satisfied with less than persuasive evidence because of a
291
+ belief that management is honest. The engagement partner should be knowledgeable about the
292
+ client. (AU 230 at ¶¶ .06, .07, .09). This standard is also applicable in Sections C.(2)(b) and
293
+ C.(2)(c) below.
294
+
295
+ 14. ZBS Group’s client acceptance and continuance policies at the time of the Issuers’
296
+ audits required: (1) completing an engagement acceptance form for prospective clients; (2) annual
297
+ reviews by the managing partner to reevaluate the acceptability of each client and engagement; and
298
+ (3) at least annually, a review of the Firm’s acceptance and continuance policies by the managing
299
+ partner to determine if they were appropriate and operating effectively. ZBS Group’s procedures
300
+ involved speaking to referral sources about the integrity of the client, conducting internet searches
301
+ for public information, and speaking to the chief executive officer (“CEO”) of the company. For
302
+ the Issuers’ audits, however, Zaidman did not speak to the companies’ CEOs even though
303
+ statements in Commission filings indicated that the sole officer was the only employee and that he
304
+ or she dedicated 25 to 35 hours per week to the business.
305
+
306
+ 15. As part of ZBS Group’s annual reviews to reevaluate the acceptability of the
307
+ Issuers, Zaidman disregarded various circumstances concerning management’s integrity that
308
+ Zaidman should have considered and followed-up on as part of the audits. For example, the sole
309
+ officer and founder of ShopEye resigned about one year after the incorporation of the company and
310
+ was replaced within a very short time period and without any compensation for the sale of his
311
+ shares. Further, there were numerous similarities between the Issuers, including that all were
312
+ startup companies with minimal resources, where the Control Persons were the only contacts for
313
+ day-to-day audit interaction but were not mentioned in any Commission filings and were not
314
+ receiving any observable compensation. Although presented with these circumstances for the
315
+ Issuers, Zaidman and ZBS Group did not consider whether there were risks of material
316
+ misstatement related to management’s integrity and subsequently did not determine an appropriate
317
+ audit response.
318
+
319
+ 16. For the above reasons, Zaidman and ZBS Group failed to exercise due care and
320
+ professional skepticism when evaluating information obtained during the client acceptance and
321
+ retention process that was relevant to identifying risks of material misstatement and thus, failed to
322
+ comply with AS No. 12, AS No. 13, and AU 230.
323
+
324
+ (b) Zaidman and ZBS Group Failed to Obtain a Sufficient Understanding of
325
+ the Company (AS No. 12 and AU 230)
326
+
327
+
328
+ 8
329
+
330
+ 17. AS No. 12 requires that the auditor obtain an understanding of the company and its
331
+ environment. This should include, among other things, obtaining an understanding of the
332
+ company’s organizational structure, management personnel, the sources of funding of the
333
+ company’s operations, and the company’s operating characteristics. In addition, the auditor is
334
+ required to make certain inquiries regarding fraud risks to personnel within the company and when
335
+ necessary, corroborate responses or address inconsistencies. (AS No. 12 at ¶¶ 7, 10, 56, 58).
336
+
337
+ 18. Zaidman and ZBS Group failed to comply with AS No. 12 and AU 230 as they
338
+ failed to obtain a sufficient understanding of the Issuers and failed to exercise professional
339
+ skepticism. In obtaining an understanding of the Issuers, Zaidman and ZBS Group failed to
340
+ identify and/or address various red flags that arose during the course of the audits. For example:
341
+
342
+ a. Zaidman and ZBS Group failed to obtain an understanding of the compensation
343
+ arrangement with the Control Persons, which could have revealed that the company
344
+ was not an operating company owned and controlled by the sole officer as
345
+ presented and instead was an undisclosed blank check company owned and
346
+ controlled by the Control Persons;
347
+
348
+ b. Zaidman and ZBS Group never communicated directly with the sole officers or
349
+ confirmed with them that the Control Persons were authorized to represent the
350
+ Issuers on their behalf. Zaidman’s communications throughout the audits were
351
+ with one or more of the Control Persons; and,
352
+
353
+ c. Zaidman and ZBS Group failed to question why there were numerous similarities
354
+ between the Issuers, including that all were startup companies with minimal
355
+ resources, where the Control Persons were the only contacts for day-to-day audit
356
+ interaction but were not mentioned in any Commission filings and were not
357
+ receiving any observable compensation. Further, all four Issuers also had notes
358
+ payable with one of the Control Persons.
359
+
360
+ 19. Zaidman and ZBS Group also failed to perform sufficient inquiries as part of risk
361
+ assessment by not speaking with the sole officers or obtaining an understanding as to the lack of
362
+ any expenses to advance the stated business plan.
363
+
364
+ (c) Zaidman and ZBS Group Failed to Perform Sufficient Procedures over
365
+ Related Parties and Failed to Include Procedures Designed to Identify
366
+ Related-Party Transactions (AU 334 and AU 230)
367
+
368
+ 20. PCAOB Auditing Standard AU Section 334, Related Parties, (“AU 334”) provides
369
+ auditor requirements for identifying and testing related party transactions. AU 334 states that
370
+ certain transactions may be indicative of the existence of related parties, including: (a) borrowing
371
+ or lending on an interest-free basis or at a rate of interest significantly above or below market rates
372
+ prevailing at the time of the transaction, (b) making loans with no scheduled terms for when or
373
+
374
+ 9
375
+
376
+ how the funds will be repaid, and (c) transactions that are occurring, but are not being given
377
+ accounting recognition, such as receiving or providing accounting, management or other services
378
+ at no charge. Sufficient appropriate procedures over related parties should extend beyond inquiry
379
+ of management. For each material related party transaction, the auditor should consider whether
380
+ he has obtained sufficient appropriate evidential matter to understand the relationship of the parties
381
+ and the effects of the transaction on the financial statements. The auditor should then evaluate all
382
+ the information available to determine whether it is adequately disclosed in the financial
383
+ statements. (AU 334 at ¶¶ .03, .08, .09, .11).
384
+
385
+ 21. Zaidman and ZBS Group failed to comply with AU 334 as they failed to identify or
386
+ evaluate whether material related party transactions were adequately and accurately presented and
387
+ disclosed in the Issuers’ financial statements. Zaidman and ZBS Group failed to comply with AU
388
+ 230 by not exercising due care and professional skepticism when identifying or evaluating related
389
+ party transactions.
390
+
391
+ 22. First, the work papers relating to the ShopEye audits included discussion of a note
392
+ for $3,000 with an issue date of November 1, 2012, payable to a Florida limited liability company
393
+ (“LLC”) controlled by one of the Control Persons. Zaidman read the note which was signed by the
394
+ Control Person and listed the Control Person’s title as “Partner” of the LLC. The note did not
395
+ indicate a specific due date, was due on demand, and listed 5% as the annual interest rate. The
396
+ note, however was not listed or disclosed in the financial statements included in Commission
397
+ filings as a related party transaction. Zaidman should have known that this note should have been
398
+ disclosed in the financial statements as a related party transaction as it was entered into with an
399
+ entity controlled by one of the Control Persons who also performed services for ShopEye. Similar
400
+ notes payable were issued by FanSport, Big Clix, and Mobile Vault to the same LLC but were not
401
+ accurately described in the financial statements. These notes payable were disclosed as issued to
402
+ one investor even though neither the LLC nor the Control Person was a shareholder of the
403
+ respective issuer. Also, the filings with the Commission for all the Issuers contained inaccurate
404
+ statements that there were no related party transactions.
405
+
406
+ 23. Second, documents evidence that the Control Persons provided accounting and
407
+ management services for the Issuers. However, there is no supporting documentation to establish
408
+ whether these services were paid or unpaid and whether they should have been disclosed as related
409
+ party transactions. In addition, these services, whether paid or unpaid, were not given accounting
410
+ recognition or disclosure in any of the filings with the Commission.
411
+
412
+ 24. Zaidman and ZBS Group’s audits lacked adequate procedures to evaluate whether
413
+ these related party transactions should have been disclosed by the Issuers in the financial
414
+ statements included in Commission filings and failed to appropriately design procedures to identify
415
+ the Issuers’ related party transactions.
416
+
417
+ (d) Zaidman and ZBS Group Failed to Maintain Sufficient Audit
418
+ Documentation (AS No. 3)
419
+
420
+ 10
421
+
422
+
423
+ 25. PCAOB Auditing Standard No. 3, Audit Documentation, (“AS No. 3”) requires
424
+ that the auditor prepare audit documentation in connection with each engagement conducted
425
+ pursuant to the standards of the PCAOB. Audit documentation must contain sufficient
426
+ information to enable an experienced auditor, having no previous connection with the
427
+ engagement to: (a) understand the nature, timing, extent, and results of the procedures
428
+ performed, evidence obtained, and conclusions reached, and (b) determine who performed the
429
+ work and the date such work was completed as well as the person who reviewed the work and
430
+ the date of such review. The auditor must retain audit documentation for at least seven years
431
+ from the date the auditor grants permission to use the auditor’s report in connection with the
432
+ issuance of the company’s financial statements. (AS No. 3 at ¶¶ 4, 6, 14).
433
+
434
+ 26. Zaidman and ZBS Group failed to comply with AS No. 3 for the Issuers’ audits as
435
+ certain audit work papers did not evidence who performed and reviewed the work and the dates
436
+ such work was completed and reviewed. Furthermore, for the FanSport, Big Clix, and 2012
437
+ Mobile Vault audits, Zaidman and ZBS Group failed to retain certain audit work papers for at
438
+ least seven years, including documentation over obtaining an understanding of the company and
439
+ required risk inquiries, and the Supervision, Review and Approval Form.
440
+
441
+ (e) ZBS Group Failed to Execute Engagement Quality Reviews (AS No. 7)
442
+
443
+ 27. PCAOB Auditing Standard No. 7, Engagement Quality Review, (“AS No. 7”)
444
+ requires an engagement quality review and concurring approval of issuance for certain
445
+ engagements conducted pursuant to the standards of the PCAOB. In an audit, the engagement
446
+ quality reviewer may provide concurring approval of issuance only if, after performing with due
447
+ professional care the review required by AS No. 7, he or she is not aware of a significant
448
+ engagement deficiency. Furthermore, the firm may grant permission to the client to use the
449
+ engagement report only after the engagement quality reviewer provides concurring approval of
450
+ issuance. (AS No. 7 at ¶¶ 1, 12, 13).
451
+
452
+ 28. ZBS Group did not obtain engagement quality reviews for the 2012 and 2013 Big
453
+ Clix audits (including obtaining concurring approval of issuance). Zaidman was the engagement
454
+ partner for these Big Clix audits and authorized the filing of and consented to the incorporation
455
+ of these audit reports in Big Clix’s Commission filings.
456
+
457
+ D. VIOLATIONS
458
+
459
+ 29. Section 17(a) of the Securities Act prohibits, in the offer or sale of securities, (1)
460
+ employing any device, scheme or artifice to defraud, (2) obtaining money or property by means
461
+ of any material misrepresentation or omission, or (3) engaging in any transaction, practice or
462
+ course of business that operates or would operate as a fraud or deceit upon the purchaser.
463
+ Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit, in connection with the
464
+ purchase or sale of securities, (a) employing any device, scheme, or artifice to defraud, (b)
465
+
466
+ 11
467
+
468
+ making any material misrepresentation or omission, or (c) engaging in any act, practice, or
469
+ course of business that operates as a fraud or deceit upon any person. As a result of the actions
470
+ described above, Zaidman and ZBS Group willfully violated Section 17(a) of the Securities Act
471
+ and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by performing and authorizing
472
+ audit reports filed with the Commission that were so deficient that they amounted to no audits at
473
+ all and that falsely stated that such audits were conducted in accordance with PCAOB standards.
474
+ 30. Rule 2-02(b)(1) of Regulation S-X requires an accountant to state “whether the
475
+ audit was made in accordance with generally accepted auditing standards.” As used with respect
476
+ to Regulation S-X in relation to audits of issuers, the phrase “generally accepted auditing
477
+ standards” means the “the standards of the PCAOB plus any applicable rules of the Commission.”
478
+ SEC Release No. 34-49708 (May 14, 2004). As a result of the conduct described above for the
479
+ Issuers’ audits, ZBS Group willfully violated Rule 2-02(b)(1) of Regulation S-X and Zaidman
480
+ willfully aided and abetted and caused ZBS Group’s violations of Rule 2-02(b)(1) of Regulation
481
+ S-X.
482
+
483
+ 31. Rule 2-06 of Regulation S-X requires accountants to retain for seven years “records
484
+ relevant to the audit or review, including work papers and other documents that form the basis of
485
+ the audit or review.” As a result of the conduct described above for the FanSport, Big Clix, and
486
+ 2012 Mobile Vault audits, ZBS Group willfully violated Rule 2-06 of Regulation S-X and
487
+ Zaidman willfully aided and abetted and caused ZBS Group’s violations of Rule 2-06 of
488
+ Regulation S-X.
489
+
490
+ 32. Section 10A(a)(2) of the Exchange Act requires each audit of an issuer conducted
491
+ by a registered public accounting firm to include “procedures designed to identify related party
492
+ transactions that are material to the financial statements or otherwise require disclosure therein.”
493
+ As a result of the conduct described above, ZBS Group and Zaidman, as the engagement partner
494
+ on each of the Issuer’s audits, willfully violated Section 10A(a)(2) of the Exchange Act.
495
+
496
+ E. FINDINGS
497
+
498
+ 33. Based on the foregoing, the Commission finds that Zaidman willfully violated
499
+ Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder,
500
+ and Section 10A(a)(2) of the Exchange Act, and willfully aided and abetted and caused ZBS
501
+ Group’s violations of Rule 2-02(b)(1) and Rule 2-06 of Regulation S-X.
502
+
503
+ 34. Based on the foregoing, the Commission finds that by willfully violating Section
504
+ 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and
505
+ Section 10A(a)(2) of the Exchange Act, and willfully aiding and abetting ZBS Group’s violations
506
+ of Rule 2-02(b)(1) and Rule 2-06 of Regulation S-X, Zaidman engaged in conduct subject to
507
+ Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of
508
+ Practice.
509
+
510
+
511
+ 12
512
+
513
+ 35. Based on the foregoing, the Commission finds that ZBS Group willfully violated
514
+ Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder,
515
+ Section 10A(a)(2) of the Exchange Act, and Rule 2-02(b)(1) and Rule 2-06 of Regulation S-X.
516
+
517
+ 36. Based on the foregoing, the Commission finds that by willfully violating Section
518
+ 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section
519
+ 10A(a)(2) of the Exchange Act, and Rule 2-02(b)(1) and Rule 2-06 of Regulation S-X, ZBS Group
520
+ engaged in conduct subject to Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the
521
+ Commission’s Rules of Practice.
522
+
523
+ 37. Based on the foregoing, the Commission finds that Zaidman and ZBS Group
524
+ engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and
525
+ Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.
526
+
527
+ IV.
528
+
529
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
530
+ agreed to in Respondents Zaidman’s and ZBS Group’s Offer.
531
+
532
+ Accordingly, it is hereby ORDERED, effective immediately, that:
533
+
534
+ A. Zaidman and ZBS Group shall cease and desist from committing or causing any
535
+ violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the
536
+ Exchange Act and Rule 10b-5 thereunder, Section 10A(a)(2) of the Exchange Act, and Rule 2-
537
+ 02(b)(1) and Rule 2-06 of Regulation S-X.
538
+
539
+ B. Zaidman is denied the privilege of appearing or practicing before the Commission
540
+ as an accountant.
541
+
542
+ C. After five years from the date of this order, Zaidman may request that the
543
+ Commission consider his reinstatement by submitting an application (attention: Office of the
544
+ Chief Accountant) to resume appearing or practicing before the Commission as:
545
+
546
+ 1. a preparer or reviewer, or a person responsible for the preparation or review,
547
+ of any public company’s financial statements that are filed with the
548
+ Commission (other than as a member of an audit committee, as that term is
549
+ defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such
550
+ an application must satisfy the Commission that Zaidman’s work in his
551
+ practice before the Commission as an accountant will be reviewed either by
552
+ the independent audit committee of the public company for which he works
553
+ or in some other acceptable manner, as long as he practices before the
554
+ Commission in this capacity; and/or
555
+
556
+
557
+ 13
558
+
559
+ 2. a preparer or reviewer, or a person responsible for the preparation or review,
560
+ of any public company’s financial statements that are filed with the
561
+ Commission as a member of an audit committee, as that term is defined in
562
+ Section 3(a)(58) of the Securities Exchange Act of 1934. Such an
563
+ application will be considered on a facts and circumstances basis with
564
+ respect to such membership, and the applicant’s burden of demonstrating
565
+ good cause for reinstatement will be particularly high given the role of the
566
+ audit committee in financial and accounting matters; and/or
567
+
568
+ 3. an independent accountant.
569
+
570
+ Such an application must satisfy the Commission that:
571
+
572
+ (a) Zaidman, or the public accounting firm with which he is
573
+ associated, is registered with the Board in accordance with the
574
+ Sarbanes-Oxley Act of 2002, and such registration continues to be
575
+ effective;
576
+
577
+ (b) Zaidman, or the registered public accounting firm with which he is
578
+ associated, has been inspected by the Board and that inspection did
579
+ not identify any criticisms of or potential defects in the
580
+ respondent’s or the firm’s quality control system that would
581
+ indicate that Zaidman will not receive appropriate supervision;
582
+ (c) Zaidman has resolved all disciplinary issues with the Board, and
583
+ has complied with all terms and conditions of any sanctions
584
+ imposed by the Board (other than reinstatement by the
585
+ Commission); and
586
+
587
+ (d) Zaidman acknowledges his responsibility, as long as he appears or
588
+ practices before the Commission as an independent accountant, to
589
+ comply with all requirements of the Commission and the Board,
590
+ including, but not limited to, all requirements relating to
591
+ registration, inspections, engagement quality reviews and quality
592
+ control standards.
593
+
594
+ D. The Commission will consider an application by Zaidman to resume appearing or
595
+ practicing before the Commission provided that his state CPA license is current and he has
596
+ resolved all other disciplinary issues with the applicable state boards of accountancy. However,
597
+ if state licensure is dependent on reinstatement by the Commission, the Commission will
598
+ consider an application on its other merits. The Commission’s review may include consideration
599
+ of, in addition to the matters referenced above, any other matters relating to Zaidman’s character,
600
+ integrity, professional conduct, or qualifications to appear or practice before the Commission as
601
+ an accountant. Whether an application demonstrates good cause will be considered on a facts
602
+
603
+ 14
604
+
605
+ and circumstances basis with due regard for protecting the integrity of the Commission’s
606
+ processes.
607
+
608
+ E. ZBS Group is denied the privilege of appearing or practicing before the
609
+ Commission as an independent accountant.
610
+
611
+ F. After five years from the date of this order, ZBS Group may request that the
612
+ Commission consider its reinstatement by submitting an application (attention: Office of the
613
+ Chief Accountant) to resume appearing or practicing before the Commission as an
614
+ independent account. Such an application must satisfy the Commission that:
615
+
616
+ (a) ZBS Group is registered with the Board in accordance with the
617
+ Sarbanes-Oxley Act of 2002, and such registration continues to be
618
+ effective. However, if registration with the Board is dependent
619
+ upon reinstatement by the Commission, the Commission will
620
+ consider the application on its other merits;
621
+
622
+ (b) ZBS Group hired an independent CPA consultant (“consultant”)
623
+ who is not unacceptable to the staff of the Commission and is
624
+ affiliated with a public accounting firm registered with the Board,
625
+ that has conducted a review of ZBS Group’s quality control system
626
+ and submitted to the staff of the Commission a report that
627
+ describes the review conducted and procedures performed, and
628
+ represents that the review did not identify any criticisms of or
629
+ potential defects in the Firm’s quality control system that would
630
+ indicate that any of ZBS Group’s employees will not receive
631
+ appropriate supervision. ZBS Group agrees to require the
632
+ consultant, if and when retained, to enter into an agreement that
633
+ provides that for the period of review and for a period of two years
634
+ from completion of the review, the consultant shall not enter into
635
+ any employment, consultant, attorney-client, auditing or other
636
+ professional relationship with ZBS Group, or any of its present or
637
+ former affiliates, directors, officers, employees, or agents acting in
638
+ their capacity. The agreement will also provide that the consultant
639
+ will require that any firm with which he/she is affiliated or of
640
+ which he/she is a member, and any person engaged to assist the
641
+ consultant in performance of his/her duties under this Order shall
642
+ not, without prior consent of the staff, enter into any employment,
643
+ consultant, attorney-client, auditing or other professional
644
+ relationship with ZBS Group, or any of its present or former
645
+ affiliates, directors, officers, employees, or agents acting in their
646
+ capacity as such for the period of the review and for a period of
647
+ two years after the review;
648
+
649
+ 15
650
+
651
+ (c) ZBS Group has resolved all disciplinary issues with the Board, and
652
+ has complied with all terms and conditions of any sanctions
653
+ imposed by the Board (other than reinstatement by the
654
+ Commission); and
655
+
656
+ (d) ZBS Group acknowledges its responsibility, as long as it appears
657
+ or practices before the Commission as an independent accountant,
658
+ to comply with all requirements of the Commission and the Board,
659
+ including, but not limited to, all requirements relating to
660
+ registration, inspections, engagement quality reviews and quality
661
+ control standards.
662
+
663
+ G. The Commission will consider an application by ZBS Group to resume appearing
664
+ or practicing before the Commission provided that its state CPA license is current and it has
665
+ resolved all other disciplinary issues with the applicable state boards of accountancy. However,
666
+ if state licensure is dependent on reinstatement by the Commission, the Commission will
667
+ consider an application on its other merits. The Commission’s review may include consideration
668
+ of, in addition to the matters referenced above, any other matters relating to ZBS Group’s
669
+ character, integrity, professional conduct, or qualifications to appear or practice before the
670
+ Commission as an accountant. Whether an application demonstrates good cause will be
671
+ considered on a facts and circumstances basis with due regard for protecting the integrity of the
672
+ Commission’s processes.
673
+
674
+ H. Respondents Zaidman and ZBS Group shall pay, jointly and severally,
675
+ disgorgement of $19,500.00, prejudgment interest of $3,961.90 and civil penalties of $25,000.00,
676
+ to the Securities and Exchange Commission for transfer to the general fund of the United States
677
+ Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall be made in the following
678
+ installments:
679
+
680
+ 1) $8,076.98 within 10 days of the entry of the Order;
681
+ 2) $8,076.98 within 45 days of the entry of the Order;
682
+ 3) $8,076.98 within 80 days of the entry of the Order;
683
+ 4) $8,076.98 within 115 days of the entry of the Order;
684
+ 5) $8,076.98 within 150 days of the entry of the Order;
685
+ 6) $8,077.00 within 180 days of the entry of the Order;
686
+
687
+ Payments shall be applied first to post order interest, which accrues pursuant to SEC Rule of
688
+ Practice 600 and pursuant to 31 U.S.C. 3717. Prior to making the final payment set forth herein,
689
+ Respondents shall contact the staff of the Commission for the amount due. If Respondents fail to
690
+ make any payment by the date agreed and/or in the amount agreed according to the schedule set
691
+ forth above, all outstanding payments under this Order, including post-order interest, minus any
692
+ payments made, shall become due and payable immediately at the discretion of the staff of the
693
+ Commission without further application to the Commission.
694
+
695
+ 16
696
+
697
+
698
+ Payment must be made in one of the following ways:
699
+
700
+ (1) Respondents may transmit payment electronically to the Commission,
701
+ which will provide detailed ACH transfer/Fedwire instructions upon
702
+ request;
703
+
704
+ (2) Respondents may make direct payment from a bank account via Pay.gov
705
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
706
+
707
+ (3) Respondents may pay by certified check, bank cashier’s check, or United
708
+ States postal money order, made payable to the Securities and Exchange
709
+ Commission and hand-delivered or mailed to:
710
+
711
+ Enterprise Services Center
712
+ Accounts Receivable Branch
713
+ HQ Bldg., Room 181, AMZ-341
714
+ 6500 South MacArthur Boulevard
715
+ Oklahoma City, OK 73169
716
+
717
+ Payments by check or money order must be accompanied by a cover letter identifying Dov
718
+ Zaidman and ZBS Group LLP as Respondents in these proceedings, and the file number of these
719
+ proceedings; a copy of the cover letter and check or money order must be sent to Glenn S. Gordon,
720
+ Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, 801
721
+ Brickell Avenue, Suite 1800, Miami, FL 33131.
722
+
723
+ I. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be
724
+ treated as penalties paid to the government for all purposes, including all tax purposes. To
725
+ preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor
726
+ Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of
727
+ any award of compensatory damages by the amount of any part of Respondents’ payment of a civil
728
+ penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a
729
+ Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order
730
+ granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of
731
+ the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be
732
+ deemed an additional civil penalty and shall not be deemed to change the amount of the civil
733
+ penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action”
734
+ means a private damages action brought against one or both Respondents by or on behalf of one or
735
+ more investors based on substantially the same facts as alleged in the Order instituted by the
736
+ Commission in this proceeding.
737
+
738
+ V.
739
+
740
+ 17
741
+
742
+ It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section
743
+ 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by
744
+ Respondent Zaidman, and further, any debt for disgorgement, prejudgment interest, civil penalty or
745
+ other amounts due by Respondent Zaidman under this Order or any other judgment, order, consent
746
+ order, decree or settlement agreement entered in connection with this proceeding, is a debt for the
747
+ violation by Respondent Zaidman of the federal securities laws or any regulation or order issued
748
+ under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19).
749
+
750
+
751
+ By the Commission.
752
+
753
+
754
+
755
+ Vanessa A. Countryman
756
+ Acting Secretary
757
+
758
+
759
+
760
+
raw/aaer/2019/AAER-4042.txt ADDED
@@ -0,0 +1,110 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+ UNITED STATES OF AMERICA
3
+ Before the
4
+ SECURITIES AND EXCHANGE COMMISSION
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 85703 / April 22, 2019
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4042 / April 22, 2019
10
+ ADMINISTRATIVE PROCEEDING
11
+ File No. 3-15747
12
+
13
+ In the Matter of
14
+ David M. Martin, CPA
15
+
16
+ :
17
+ :
18
+ :
19
+ :
20
+ :
21
+ :
22
+ ORDER GRANTING APPLICATION FOR
23
+ REINSTATEMENT TO APPEAR AND PRACTICE
24
+ BEFORE THE COMMISSION AS AN ACCOUNTANT
25
+ RESPONSIBLE FOR THE PREPARATION OR
26
+ REVIEW OF FINANCIAL STATEMENTS REQUIRED
27
+ TO BE FILED WITH THE COMMISSION
28
+
29
+ On February 11, 2014, David M. Martin, CPA (“Martin”) was suspended from appearing
30
+ or practicing before the Commission as an accountant as a result of settled public administrative
31
+ proceedings instituted by the Commission against him pursuant to Rule 102(e)(3) of the
32
+ Commission’s Rules of Practice.1 This order is issued in response to Martin’s application for
33
+ reinstatement to appear and practice before the Commission as an accountant responsible for the
34
+ preparation or review of financial statements required to be filed with the Commission.
35
+ The Commission found that Martin had been permanently enjoined by a United States
36
+ District Court from future violations of Section 13(b)(5) of the Securities Exchange Act of 1934
37
+ (“Exchange Act”) and Rules 13b2-1 and 13b2-2 thereunder, and from aiding and abetting
38
+ violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-
39
+ 20, 13a-1, and 13a-13 thereunder in an action brought by the Commission. In its complaint in
40
+ the injunctive action, the Commission alleged that Martin, while serving as the Chief Financial
41
+ Officer of Life Partners Holdings, Inc. (“LPHI”), played a role in LPHI’s misleading of
42
+ shareholders by failing to disclose that the company was systematically and materially
43
+ underestimating the life expectancy estimates it used to price certain transactions. Life
44
+ expectancy estimates were a critical factor impacting the company’s revenues and profit margins
45
+ as well as the company’s ability to generate profits for its shareholders. The Commission further
46
+ alleged that Martin was involved in disclosure violations and improper accounting that LPHI
47
+
48
+ 1 See Accounting and Auditing Enforcement Release No. 3534 dated February 11, 2014. Martin was permitted,
49
+ pursuant to the order, to apply for reinstatement after three years upon making certain showings.
50
+
51
+ 2
52
+ used to overvalue assets held on the company’s books and create the appearance of a steady
53
+ stream of earnings from brokering life settlement transactions.
54
+
55
+ In his capacity as a preparer or reviewer, or as a person responsible for the preparation or
56
+ review, of financial statements of a public company to be filed with the Commission, Martin
57
+ attests that he will undertake to have his work reviewed by the independent audit committee of
58
+ any company for which he works, or in some other manner acceptable to the Commission, while
59
+ practicing before the Commission in this capacity. Martin is not, at this time, seeking to appear
60
+ or practice before the Commission as an independent accountant. If he should wish to resume
61
+ appearing and practicing before the Commission as an independent accountant, he will be
62
+ required to submit an application to the Commission showing that he has complied and will
63
+ comply with the terms of the original suspension order in this regard. Therefore, Martin’s
64
+ suspension from practice before the Commission as an independent accountant continues in
65
+ effect until the Commission determines that a sufficient showing has been made in this regard in
66
+ accordance with the terms of the original suspension order.
67
+
68
+ Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for
69
+ reinstatement, and provides that the Commission may reinstate the privilege to appear and
70
+ practice before the Commission “for good cause shown.”2 This “good cause” determination is
71
+ necessarily highly fact specific.
72
+
73
+ On the basis of information supplied, representations made, and undertakings agreed to
74
+ by Martin, it appears that he has complied with the terms of the February 11, 2014 order
75
+ suspending him from appearing or practicing before the Commission as an accountant, that no
76
+ information has come to the attention of the Commission relating to his character, integrity,
77
+ professional conduct or qualifications to practice before the Commission that would be a basis
78
+ for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice,
79
+ and that Martin, by undertaking to have his work reviewed by the independent audit committee
80
+ of any company for which he works, or in some other manner acceptable to the Commission, in
81
+ his practice before the Commission as a preparer or reviewer of financial statements required to
82
+ be filed with the Commission, has shown good cause for reinstatement. Therefore, it is
83
+ accordingly,
84
+
85
+
86
+
87
+
88
+
89
+
90
+
91
+
92
+ 2 Rule 102(e)(5)(i) provides:
93
+
94
+ “An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3)
95
+ of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing;
96
+ however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the
97
+ Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i).
98
+
99
+
100
+ 3
101
+ ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that
102
+ David M. Martin, CPA is hereby reinstated to appear and practice before the Commission as an
103
+ accountant responsible for the preparation or review of financial statements required to be filed
104
+ with the Commission.
105
+
106
+ By the Commission.
107
+
108
+
109
+ Vanessa A. Countryman
110
+ Acting Secretary
raw/aaer/2019/AAER-4043.txt ADDED
@@ -0,0 +1,197 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+ UNITED STATES OF AMERICA
3
+ Before the
4
+ SECURITIES AND EXCHANGE COMMISSION
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 85709 / April 23, 2019
8
+
9
+ ACCOUNTING AND AUDITING ENFORCEMENT
10
+ Release No. 4043 / April 23, 2019
11
+
12
+ ADMINISTRATIVE PROCEEDING
13
+ File No. 3-19153
14
+
15
+ In the Matter of
16
+
17
+ MICHAEL F. CRONIN, CPA,
18
+
19
+ Respondent.
20
+
21
+
22
+ ORDER INSTITUTING PUBLIC
23
+ ADMINISTRATIVE AND CEASE-AND-
24
+ DESIST PROCEEDINGS PURSUANT TO
25
+ SECTION 4C AND 21C OF THE
26
+ SECURITIES EXCHANGE ACT OF 1934
27
+ AND RULE 102(e) OF THE
28
+ COMMISSION’S RULES OF PRACTICE,
29
+ MAKING FINDINGS, AND IMPOSING
30
+ REMEDIAL SANCTIONS AND A
31
+ CEASE-AND-DESIST ORDER
32
+
33
+ I.
34
+
35
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
36
+ administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections
37
+ 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of
38
+ the Commission’s Rules of Practice, against Michael F. Cronin, CPA (“Respondent”).2
39
+
40
+ II.
41
+
42
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
43
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
44
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
45
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
46
+ herein, except as to the Commission’s jurisdiction over him and the subject matter of these
47
+ proceedings, which are admitted, and except as provided herein in Section V, Respondent consents
48
+
49
+ 1 Section 4C provides, in relevant part, that: “The Commission may censure any person, or deny, temporarily or
50
+ permanently, to any person the privilege of appearing or practicing before the Commission in any way, if that person
51
+ is found . . . to have willfully violated . . . any provision of the securities laws or the rules and regulations
52
+ thereunder.”
53
+ 2 Rule 102(e)(1)(iii) provides, in relevant part, that: “The Commission may . . . deny, temporarily or permanently,
54
+ the privilege of appearing or practicing before it . . . to any person who is found . . . to have willfully violated, or
55
+ willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations
56
+ thereunder.
57
+ 2
58
+ to the entry of this Order Instituting Public Administrative and Cease and Desist Proceedings
59
+ Pursuant to Section 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the
60
+ Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-
61
+ And-Desist Order (“Order”), as set forth below.
62
+
63
+ III.
64
+
65
+ On the basis of this Order and Respondent’s Offer, the Commission finds that:
66
+
67
+ 1. Michael F. Cronin, CPA, age 63, of Winter Springs, FL, is a certified public
68
+ accountant with licenses in New York and Florida. Prior to May 2013, Cronin was the sole
69
+ proprietor of a registered public accounting firm named Michael F. Cronin, CPA (the “Firm”).
70
+
71
+ 2. On May 14, 2013, the PCAOB filed a settled action against Cronin and his Firm,
72
+ for certain deficiencies in audit work performed between 2007 and 2011 on certain public
73
+ company engagements (the “PCAOB Order”). The PCAOB Order, which was and is available on
74
+ its website, censured, fined, and revoked the registration of the Firm and barred Cronin from being
75
+ an associated person of a registered public accounting firm with the right to file a petition for
76
+ Board consent to associate with a registered public accounting firm after three years from the date
77
+ of the PCAOB Order.
78
+
79
+ 3. The PCAOB Order explicitly stated that, pursuant to Section 105(c)(7)(B) of the
80
+ Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), it is “unlawful for any person that is . . . barred
81
+ from being associated with a registered public accounting firm . . . willfully to become or remain
82
+ associated with any issuer . . . in an accountancy or financial management capacity . . . without the
83
+ consent of the [PCAOB] or the Commission.”
84
+
85
+ 4. From May 2013 through May 2018, after the PCAOB Order (the “Relevant Time
86
+ Period”), Cronin continued to perform accountancy or financial management services for eight
87
+ issuers including, but not limited to, providing general accounting and bookkeeping services;
88
+ preparing financial statements and the notes to the financial statements; preparing the Management
89
+ Discussion & Analysis section for a quarterly report that was filed with the Commission; and
90
+ serving as the intermediary between issuers and their independent auditors.
91
+
92
+ 3
93
+ 5. During the Relevant Time Period, Cronin received the following payments for
94
+ accountancy or financial management work he performed.
95
+
96
+ Entity Name Amount
97
+ Company A $1,900.00
98
+ Company B $5,400.00
99
+ Company C $5,000.00
100
+ Company D $40,000.00
101
+ Company E $28,465.00
102
+ Company F $12,715.00
103
+ Company G $650.00
104
+ Company H $1,500.00
105
+ Total $ 95,630.00
106
+
107
+
108
+ 6. Cronin never requested or received consent from the PCAOB or the Commission to
109
+ become or remain associated with any issuer in an accountancy or financial management capacity.
110
+
111
+ 7. As a result of the conduct described above, Cronin willfully violated Section
112
+ 105(c)(7)(B) of Sarbanes-Oxley, which prohibits a person barred from associating with a registered
113
+ public accounting firm from willfully becoming or remaining associated with an issuer in an
114
+ accountancy or financial management capacity without consent of the PCAOB or the Commission.
115
+
116
+ IV.
117
+
118
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
119
+ agreed to in Respondent Cronin’s Offer.
120
+
121
+ Accordingly, it is hereby ORDERED, effective immediately, that:
122
+
123
+ A. Respondent cease and desist from committing or causing any violations and any
124
+ future violations of Section105(c)(7)(B) of Sarbanes-Oxley.
125
+
126
+ B. Respondent is denied the privilege of appearing or practicing before the
127
+ Commission as an accountant.
128
+
129
+ C. Respondent shall pay disgorgement of $95,630, prejudgment interest of $12,446
130
+ and civil penalties of $42,918, to the Securities and Exchange Commission for transfer to the
131
+ general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). Payment
132
+ shall be made in the following installments: $40,000 within ten days of entry of the Order; $36,998
133
+ ninety days after entry of the Order; $36,998 180 days after entry of the Order; and approximately
134
+ $36,998 270 days after entry of the Order. Payments shall be applied first to post order interest,
135
+ which accrues pursuant to SEC Rule of Practice 600 and pursuant to 31 U.S.C. 3717. Prior to
136
+ making the final payment set forth herein, Respondent shall contact the staff of the Commission for
137
+ the amount due. If Respondent fails to make any payment by the date agreed and/or in the amount
138
+ 4
139
+ agreed according to the schedule set forth above, all outstanding payments under this Order,
140
+ including post-order interest, minus any payments made, shall become due and payable
141
+ immediately at the discretion of the staff of the Commission without further application to the
142
+ Commission.
143
+
144
+ Payment must be made in one of the following ways:
145
+
146
+ (1) Respondent may transmit payment electronically to the Commission, which
147
+ will provide detailed ACH transfer/Fedwire instructions upon request;
148
+
149
+ (2) Respondent may make direct payment from a bank account via Pay.gov
150
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
151
+
152
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
153
+ States postal money order, made payable to the Securities and Exchange
154
+ Commission and hand-delivered or mailed to:
155
+
156
+ Enterprise Services Center
157
+ Accounts Receivable Branch
158
+ HQ Bldg., Room 181, AMZ-341
159
+ 6500 South MacArthur Boulevard
160
+ Oklahoma City, OK 73169
161
+
162
+ Payments by check or money order must be accompanied by a cover letter identifying
163
+ Michael F. Cronin as a Respondent in these proceedings, and the file number of these proceedings;
164
+ a copy of the cover letter and check or money order must be sent to Melissa Hodgman, Division of
165
+ Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549.
166
+
167
+ D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be
168
+ treated as penalties paid to the government for all purposes, including all tax purposes. To
169
+ preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
170
+ Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any
171
+ award of compensatory damages by the amount of any part of Respondent’s payment of a civil
172
+ penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a
173
+ Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting
174
+ the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the
175
+ Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed
176
+ an additional civil penalty and shall not be deemed to change the amount of the civil penalty
177
+ imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a
178
+ private damages action brought against Respondent by or on behalf of one or more investors based
179
+ on substantially the same facts as alleged in the Order instituted by the Commission in this
180
+ proceeding.
181
+
182
+ 5
183
+ V.
184
+ It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section
185
+ 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by
186
+ Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other
187
+ amounts due by Respondent under this Order or any other judgment, order, consent order, decree
188
+ or settlement agreement entered in connection with this proceeding, is a debt for the violation by
189
+ Respondent of the federal securities laws or any regulation or order issued under such laws, as set
190
+ forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19).
191
+
192
+ By the Commission.
193
+
194
+
195
+
196
+ Vanessa A. Countryman
197
+ Acting Secretary
raw/aaer/2019/AAER-4044.pdf ADDED
Binary file (97.4 kB). View file
 
raw/aaer/2019/AAER-4045.txt ADDED
@@ -0,0 +1,499 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+ UNITED STATES OF AMERICA
4
+ Before the
5
+ SECURITIES AND EXCHANGE COMMISSION
6
+
7
+ SECURITIES ACT OF 1933
8
+ Release No. 10636 / May 3, 2019
9
+
10
+ SECURITIES EXCHANGE ACT OF 1934
11
+ Release No. 85767 / May 3, 2019
12
+
13
+ ACCOUNTING AND AUDITING ENFORCEMENT
14
+ Release No. 4045 / May 3, 2019
15
+
16
+ ADMINISTRATIVE PROCEEDING
17
+ File No. 3-19156
18
+
19
+
20
+
21
+ In the Matter of
22
+
23
+ GT ADVANCED
24
+ TECHNOLOGIES INC.,
25
+
26
+ Respondent.
27
+
28
+
29
+ ORDER INSTITUTING CEASE-
30
+ AND-DESIST PROCEEDINGS
31
+ PURSUANT TO SECTION 8A
32
+ OF THE SECURITIES ACT OF
33
+ 1933 AND SECTION 21C OF
34
+ THE SECURITIES EXCHANGE
35
+ ACT OF 1934, MAKING
36
+ FINDINGS, AND IMPOSING A
37
+ CEASE-AND-DESIST ORDER
38
+
39
+ I.
40
+
41
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-
42
+ and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act
43
+ of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange
44
+ Act”), against GT Advanced Technologies Inc. (“GT” or “Respondent”).
45
+
46
+ II.
47
+
48
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
49
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
50
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
51
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
52
+ herein, except as to the Commission’s jurisdiction over Respondent and the subject matter of these
53
+ proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease-
54
+ and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of
55
+ 2
56
+ the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order
57
+ (“Order”), as set forth below.
58
+
59
+ III.
60
+
61
+ On the basis of this Order, and Respondent’s Offer, the Commission finds1 that:
62
+ Summary
63
+
64
+ 1. This matter involves accounting misconduct and material misrepresentations by GT
65
+ Advanced Technologies Inc. (“GT”) in connection the company’s second quarter Forms 10-Q for
66
+ 2014 concerning a supply contract and debt agreement that GT entered into with Apple, Inc.
67
+ (“Apple”) in October 2013. The supply agreement required GT to manufacture large scale
68
+ “sapphire glass” for use by Apple as cover screens for its next generation iPhone in a facility leased
69
+ from Apple. The debt agreement required Apple to advance to GT $578 million in four
70
+ installments with each installment payment being contingent on GT meeting certain quality and
71
+ quantity milestones. Further, GT was to repay the debt to Apple by delivering sapphire glass. The
72
+ relationship with Apple was extremely high profile for the company, material to GT’s revenue and
73
+ reported liabilities and how its stock was valued, and closely followed by analysts.
74
+ 2. By April 25, 2014, GT’s CEO, Thomas Gutierrez (“Gutierrez”), and other officials
75
+ were aware that GT failed to meet the required quantity, quality, and delivery standards, including
76
+ a “fourth milestone” in the debt agreement. GT knew that Apple had withheld its fourth
77
+ installment payment of $139 million due to that failure. In connection with quarterly filing for the
78
+ first quarter 2014, GT failed to disclose its performance failures under the contracts, resulting in
79
+ Apple not making the fourth milestone payment. The company’s failure to meet the fourth
80
+ milestone gave Apple the right to call back $306 million in GT’s debt from the prior installments
81
+ and, by the second quarter 2014, would have required GT to recognize the debt as current and not
82
+ long-term debt. The “current” debt reclassification would have had an immediate, material impact
83
+ on GT’s liquidity and status as a going concern. Had GT properly classified the Apple debt as
84
+ current, its current liabilities would have increased from $393.5 million to $700.2 million. The
85
+ accelerated repayment obligation of $306.7 million would have affected GT’s liquidity and status
86
+ as a going concern because GT’s second quarter working capital was only $155.6 million. For the
87
+ second quarter, the misclassification of the Apple debt caused GT to overstate working capital by
88
+ $306.7 million, or by 200%, and to understate current liabilities by $306.7 million or 43%.
89
+ 3. In order to avoid recognizing the debt as current, GT, without reasonable basis,
90
+ formed a position that Apple was in breach of a lease agreement covering a facility used to produce
91
+ sapphire and, as a result of Apple’s purported breach, GT was released from its performance and
92
+ milestone obligations to Apple under the debt agreement. In the view of GT, under these
93
+
94
+ 1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other
95
+ person or entity in this or any other proceeding.
96
+
97
+ 3
98
+ circumstances, Apple could no longer call back the debt, allowing the company to continue to
99
+ classify the debt as long-term.
100
+ 4. During an August 5, 2014 earnings call in connection with GT’s quarterly financial
101
+ reporting for its second quarter, Gutierrez represented on the call that GT expected to hit
102
+ performance targets and receive the fourth installment payment from Apple by October 2014. The
103
+ statement was misleading and created a false impression regarding the relationship between the
104
+ parties and GT’s performance under the contract. Gutierrez failed to disclose to investors or Apple
105
+ that GT had taken the internal position that Apple breached the lease and considered itself excused
106
+ from performing under the debt agreement. This position severely jeopardized, if not eliminated,
107
+ any reasonable expectation by GT that Apple would pay the fourth installment payment. In
108
+ addition, prior to the earnings call, neither Gutierrez nor the company disclosed that GT had
109
+ missed the fourth milestone in April, and continued in a state of failed performance in the months
110
+ that had elapsed. Apple also had not agreed to pay GT the fourth installment payment.
111
+ 5. In connection with GT’s disclosure of sources of cash, liquidity, backlog, and EPS
112
+ projections, GT included unsupported sales projections for sales of sapphire glass furnaces. The
113
+ projections assumed future sales despite several indications to GT that these sales were unrealistic,
114
+ including that Apple refused to authorize the sales and that GT’s prospective customers were
115
+ unable to commit to purchase orders.
116
+ 6. Within eight weeks of the second quarter filing and earnings calls, GT filed for
117
+ bankruptcy under Chapter 11 of the Bankruptcy Code, resulting in significant investor harm.
118
+ Respondent
119
+ 7. GT Advanced Technologies Inc., during the relevant period, was a New
120
+ Hampshire-based diversified technology company that provided crystal growth equipment and
121
+ services for the global, solar, LED and electronics industries. GT’s common stock was registered
122
+ with the Commission pursuant to Section 12(b) of the Exchange Act and its shares were listed on
123
+ the NASDAQ until they were removed from listing on December 11, 2014. As of June 28, 2014,
124
+ there were approximately 138 million shares of common stock outstanding with a total market
125
+ capitalization of approximately $434 million. On October 6, 2014, GT filed for reorganization
126
+ under Chapter 11 of the Bankruptcy Code. GT continued its operations during the bankruptcy
127
+ proceedings and exited the bankruptcy pursuant to a court-approved plan on March 17, 2016, in
128
+ which all equity interests were extinguished. GT Advanced Technologies Inc. is privately-held
129
+ with new officers and directors, and is owned by former senior debt holders and new investors.
130
+ Currently, the company provides polysilicon and crystal growth technologies, and produces crystal
131
+ materials.
132
+ Facts
133
+ 8. On October 31, 2013, GT entered into multiple agreements with Apple and parties
134
+ related to Apple, including a Statement of Work (“supply agreement”), Prepayment Agreement
135
+ (“debt agreement”), and Lease Agreement (“lease agreement”). Gutierrez, with other GT
136
+ executives, negotiated the contracts.
137
+ 4
138
+ 9. The agreements required GT to operate 2,090 “Advanced Sapphire Furnaces”
139
+ (“ASF furnaces”) with capability to produce 262kg sapphire “boules,” or a synthetic cylindrical
140
+ mass of sapphire grown in a furnace, to supply a minimum of 56 million millimeters of sapphire in
141
+ 2014. The contracts with Apple required production of an unprecedented amount of sapphire in
142
+ boules that were over twice the size of boules GT had previously produced. Given the magnitude
143
+ of the production obligations and high profile counter-party, the Apple contract was a game-
144
+ changing event for GT.
145
+ 10. To accommodate the scale of sapphire manufacturing, Apple leased a facility in
146
+ Arizona, known as the “Mesa facility” to GT pursuant to a lease agreement.
147
+ 11. The parties also signed a supply contract, which specified the amounts of sapphire
148
+ GT was to produce, and the price Apple would pay for it. The supply agreement also contained an
149
+ exclusivity provision that limited GT’s future ASF furnace sales to customers already in its
150
+ backlog or customers that did not produce sapphire glass for consumer devices, which could be
151
+ deemed Apple’s competitors.
152
+ 12. The debt agreement required GT to achieve certain technical quality and quantity
153
+ metrics in order to receive each of four prepayments from Apple. Each milestone required GT to
154
+ produce 262kg boules that contained increasing percentages of material suitable for use by Apple.
155
+ In exchange, Apple agreed to pay GT $578 million in four installments, or “prepayments,” based
156
+ upon GT reaching each of the four milestones. The debt agreement also required GT to: repay
157
+ prepayments through the delivery of sapphire beginning in 2015; use Apple’s prepayments to
158
+ purchase 2,036 ASF furnaces to be used at an Arizona facility; and retrofit 54 ASF furnaces to be
159
+ used in a facility that GT already maintained in Massachusetts.
160
+ 13. Significantly, the debt agreement provided Apple the right to cancel future
161
+ milestone prepayments and accelerate GT’s repayment obligations on already-received amounts if
162
+ GT failed to meet any technical quality and quantity milestone.
163
+ Apple’s Installment Payments to GT
164
+ 14. On November 15, 2013, Apple made the first milestone payment to GT which was
165
+ due fifteen days after contract signing and did not have any associated milestone requirements.
166
+ 15. By December 2013, just weeks after execution of the debt agreement, GT could not
167
+ meet the second milestone requirement, causing Apple to withhold its second prepayment that was
168
+ due on December 30, 2013 until January 23, 2014.
169
+ 16. As of that time, Apple had not completed, by the contractual deadline, the first
170
+ phase of construction of the Mesa Arizona manufacturing facility, which impacted GT’s ability to
171
+ achieve the second milestone requirements by the original deadline. The parties, however, agreed
172
+ to amend the debt agreement to loosen some restrictions and provide GT a better chance of
173
+ meeting its future milestone requirements, including by providing GT more time to meet the third
174
+ milestone and leniency with regard to producing usable sapphire. GT never disclosed the
175
+ amendment to the debt agreement, dated January 23, 2014, in a Form 8-K or in any periodic filing.
176
+ 5
177
+ 17. The successful growth of a sapphire boule required a constant supply of electrical
178
+ power and a carefully regulated flow of cooling water at precise moments in the boule growth
179
+ process. A failure in the supply of electrical power or cooling water could destroy some or all of
180
+ the sapphire boules then in the growth process. In the first two quarters of 2014, interruptions in
181
+ the supply of power and water, referred to as “facilities events,” unexpectedly occurred on some
182
+ occasions, which destroyed sapphire boules that were then in the growth process.
183
+ 18. On April 3, 2014, Apple paid the third installment. As to the fourth installment of
184
+ $139 million, GT had a deadline of April 25, 2014 to meet the milestone requirements.
185
+ 19. As the April 25th deadline approached and then passed, GT failed to meet the fourth
186
+ milestone requirements. In connection with its first quarter Form 10-Q filing, GT failed to disclose
187
+ its failure to meet the performance requirements by the April 25th deadline and that Apple had not
188
+ made the fourth payment as a result.
189
+ 20. Apple, in fact, never made the $139 million payment or provided GT with a waiver
190
+ of the obligation to meet the fourth milestone. Further, although the parties discussed the
191
+ possibility of an amendment to the fourth milestone requirement, the terms for an amended
192
+ agreement were never agreed upon and the parties never executed a second amendment to the debt
193
+ agreement.
194
+ GT’s Failure to Meet Obligations Under the Contract
195
+
196
+ 21. From nearly the start of the contract, GT was unable to meet required delivery and
197
+ quality standards under the contract. Among other problems, GT had difficulty scaling the
198
+ sapphire “recipe” to produce 262 kg boules, and experienced quality problems, including cracks,
199
+ structural, and cosmetic defects that caused the material to fail to comport with Apple’s
200
+ specifications. Gutierrez received regular reports concerning the sapphire project and received
201
+ board materials detailing GT’s failure to scale the sapphire “recipe” to produce larger boules while
202
+ maintaining quality standards suitable for use by Apple. As reflected in a document presented to
203
+ GT’s board on January 16, 2014, for example, Apple was “alarmed” that 75% of GT’s boules were
204
+ cracked.
205
+ 22. GT also experienced cooling water and power interruptions at the facility. On
206
+ February 23, 2014 and March 8, 2014, process cooling water interruptions took place, damaging
207
+ boules that were then in production. Power interruptions occurred on April 22, 2014, and July 22,
208
+ 2014, which similarly damaged boules that were in production. Gutierrez knew about the power
209
+ and water interruptions.
210
+ 23. In May 2014, an Apple supply executive warned Gutierrez by text that the low
211
+ quantity of sapphire produced was a “major problem.” By June, the Apple supply executive
212
+ emailed Gutierrez that he had “extremely limited confidence” that GT could produce even 33
213
+ million millimeters of sapphire in 2014 “based on GT’s inability to date to track factory
214
+ performance” and that GT’s “de-commitments have to stop.”
215
+ 6
216
+ 24. Given the production difficulties, throughout 2014, GT continually revised its
217
+ sapphire production projections downward. By June 3, 2014, as reflected in an internal supply
218
+ review shared with Gutierrez, GT could not meet its contractual obligation to produce 56 million
219
+ millimeters of sapphire in 2014. In July, Apple had expressly advised Gutierrez that, due to the
220
+ production failures, Apple would not use sapphire glass for its iPhone 6 launch.
221
+ 25. By July, as reflected in emails, GT’s Chief Technology Officer informed Gutierrez
222
+ that it would take at least six months from the summer of 2014 (January 2015 at the earliest) to fix
223
+ the known problems and produce over 200kg boules of acceptable quality to meet the fourth
224
+ milestone requirements set forth in the January amendment to the debt agreement. As a result, in
225
+ the summer of 2014, GT experienced cash flow problems from its inability to achieve the
226
+ milestones under the agreement.
227
+ 26. At the end of July, Gutierrez requested that Apple to make the fourth installment
228
+ payment notwithstanding the performance problems, but Apple rejected the request.
229
+ 27. Failing to meet the fourth milestone provided Apple with the ability to accelerate
230
+ the debt repayment requiring GT to pay back to Apple the installment payments.
231
+ GT’s Internal Position that Apple was in Breach
232
+ 28. On August 7, 2014, GT filed its second quarter 2014 form 10-Q. In the filing, GT
233
+ did not disclose that it had failed to meet supply and delivery obligations to Apple.
234
+ 29. The debt agreement clearly stated that “[i]f [GT] has not met the technology
235
+ specifications …to this Agreement by the deadlines [set forth in this Agreement] Apple shall be
236
+ entitled to cancel any subsequent Milestone Payment and to receive repayment within five (5)
237
+ Business Days of all or a portion of all previous Milestone Payments.”
238
+ 30. Under GAAP, GT treated Apple’s installment payments as debt, including
239
+ classifying 87.5% as long-term debt and 12.5% as short term. At the end of the first quarter 2014,
240
+ GT classified $16.8 million as current debt and $246.2 million as non-current debt and at the end
241
+ of the second quarter 2014, GT classified $43.9 million as current debt and $306.7 million as non-
242
+ current debt.
243
+ 31. By failing to comply with the fourth milestone prepayment metrics before the end
244
+ of the second quarter, GT violated the debt agreement. Under FASB Accounting Standards Board
245
+ Accounting Standards Codification 470 (“ASC 470”), given GT’s violation of the debt agreement,
246
+ GT was required to record the debt as a current liability, unless Apple waived the repayment for
247
+ more than a year, or Apple granted a grace period during which GT determined that it was
248
+ probable that it would cure the violation.
249
+ 32. As early as January 2014, GT was on notice that its ASC 470 obligation turned on
250
+ whether Apple had the mere “ability” to call the debt, regardless of whether Apple, in fact,
251
+ exercised that right. As reflected in a January 18, 2014 email, GT’s CFO at the time expressly
252
+ stated “[t]he accounting treatment on debt classification is not dictated by their declaration of
253
+ default, its (sic) if we determine they have the ability to issue such a default notice.” (Emphasis in
254
+ 7
255
+ the original). GT never sought a waiver from Apple, let alone obtained an actual waiver, and
256
+ Apple never modified its right to be repaid.
257
+ 33. During the second quarter, but prior to the filing of the Form 10-Q, GT’s external
258
+ auditor was concerned that GT’s failure to achieve the fourth milestone constituted a violation of
259
+ the debt covenant and gave Apple the ability to call back GT’s debt from the prepayments. As a
260
+ result, GT’s auditor looked at whether GT’s continued classification of the debt as long term
261
+ comported with GAAP. Had GT classified the prior Apple payments as current debt, this would
262
+ have had an immediate, material impact on its liquidity and status as a going concern because
263
+ Apple would have the right to call back $306 million in debt from the prior payments that GT
264
+ owed. In determining whether GT had to classify the debt as current or continue to record it as
265
+ long-term, GT’s external auditor discussed GT approaching Apple for a waiver, and discussed the
266
+ following language: “Apple waives all its rights under the Prepayment Agreement to require
267
+ repayment of Milestone Payments previously paid to GT based on GT not meeting the Milestones
268
+ as described in the January 17, 2014 Amendment to the Prepayment Agreement.” Similarly, GT’s
269
+ then CFO encouraged Gutierrez to directly approach Apple and seek a waiver. However, in a June
270
+ 18th email to Gutierrez, GT’s then Chief Operating Officer advised him that “this is an issue of
271
+ how we deal with [the external auditor] and [the CFO] learning how to keep him in a box.”
272
+ 34. As a result of GT’s failure to obtain a waiver, GT’s General Counsel, drafted an
273
+ opinion shared with GT’s auditor that reflected that GT’s failure to meet the fourth milestone
274
+ prepayment metrics did not cause acceleration of the prepayment debt. Instead, GT formulated an
275
+ “approach” that avoided the classification of the debt as current by taking the position that Apple
276
+ was in breach of the contract.
277
+ 35. On July 7, 2014, Gutierrez requested by email that Apple confirm that the parties
278
+ were “postponing establishing revised criteria for the 4th milestone until Q4.” Apple responded
279
+ the following day, stating: “Correct: we are postponing our discussions with respect to the 4th
280
+ prepayment milestone.” GT sent this exchange to its external auditor. Gutierrez, however, did not
281
+ send to Apple the language respecting waiver that GT’s CFO had proposed.
282
+ 36. Without being able to provide evidence of a waiver from Apple, GT formed a
283
+ position that Apple was in breach of a lease agreement because, in GT’s view, Apple had not met
284
+ certain power and water specifications in the lease, and, as a result, GT was released from its
285
+ obligations to meet the performance milestones under the debt agreement and could not be deemed
286
+ to have violated the debt covenant. On the basis of this new position, GT continued to record the
287
+ debt as long-term.
288
+ 37. As GT knew or should have known, the letter was not supported by facts known to
289
+ the company at the time and, thus, its debt was improperly recorded as long-term debt.
290
+ Specifically, the project reports reflected that the parties had resolved the electrical and water
291
+ design issues by May 2014, but GT did not disclose this fact to its auditor. Moreover, GT took the
292
+ position that Apple was in breach without providing Apple with notice of the breach, which was a
293
+ requirement under the lease.
294
+ 8
295
+ 38. Further, the debt agreement conditioned Apple’s earlier installment payments on
296
+ GT’s acknowledgement that Apple was not in breach of the lease. The agreement expressly states
297
+ that at the time of each installment payment, the parties agree that “there are no ongoing disputes
298
+ under the Facility Lease Agreement which have a material impact on the use of the manufacturing
299
+ facility to be located in Mesa, AZ that Apple is purchasing and developing (the “Mesa Facility”)
300
+ for its intended purpose.” Thus, GT knew or should have known that its position that Apple was in
301
+ breach was inconsistent with the terms upon which GT received three prior installment payments
302
+ from Apple.
303
+ 39. Gutierrez was aware of GT’s position that Apple was in breach of the lease
304
+ agreement. Gutierrez was also aware that GT did not disclose this view to GT’s investors.
305
+ 40. GT failed to devise and maintain a system of internal accounting controls
306
+ sufficient to provide reasonable assurance that its debt classification complied with GAAP.
307
+ 41. Had GT properly classified and recorded the Apple debt as current, its current
308
+ liabilities would have increased from $393.5 million to $700.2 million. The accelerated repayment
309
+ obligation of $306.7 million would have affected GT’s liquidity and status as a going concern
310
+ because GT’s second quarter working capital was only $155.6 million. For the second quarter, the
311
+ misclassification of the Apple debt caused GT to overstate working capital by $306.7 million, or
312
+ by 200%, and to understate current liabilities by $306.7 million or 43%.
313
+ GT’s False and Misleading Second Quarter Earnings Calls and Filing
314
+ 42. On August 5, Gutierrez as the CEO, held an analyst call, disclosing that GT
315
+ expected Apple to pay the fourth installment by October 2014. Specifically, Gutierrez stated on
316
+ the call that: “[t]he fourth prepayment from Apple is contingent upon the achievement of certain
317
+ operational targets by GT. GT expects to hit these targets and receive the final $139 million
318
+ prepayment by the end of October 2014.” On August 13, Gutierrez held another analyst call where
319
+ he similarly stated that “[w]e have indicated that we expect our final payment in the October time
320
+ frame. I wouldn't say that if I didn't believe it and my conviction in terms of the long-term
321
+ importance of the business to GT remains intact.”
322
+ 43. In the days prior to the second quarter filing, Gutierrez sent Apple a draft of various
323
+ proposed second quarter disclosures, including proposed disclosure for GT’s second quarter
324
+ earnings release, which stated “[t]he 4th and final prepayment from Apple, which is tied to
325
+ achievement of certain operational targets, under GT’s control in Mesa, is now expected to be paid
326
+ in the September/October timeframe.” In response, on August 1, 2014, Apple informed Gutierrez
327
+ and two other GT officials that the disclosure was “Not ok” and that the disclosure was
328
+ “ambiguous about whether it is GT’s or Apple’s expectation to pay it in that time-frame.” Apple
329
+ further requested that GT rephrase the disclosure “to something like ‘GT expects to [meet those
330
+ targets] [receive the prepayment] in the September/October timeframe’ … not ‘is now expected to
331
+ be paid’.”
332
+ 44. During this email exchange or any subsequent communication, GT and Gutierrez
333
+ did not raise with Apple that GT took the position that Apple breached the lease agreement, which
334
+ 9
335
+ excused GT from performing under the contracts, including meeting the fourth milestone of the
336
+ debt agreement.
337
+ 45. GT’s disclosure on the earnings call, through its CEO, was misleading and false
338
+ given that the public was unaware that GT took the position that Apple was in breach (and thus GT
339
+ was released from its obligations) and painted a misleading picture of GT’s relationship with Apple
340
+ and GT’s performance under the contract. This position severely jeopardized any reasonable
341
+ expectation by GT that Apple would pay the fourth installment payment. In this regard, under the
342
+ contract terms, Apple could refuse to pay GT if there were lease disputes. In addition, GT’s
343
+ expectation of receiving the fourth payment was undermined by its repeated failure to meet
344
+ performance milestones. At a minimum, the breach position called into question whether either
345
+ party had any ongoing obligations under the contract.
346
+ 46. GT disclosed in the Form 10-Q for the second quarter of 2014 that: “We have not
347
+ received the fourth prepayment amount under the Prepayment Agreement and there can be no
348
+ guarantee that we will satisfy the technical and performance metrics necessary to receive such
349
+ prepayment amount in the near future, or at all.” Gutierrez’s statements on the earnings call,
350
+ however, were inconsistent with facts known to GT, including that: GT had already missed the
351
+ April 25 milestone date and remained in a state of failed performance on production of sapphire
352
+ glass for over three months by the time of the call; GT’s failures could not be rectified until
353
+ January 2015 at the earliest; and the parties had not determined the terms of a future amendment or
354
+ executed an amendment.
355
+ 47. Apple was concerned that GT’s statement on the earnings call was misleading and
356
+ inconsistent with GT’s deficient performance under the contract. For example, in an internal
357
+ Apple exchange, the senior-most Apple executive overseeing the GT contract stated to his
358
+ colleagues: “I feel like we got sold a bit of a story by Tom [Gutierrez]. It was all doom and gloom
359
+ when he talked to us and how he needed our help to stay alive, then he ups his earnings guidance
360
+ for the year on the call.” The Apple supply executive responded “I am concerned about his
361
+ earnings (the message was too positive).”
362
+ 48. GT’s statement on the earnings call concerning the fourth installment payment was
363
+ material. Several analysts who covered GT’s stock, for example, noted GT’s expectation that
364
+ Apple would make the fourth installment payment as a positive development.
365
+ 49. In its Form 10-Q for the second quarter 2014, GT also failed to disclose additional
366
+ material facts that would have been material to investors, especially in light of the misleading
367
+ statements on the earnings calls. These include: (a) the nature and extent of its sapphire
368
+ manufacturing difficulties; (b) the lack of progress against its supply commitment; (c) GT’s failure
369
+ to meet the fourth milestone and ability to cure the situation for several months past the April
370
+ deadline; (d) the debt agreement had been already amended once due to GT’s failure to meet the
371
+ second milestone; (e) GT had not met sapphire and supply and delivery obligations; and (f) power
372
+ failures represented not just a material risk, but a material event that had actually occurred.
373
+ 10
374
+ GT’s Second Quarter Liquidity, Backlog, and 2014 EPS Estimate
375
+
376
+ 50. In connection with the second quarter Form 10-Q filing, GT’s external auditor
377
+ became concerned about GT’s cash flow, and for the first time, requested a liquidity analysis. In
378
+ addition, GT held debenture notes that included a covenant for default for inability to pay $100
379
+ million in indebtedness. If GT defaulted on the Apple debt, the company faced significant risk of
380
+ cross-defaults under these debenture notes.
381
+ 51. In response, GT, provided the external auditor with a liquidity analysis that
382
+ included inaccurate assumptions concerning its ability to sell: (1) $275 million in ASF furnaces to
383
+ non-Apple customers; and (2) 25 million millimeters of sapphire to Apple for $232 million. These
384
+ assumptions would result in GT ending the year with a cash balance of between $267 million and
385
+ $424 million.
386
+ 52. GT relied in large part on Gutierrez’s internal projections that GT could achieve its
387
+ 2014 ASF sales goals by selling in the second half of the year either 450 ASF’s to two Apple
388
+ suppliers or to a Taiwanese company. Based on the unsupported liquidity analysis, GT disclosed
389
+ in its second quarter Form 10-Q that it had “sufficient” cash to satisfy its commitments and
390
+ requirements for the next twelve months. Gutierrez’s projected furnace sales also provided, in
391
+ part, the basis for GT’s non-GAAP EPS guidance estimate of $0.12-$0.18 to be misleading as
392
+ disclosed in its second quarter earnings release attached to Form 8-K.
393
+ 53. GT’s projections incorporated in GT’s liquidity analysis were unsupported, unduly
394
+ optimistic, and without reasonable basis. GT relied on these projections to assess revenue of
395
+ approximately $236 million and to maintain its books and records.
396
+
397
+ 54. As to the potential sales to the two Apple suppliers, Apple had offered on July 30,
398
+ 2014, to “approach [two of its suppliers] with an offer to purchase 450 furnaces for their facilities”
399
+ to be “exclusively used for Apple projects.” Prior to the August 5, 2014 earnings call, Apple had
400
+ only given to Gutierrez the names of the sales contacts and informed him they had both been told
401
+ that “Apple is interested in [the two suppliers] expanding their sapphire growth capacity to reduce
402
+ parts pricing.” At the time of the filing, GT representatives had not yet met with either of the two
403
+ suppliers. Communications with the suppliers never advanced to the stage of completing non-
404
+ disclosure agreements, a necessary first step for any negotiations.
405
+
406
+ 55. As to the potential sale of 447 ASF to the Taiwanese customer, GT made the
407
+ representations despite the fact that these projected sales would violate the exclusivity provisions
408
+ of the Apple agreements with Apple and GT did not have permission from Apple to close on these
409
+ sales. As reflected in an August 3, 2014 email from Apple to Gutierrez, Apple specifically
410
+ declined to give permission to GT to sell furnaces to a potentially new customer in Taiwan, stating
411
+ “Tom, we are not going to waive the terms for the 983 [the total backlog] furnaces.”
412
+ 56. GT knew or should have known that the market for ASF furnaces was limited. GT
413
+ received industry analysis reflecting that demand for ASF furnaces was based on Apple using GT’s
414
+ sapphire glass in its iPhone screens. By the time of the liquidity analysis, GT was aware that
415
+ 11
416
+ Apple would not announce an iPhone with a sapphire screen in September 2014 and, thus, market
417
+ participants would have little interest in new ASF furnace purchases.
418
+ 57. In July, at Gutierrez’s direction, GT increased the forecasted ASF furnace sales
419
+ from its original internal estimate of $130 million to $275 million, despite red flags indicating that
420
+ the forecasts were unrealistic. In this regard, ASF furnace customers presented limited sales
421
+ opportunities and discussions with potential Apple suppliers had not begun. In fact, Gutierrez
422
+ acknowledged in a July 30, 2014 email to Apple that five of GT’s six ASF furnace “backlog”
423
+ customers (that were in its pipeline at the time the Apple contract was executed) lacked the
424
+ capacity to purchase furnaces in 2014. The remaining client’s interest represented only about $65
425
+ million in potential sales.
426
+
427
+ 58. GT’s cash analysis included the assumption that GT would receive the fourth
428
+ installment, despite Apple never providing such assurances and contrary to the legal opinion
429
+ drafted by its General Counsel. As a result of these unsupported assumptions, in its second quarter
430
+ 2014 Form 10-Q, GT inaccurately stated that “existing cash, customer deposits and prepayment
431
+ installment proceeds will be sufficient to satisfy working capital requirements, commitments for
432
+ capital expenditures and other cash requirements for at least the next twelve months,” and “[GT]
433
+ will have sufficient cash resources to fund operations for at least the next twelve months.”
434
+ 59. Based on these unsupported assumptions, GT also overstated sapphire equipment
435
+ (ASF furnaces) backlog in its second quarter 2014 Form 10-Q and earnings release, attached to
436
+ Form 8-K. Most of the agreements in backlog were over 18 months old. Although GT had sales
437
+ agreements with the backlog customers, it did not have an expectation of delivering furnaces to
438
+ them in the second half of 2014. Although GT’s second quarter 2014 Form 10-Q stated that “our
439
+ order backlog as of any particular date should not be relied upon as indicative of our revenues for
440
+ any future period,” analysts typically regard it as an indication of the company’s sales prospects.
441
+ GT’s backlog disclosure was material given that several analysts covering GT’s stock specifically
442
+ referenced the backlog disclosure as a positive factor.
443
+
444
+ 60. On October 6, 2014, two months after filing its second quarter 2014 Form 10-Q,
445
+ GT filed voluntary petitions for reorganization under Chapter 11 and filed a Form 8-K in which the
446
+ company stated that as of September 29, 2014 it had approximately $85 million of cash compared
447
+ to $333 million of cash at June 28, 2014.
448
+ The Offer and Sale of Securities
449
+
450
+ 61. During the relevant time, GT offered and sold securities pursuant to a Form S-8 the
451
+ Company filed on April 20, 2012. During fiscal year 2014, GT received payment from stock option
452
+ exercises as a result of exercises and sales of stock by GT employees. GT’s Form S-8 filed in 2012
453
+ incorporated by reference GT’s subsequent periodic filings under the Exchange Act, including the
454
+ quarterly and current filings during fiscal year 2014.
455
+
456
+
457
+
458
+
459
+ 12
460
+ Violations
461
+
462
+ 62. As a result of the conduct above, GT violated Sections 17(a)(2) of the Securities
463
+ Act, which makes it unlawful, in the offer or sale of securities, to obtain money or property by
464
+ means of any untrue statement of a material fact or any omission to state a material fact necessary
465
+ in order to make the statements made, in light of the circumstances under which they were made,
466
+ not misleading, and 17(a)(3) of the Securities Act, which, in the offer or sale of securities,
467
+ proscribes any transaction, practice or course of business which operates or would operate as a
468
+ fraud or deceit upon a purchaser of securities.
469
+ 63. As a result of the conduct described above, GT violated Section 13(a) of the
470
+ Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder, which requires issuers to file with
471
+ the Commission accurate current reports, which include such further information as may be
472
+ necessary to make the required statements not misleading.
473
+
474
+ 64. As a result of the conduct described above, GT violated Section 13(b)(2)(A) of the
475
+ Exchange Act, which requires issuers to “make and keep books, records, and accounts, which, in
476
+ reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
477
+ issuer” and Section 13(b)(2)(B) of the Exchange Act, which requires issuers to devise and maintain
478
+ a system of internal accounting controls sufficient to provide reasonable assurances that
479
+ transactions are recorded to permit the preparation of financial statements in conformity with
480
+ generally accepted accounting principles.
481
+
482
+ IV.
483
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
484
+ agreed to in Respondent’s Offer.
485
+
486
+ Accordingly, it is hereby ORDERED that:
487
+
488
+ Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act,
489
+ Respondent cease and desist from committing or causing any violations and any future violations of
490
+ Sections 17(a)(2) and (3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of
491
+ the Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder.
492
+
493
+ By the Commission.
494
+
495
+ Vanessa A. Countryman
496
+ Acting Secretary
497
+
498
+
499
+
raw/aaer/2019/AAER-4046.txt ADDED
@@ -0,0 +1,279 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+ 1
3
+
4
+ UNITED STATES OF AMERICA
5
+ Before the
6
+ SECURITIES AND EXCHANGE COMMISSION
7
+
8
+
9
+ SECURITIES EXCHANGE ACT OF 1934
10
+ Release No. 85819 / May 9, 2019
11
+
12
+ ACCOUNTING AND AUDITING ENFORCEMENT
13
+ Release No. 4046 / May 9, 2019
14
+
15
+ ADMINISTRATIVE PROCEEDING
16
+ File No. 3-19162
17
+
18
+
19
+ In the Matter of:
20
+
21
+ Telefônica Brasil S.A.,
22
+ :
23
+ Respondent.
24
+ ORDER INSTITUTING CEASE-AND-
25
+ DESIST PROCEEDINGS, PURSUANT TO
26
+ SECTION 21C OF THE SECURITIES
27
+ EXCHANGE ACT OF 1934, MAKING
28
+ FINDINGS, AND IMPOSING REMEDIAL
29
+ SANCTIONS AND A CEASE-AND-DESIST
30
+ ORDER
31
+ I.
32
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that
33
+ cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the
34
+ Securities Exchange Act of 1934 (“Exchange Act”), against Telefônica Brasil S.A. (“Telefônica
35
+ Brasil” or “Respondent”).
36
+ II.
37
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
38
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
39
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
40
+ Commission, or to which the Commission is a party, and without admitting or denying the
41
+ findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these
42
+ proceedings, which are admitted, Respondent consents to the entry of this Order Instituting
43
+ Cease-and-Desist Proceedings, Pursuant to 21C of the Securities Exchange Act of 1934, Making
44
+ Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth
45
+ below.
46
+
47
+ 2
48
+
49
+ III.
50
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that:
51
+ 1. These proceedings arise out of Telefônica Brasil’s violations of the internal
52
+ accounting controls and recordkeeping provisions of the Foreign Corrupt Practices Act of 1977
53
+ (the “FCPA”) [15 U.S.C. § 78m].
54
+ 2. As described below, Telefônica Brasil failed to devise and maintain sufficient
55
+ internal accounting controls over a hospitality program that the company hosted in connection
56
+ with the 2014 World Cup and 2013 Confederations Cup. In the context of this program,
57
+ Telefônica Brasil offered and provided tickets and hospitality to government officials who were
58
+ directly involved with, or in a position to influence, legislative actions, regulatory approvals, and
59
+ business dealings involving the company. In total, Telefônica Brasil provided World Cup tickets
60
+ and related hospitality to approximately 93 government officials and Confederations Cup tickets
61
+ and related hospitality to approximately 34 government officials.
62
+ 3. The payments for the tickets were not accurately reflected in Telefônica Brasil’s
63
+ books and records, and the company failed to devise and maintain a sufficient system of internal
64
+ accounting controls. This conduct arose in an environment in which the company failed to
65
+ adequately enforce its corporate antibribery and anticorruption policies.
66
+ 4. As a result, Telefônica Brasil violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the
67
+ Exchange Act.
68
+ Respondent
69
+ 5. Telefônica Brasil is a subsidiary of Telefónica S.A., a Spanish multinational
70
+ broadband and telecommunications provider with worldwide operations, and is the largest
71
+ telecommunications company in Brazil with headquarters in São Paulo. Telefônica Brasil’s
72
+ American Depositary Receipts are registered with the Commission pursuant to Section 12(b) of
73
+ the Exchange Act and traded on the New York Stock Exchange under the symbol “VIV.”
74
+ 6. Telefônica Brasil markets its mobile services under its Vivo brand. Telefônica Brasil
75
+ employs approximately 34,000 employees with revenues of approximately $14 billion as of
76
+ December 31, 2017.
77
+
78
+
79
+
80
+
81
+ 1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other
82
+ person or entity in this or any other proceeding.
83
+
84
+ 3
85
+
86
+ Facts
87
+ Telefônica Brasil’s World Cup Ticket Program
88
+
89
+ 7. In March 2012, the opportunity arose for Telefônica Brasil to purchase tickets for
90
+ the World Cup that would take place in Brazil in June and July 2014. Telefônica Brasil agreed to
91
+ purchase 1860 World Cup tickets from a FIFA vendor, for a total of approximately $5.1 million,
92
+ to be paid in three installments in 2012, 2013, and 2014. An internal memorandum by Telefônica
93
+ Brasil’s Marketing Director dated May 23, 2012, which sought approval for the purchase of the
94
+ tickets, described the purchase as being “for relationship-building activities with strategic
95
+ audiences.” An executive expense committee at Telefônica Brasil, comprising of senior
96
+ leadership at the company, approved the general purchase of the tickets. The paperwork seeking
97
+ internal approval to purchase these tickets included no mention of giving tickets to government
98
+ officials. However, it was known within the company that some of the tickets would be given to
99
+ government officials.
100
+
101
+ 8. Telefônica Brasil purchased the World Cup tickets and intended to pay for related
102
+ hospitality at an average cost per guest of approximately $3,204, of which $2,750 comprised the
103
+ cost of the tickets. The company allocated these tickets to its various departments, including
104
+ approximately 10 percent of the tickets to the Institutional Relations Department (“IR
105
+ Department”), which interacted with the Brazilian government and foreign governments.
106
+ Telefônica Brasil, primarily through the IR Department, gave a total of 194 World Cup tickets to
107
+ 93 government officials (in some cases, more than one ticket was given to an official so that he
108
+ or she could invite friends or family members). The total value of tickets and related hospitality
109
+ given to these government officials amounted to $621,576.
110
+
111
+ 9. Most of the tickets given to government officials were given to individuals who
112
+ were significant to the company’s business interests, including federal congressmen and
113
+ senators, mayors, and other government officials. A small number of personnel from foreign
114
+ embassies who were commercial customers of Telefônica Brasil, including one ambassador, also
115
+ received tickets. In selecting ticket recipients, management looked at the possible benefit to the
116
+ company and at opportunities to build relationships with important officials. In an internal IR
117
+ Department email dated May 27, 2014, an IR Manager noted that in creating the lists of
118
+ suggested guests, he took “into account the importance of the actions that each guest has already
119
+ effectively done in our favor.” The employee then suggested that certain government officials be
120
+ given tickets and outlined their roles in the Brazilian government. Among other examples, in a
121
+ June 4, 2014 email, an IR employee requested from an IR Manager a ticket for a federal
122
+ legislator’s chief of staff who “has opened many doors for us” and noted that there was further
123
+ legislative activity “going through the House and I will need his help.” Other June 2014 emails
124
+ reflect that a free trade tax zone official responsible for providing customs clearances was given
125
+ a ticket and asked for his “ongoing support” in receiving a customs clearance for a particular
126
+ invoice. A July 2014 email between IR Department employees suggested inviting two Brazilian
127
+ mayors but only if, during the telephone calls inviting them, the IT Department could raise with
128
+ them certain “legislative amendments” of importance to the company.
129
+
130
+
131
+ 4
132
+
133
+ Telefônica Brasil’s Confederations Cup Ticket Program
134
+
135
+ 10. In 2013, the year before the World Cup, Telefônica Brasil also purchased
136
+ Confederations Cup tickets and related hospitality for invited guests. The Confederations Cup is
137
+ a major soccer tournament that precedes the World Cup by one year and takes place in the same
138
+ country that is hosting the World Cup.
139
+
140
+ 11. In March and April 2013, Telefônica Brasil paid a FIFA vendor $428,219 for 240
141
+ tickets for the Confederations Cup which amounted to an average cost per ticket of
142
+ approximately $1,784. Telefônica Brasil also paid $312,226 for hospitality related to the
143
+ Confederations Cup. Taking both the cost of the tickets and hospitality into account, the average
144
+ cost per guest for the Confederations Cup amounted to approximately $3,085. As with the World
145
+ Cup, the company allocated these tickets to its various departments, including approximately 15
146
+ percent to the IR Department.
147
+
148
+ 12. Telefônica Brasil, primarily through the IR Department, gave a total of 38
149
+ Confederations Cup tickets to 34 government officials. The total value of tickets and related
150
+ hospitality given to these government officials amounted to $117,230. Confederations Cup
151
+ tickets were given to government officials who were significant to the company’s business
152
+ interests, including federal congressmen and various government ministry officials.
153
+
154
+ Telefônica Brasil Lacked Internal Accounting Controls
155
+
156
+ 13. As with its parent company, Telefônica Brasil had a general code of ethics that
157
+ explicitly prohibited offering or accepting gifts, hospitality, or other types of incentives “which
158
+ may reward or influence a business decision,” as well as a policy that donations would not be
159
+ made if linked with political activity.
160
+
161
+ 14. However, Telefônica Brasil lacked internal accounting controls sufficient to
162
+ implement or maintain these policies and prevent giving things of value, like World Cup tickets,
163
+ to government officials where such gifts might influence or reward an official decision. As a
164
+ result, with the approval of senior managers, the company ended up offering such tickets and
165
+ hospitality to government officials who were directly involved with, or in a position to influence,
166
+ regulatory matters, legislation, and other business efforts of benefit to Telefônica Brasil.
167
+
168
+ 15. In implementing internal accounting controls over gifts, Telefônica Brasil
169
+ management focused on company employees accepting tickets and hospitality, as opposed to the
170
+ company offering tickets and hospitality to others, including government officials. Although the
171
+ broad policy prohibition was clear, and certain individuals inquired about its applicability, it was
172
+ not followed due to the lack of internal accounting controls, a compliance breakdown, and a
173
+ deficient internal audit function.
174
+
175
+
176
+
177
+ 5
178
+
179
+ Telefônica Brasil Improperly Accounted for its Purchase of World Cup and
180
+ Confederations Cup Tickets and Related Hospitality for Government Officials
181
+
182
+ 16. The total cost for the World Cup ticket purchase was approximately $5.1 million
183
+ and was paid in three installments in 2012, 2013, and 2014. Telefônica Brasil booked the first
184
+ two installment payments for the World Cup tickets as “Publicity Institutional Events” and the
185
+ third installment payment as “Advertising & Publicity” (the third payment was not also booked
186
+ as “Publicity Institutional Events” because of a change in accounting codes at the company). It
187
+ booked the hospitality provided for the World Cup as “Advertising & Publicity.”
188
+
189
+ 17. The total cost for the Confederations Cup ticket purchase was approximately
190
+ $428,000 and was paid in two installments in 2013. Telefônica Brasil booked the two installment
191
+ payments for the Confederations Cup tickets as “Publicity Institutional Events” and booked the
192
+ hospitality provided for the event as “Advertising & Publicity.”
193
+
194
+ 18. Telefônica Brasil failed to properly characterize the purchase of tickets and
195
+ related hospitality that were given to government officials. It recorded the purchases and
196
+ hospitality as being for general advertising and publicity purposes when in fact those tickets and
197
+ related hospitality were given to government officials. As such, Telefônica Brasil’s books and
198
+ records did not, in reasonable detail, accurately and fairly reflect the transactions and
199
+ dispositions of the company’s assets.
200
+
201
+ 19. As a result of the conduct described above, Telefônica Brasil violated Sections
202
+ 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Telefônica Brasil violated Section 13(b)(2)(A)
203
+ of the Exchange Act by improperly recording the purchase of tickets and hospitality that were
204
+ given to government officials. Telefônica Brasil also violated Section 13(b)(2)(B) by failing to
205
+ devise and maintain sufficient internal accounting controls to detect and prevent the making of
206
+ improper payments to foreign officials.
207
+
208
+ Telefônica Brasil’s Remedial Efforts and Cooperation
209
+
210
+ 20. In determining to accept the Offer, the Commission considered remedial acts
211
+ promptly undertaken by Respondent and cooperation afforded the Commission staff. Telefonica
212
+ Brasil’s remediation included enhancing its internal accounting controls and compliance
213
+ functions, and adopting a new anti-corruption policy and compliance structure. Telefônica
214
+ Brasil’s cooperation included timely sharing of facts developed during the course of an internal
215
+ investigation by its board and voluntarily producing and translating documents.
216
+
217
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
218
+ agreed to in Respondent’s Offer.
219
+ Accordingly, it is hereby ORDERED that:
220
+ A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from
221
+ committing or causing any violations and any future violations of Sections 13(b)(2)(A) and
222
+
223
+ 6
224
+
225
+ 13(b)(2)(B) of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(A) and
226
+ 78m(b)(2)(B)].
227
+ B. Respondents shall, within 10 days of the entry of this Order, pay a civil money
228
+ penalty in the amount of $4,125,000 to the Securities and Exchange Commission for transfer to
229
+ the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If
230
+ timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.
231
+
232
+ Payment must be made in one of the following ways:
233
+
234
+ (1) Respondent may transmit payment electronically to the Commission, which
235
+ will provide detailed ACH transfer/Fedwire instructions upon request;
236
+
237
+ (2) Respondent may make direct payment from a bank account via Pay.gov
238
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
239
+
240
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
241
+ States postal money order, made payable to the Securities and Exchange
242
+ Commission and hand-delivered or mailed to:
243
+
244
+ Enterprise Services Center
245
+ Accounts Receivable Branch
246
+ HQ Bldg., Room 181, AMZ-341
247
+ 6500 South MacArthur Boulevard
248
+ Oklahoma City, OK 73169
249
+
250
+ Payments by check or money order must be accompanied by a cover letter identifying
251
+ Telefônica Brasil S.A. as a Respondent in these proceedings, and the file number of these
252
+ proceedings; a copy of the cover letter and check or money order must be sent to Charles Cain,
253
+ FCPA Unit Chief, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE,
254
+ Washington, DC 20549.
255
+
256
+ C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall
257
+ be treated as penalties paid to the government for all purposes, including all tax purposes. To
258
+ preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
259
+ Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any
260
+ award of compensatory damages by the amount of any part of Respondent’s payment of a civil
261
+ penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such
262
+ a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order
263
+ granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount
264
+ of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be
265
+ deemed an additional civil penalty and shall not be deemed to change the amount of the civil
266
+
267
+
268
+ 7
269
+
270
+ penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action”
271
+ means a private damages action brought against Respondent by or on behalf of one or more
272
+ investors based on substantially the same facts as alleged in the Order instituted by the
273
+ Commission in this proceeding.
274
+ By the Commission.
275
+
276
+
277
+ Vanessa Countryman
278
+ Acting Secretary
279
+
raw/aaer/2019/AAER-4047.txt ADDED
@@ -0,0 +1,185 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+
4
+ UNITED STATES OF AMERICA
5
+ before the
6
+ SECURITIES AND EXCHANGE COMMISSION
7
+
8
+ SECURITIES EXCHANGE ACT OF 1934
9
+ Release No. 85847 / May 13, 2019
10
+
11
+ ACCOUNTING AND AUDITING ENFORCEMENT
12
+ Release No. 4047 / May 13, 2019
13
+
14
+ ADMINISTRATIVE PROCEEDING
15
+ File No. 3-19163
16
+
17
+ In the Matter of
18
+
19
+ BRYAN B. LONG, CPA,
20
+ Respondent.
21
+
22
+
23
+
24
+
25
+ ORDER INSTITUTING PUBLIC
26
+ ADMINISTRATIVE PROCEEDINGS
27
+ PURSUANT TO RULE 102(e) OF THE
28
+ COMMISSION’S RULES OF PRACTICE,
29
+ MAKING FINDINGS, AND IMPOSING
30
+ REMEDIAL SANCTIONS
31
+
32
+
33
+ I.
34
+
35
+ The Securities and Exchange Commission (“Commission”) deems it appropriate and in the
36
+ public interest that public administrative proceedings be, and hereby are, instituted against Bryan
37
+ B. Long (“Respondent” or “Long”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of
38
+ Practice.1
39
+
40
+
41
+
42
+
43
+ 1 Rule 102(e)(3)(i) provides, in relevant part, that:
44
+
45
+ The Commission, with due regard to the public interest and without preliminary hearing,
46
+ may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has
47
+ been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his
48
+ or her misconduct in an action brought by the Commission, from violating or aiding and abetting
49
+ the violation of any provision of the Federal securities laws or of the rules and regulations
50
+ thereunder.
51
+ 2
52
+ II.
53
+
54
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
55
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
56
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
57
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
58
+ herein, except as to the Commission’s jurisdiction over him and the subject matter of these
59
+ proceedings, and the findings contained in Section III.5 below, which are admitted, Respondent
60
+ consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule
61
+ 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
62
+ Sanctions (“Order”), as set forth below.
63
+
64
+ III.
65
+
66
+ On the basis of this Order and Respondent’s Offer, the Commission finds that:
67
+
68
+ 1. Long, age 42, is and has been a certified public accountant licensed to practice in the
69
+ State of Virginia. Long was the Director of SEC Reporting at eBay, Inc. (“eBay”) from October 2013
70
+ to July 2015, and then at PayPal Holdings, Inc. (“PayPal”) from July 2015 to December 2015. Prior
71
+ to his employment at eBay and PayPal, Long worked for ten years at a prominent accounting and
72
+ auditing firm in a variety of roles related to auditing.
73
+
74
+ 2. eBay is a Delaware corporation headquartered in San Jose, California that owns
75
+ and operates, among other things, an online marketplace and, prior to July 17, 2015, PayPal’s digital
76
+ payments business. eBay’s common stock is registered with the Commission pursuant to Section
77
+ 12(b) of the Exchange Act and trades on the NASDAQ Global Select Market (symbol: EBAY). eBay
78
+ files periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act and related
79
+ rules thereunder. On July 17, 2015, eBay and PayPal separated into independent publicly traded
80
+ companies.
81
+
82
+ 3. PayPal is a Delaware corporation headquartered in San Jose, California that
83
+ operates a digital payment network. PayPal’s common stock is registered with the Commission
84
+ pursuant to Section 12(b) of the Exchange Act and trades on the NASDAQ Global Select Market
85
+ (symbol: PYPL). PayPal files periodic reports with the Commission pursuant to Section 13(a) of
86
+ the Exchange Act and related rules thereunder. Prior to July 17, 2015, PayPal was a subsidiary of
87
+ eBay.
88
+
89
+ 4. Xoom Corporation (“Xoom”) was a Delaware corporation headquartered in
90
+ San Francisco, California that provided international money transfer and remittances across a
91
+ number of cross-border corridors. Xoom’s common stock was registered with the Commission
92
+ pursuant to Section 12(b) of the Exchange Act and traded on the NASDAQ Stock Market (symbol:
93
+ XOOM). On July 1, 2015, PayPal and Xoom jointly announced that PayPal would acquire Xoom
94
+ for approximately $890 million net of cash. On November 12, 2015, PayPal’s acquisition of Xoom
95
+ closed. Xoom now operates as a separate service within PayPal.
96
+
97
+ 3
98
+ 5. On September 28, 2018, the Commission filed a complaint against Long in
99
+ SEC v. Bryan B. Long (Civil Action No. 18-CV-05973-EMC). On May 7, 2019, the court entered
100
+ an order permanently enjoining Long, by consent, from future violations of Sections 10(b) of the
101
+ Exchange Act and Rule 10b-5 thereunder. Long was also ordered to pay $35,842.49 in
102
+ disgorgement of profits gained as a result of the conduct alleged in the complaint, and $636.66 in
103
+ prejudgment interest; and a $35,842.49 civil money penalty.
104
+
105
+ 6. The Commission’s complaint alleged, among other things, that Long bought
106
+ speculative call options on Xoom stock based on material nonpublic information about PayPal’s
107
+ planned acquisition of Xoom that he learned in advance of the announcement of the deal. The
108
+ complaint alleged that Long first purchased over $10,500 of Xoom call options on May 20, 2015,
109
+ within five days of PayPal making its initial offer to acquire Xoom. The complaint alleged that after
110
+ Long received information that a deal could be announced in early July, he made a second purchase
111
+ of another $5,000 of Xoom call options on June 22, 2015, which were set to expire less than thirty
112
+ days after his purchase. After the market closed on July 1, 2015, PayPal’s acquisition of Xoom was
113
+ made public. The next morning, Xoom stock opened trading at $25.50 per share, a 52-week high,
114
+ and Long sold all of his Xoom options, reaping $35,842.49 in profits.
115
+
116
+ IV.
117
+
118
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to
119
+ impose the sanction agreed to in Respondent Doe’s Offer.
120
+
121
+ Accordingly, it is hereby ORDERED, effective immediately, that:
122
+
123
+ A. Long is suspended from appearing or practicing before the Commission as an
124
+ accountant.
125
+
126
+ B. After three years from the date of this order, Long may request that the
127
+ Commission consider his reinstatement by submitting an application (attention: Office of the
128
+ Chief Accountant) to resume appearing or practicing before the Commission as:
129
+
130
+ 1. a preparer or reviewer, or a person responsible for the preparation or
131
+ review, of any public company’s financial statements that are filed with the Commission (other
132
+ than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the
133
+ Securities Exchange Act of 1934). Such an application must satisfy the Commission that Long’s
134
+ work in his practice before the Commission as an accountant will be reviewed either by the
135
+ independent audit committee of the public company for which he works or in some other
136
+ acceptable manner, as long as he/she practices before the Commission in this capacity; and/or
137
+
138
+ 2. a preparer or reviewer, or a person responsible for the preparation or
139
+ review, of any public company’s financial statements that are filed with the Commission as a
140
+ member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act
141
+ of 1934. Such an application will be considered on a facts and circumstances basis with
142
+ respect to such membership, and the applicant’s burden of demonstrating good cause for
143
+ 4
144
+ reinstatement will be particularly high given the role of the audit committee in financial and
145
+ accounting matters; and/or
146
+
147
+ 3. an independent accountant.
148
+
149
+ Such an application must satisfy the Commission that:
150
+
151
+ (a) Long, or the public accounting firm with which he is associated, is
152
+ registered with the Public Company Accounting Oversight Board (“Board”) in accordance with
153
+ the Sarbanes-Oxley Act of 2002, and such registration continues to be effective;
154
+
155
+ (b) Long, or the registered public accounting firm with which he is
156
+ associated, has been inspected by the Board and that inspection did not identify any criticisms of
157
+ or potential defects in Long’s or the firm’s quality control system that would indicate that the
158
+ respondent will not receive appropriate supervision;
159
+ (c) Long has resolved all disciplinary issues with the Board, and has
160
+ complied with all terms and conditions of any sanctions imposed by the Board (other than
161
+ reinstatement by the Commission); and
162
+
163
+ (d) Long acknowledges his responsibility, as long as he appears or
164
+ practices before the Commission as an independent accountant, to comply with all requirements
165
+ of the Commission and the Board, including, but not limited to, all requirements relating to
166
+ registration, inspections, concurring partner reviews and quality control standards.
167
+
168
+ C. The Commission will consider an application by Long to resume appearing
169
+ or practicing before the Commission provided that his state CPA license is current and he
170
+ has resolved all other disciplinary issues with the applicable state boards of accountancy.
171
+ However, if state licensure is dependent on reinstatement by the Commission, the
172
+ Commission will consider an application on its other merits. The Commission’s review
173
+ may include consideration of, in addition to the matters referenced above, any other matters
174
+ relating to Long’s character, integrity, professional conduct, or qualifications to appear or
175
+ practice before the Commission as an accountant. Whether an application demonstrates
176
+ good cause will be considered on a facts and circumstances basis with due regard for
177
+ protecting the integrity of the Commission’s processes.
178
+
179
+ By the Commission.
180
+
181
+
182
+
183
+ Vanessa A. Countryman
184
+ Acting Secretary
185
+
raw/aaer/2019/AAER-4051.txt ADDED
@@ -0,0 +1,879 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+ UNITED STATES OF AMERICA
4
+ Before the
5
+ SECURITIES AND EXCHANGE COMMISSION
6
+
7
+
8
+ SECURITIES EXCHANGE ACT OF 1934
9
+ Release No. 86118 / June 17, 2019
10
+
11
+ ACCOUNTING AND AUDITING ENFORCEMENT
12
+ Release No. 4051 / June 17, 2019
13
+
14
+ ADMINISTRATIVE PROCEEDING
15
+ File No. 3-19203
16
+
17
+
18
+
19
+ In the Matter of
20
+
21
+ KPMG LLP,
22
+
23
+ Respondent.
24
+
25
+
26
+
27
+
28
+
29
+ ORDER INSTITUTING PUBLIC
30
+ ADMINISTRATIVE AND CEASE-AND-
31
+ AND- DESIST PROCEEDINGS PURSUANT TO
32
+ SECTIONS 4C AND 21C OF THE
33
+ SECURITIES EXCHANGE ACT OF 1934
34
+ AND RULE 102(e) OF THE
35
+ COMMISSION’S RULES OF PRACTICE,
36
+ MAKING FINDINGS, AND IMPOSING
37
+ REMEDIAL SANCTIONS AND A CEASE-
38
+ AND-DESIST ORDER
39
+
40
+
41
+ I.
42
+
43
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
44
+ administrative and cease-and-desist proceedings be, and hereby are, instituted against Respondent
45
+ KPMG LLP (“KPMG”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934
46
+ (“Exchange Act”) and Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of
47
+ Practice.2
48
+
49
+ 1 Section 4C provides, in relevant part, that:
50
+
51
+ The Commission may censure any person, or deny, temporarily or permanently, to any person the
52
+ privilege of appearing or practicing before the Commission in any way, if that person is found . . . (1)
53
+ not to possess the requisite qualifications to represent others; (2) to be lacking in character or integrity,
54
+ or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or
55
+ willfully aided and abetted the violation of, any provision of the securities laws or the rules and
56
+ regulations issued thereunder.
57
+
58
+ 2 Rule 102(e)(1)(ii) provides, in pertinent part, that:
59
+
60
+ 2
61
+ II.
62
+
63
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
64
+ of Settlement (“Offer”) that the Commission has determined to accept. Respondent admits the
65
+ facts set forth in Section III below, acknowledges that its conduct violated PCAOB Rule 3500T
66
+ and provides a basis for the Commission to impose remedies pursuant to Exchange Act Sections
67
+ 4C(a)(2) and (a)(3) and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice; admits
68
+ the Commission’s jurisdiction over it and the subject matter of these proceedings; and consents to
69
+ the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings
70
+ Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the
71
+ Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-
72
+ and-Desist Order (“Order”), as set forth below.
73
+
74
+ III.
75
+
76
+ On the basis of this Order and Respondent’s Offer, the Commission finds3 that:
77
+
78
+ SUMMARY
79
+
80
+ 1. This matter involves two separate courses of misconduct that resulted in violations
81
+ of the fundamental requirement that auditors act with integrity.
82
+ 2. First, from 2015 to 2017, now-former senior members of KPMG’s Audit Quality
83
+ and Professional Practice group (“AQPP” or “National Office”) – which is responsible for the
84
+ firm’s system of quality control – improperly obtained and used confidential information
85
+ belonging to the Public Company Accounting Oversight Board (“PCAOB” or “Board”) in an effort
86
+ to improve the results of the PCAOB’s annual inspections of KPMG audits. The information
87
+ obtained included lists of the specific audit engagements the PCAOB planned to inspect, the
88
+ criteria the PCAOB used to select engagements for inspection, and the focus areas of the
89
+ inspections. The personnel sought the information because the firm had experienced a high rate of
90
+ audit deficiency findings in prior PCAOB inspections and had made improving its inspection
91
+ results a priority.
92
+
93
+
94
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing
95
+ before it . . . to any person who is found to be lacking in character or integrity or to have engaged in
96
+ unethical or improper professional conduct.
97
+
98
+ Rule 102(e)(1)(iii) provides, in pertinent part, that:
99
+
100
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing
101
+ before it . . . to any person who is found…to have willfully violated, or willfully aided and abetted the
102
+ violation of any provision of the Federal securities laws or the rules and regulations thereunder.
103
+
104
+ 3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any
105
+ other person or entity in this or any other proceeding.
106
+
107
+ 3
108
+ 3. After obtaining the confidential list of the PCAOB’s planned inspections in 2016,
109
+ the now-former KPMG personnel oversaw a program to review and revise certain audit
110
+ workpapers after the audit reports had been issued to reduce the likelihood that the PCAOB would
111
+ find deficiencies in those audits. This effort resulted in a substantial improvement to KPMG’s
112
+ 2016 inspection results. In 2017, the now-former KPMG personnel again obtained the list of audit
113
+ engagements that the PCAOB planned to inspect, but the misconduct was discovered by others
114
+ within the firm and reported to KPMG leadership before relevant workpapers could be changed.
115
+ In addition, a now-former KPMG partner attempted to use improperly-obtained confidential
116
+ information relating to the PCAOB’s inspection of another audit firm to win new business for
117
+ KPMG.
118
+ 4. Second, before, during, and after the senior National Office professionals used
119
+ confidential PCAOB information, KPMG audit professionals – at all levels of seniority – engaged
120
+ in misconduct in connection with examinations on internally-administered training courses that
121
+ were intended to test whether they understood a variety of accounting principles and other topics of
122
+ importance.
123
+ 5. This misconduct took a variety of forms. KPMG audit professionals shared exam
124
+ answers with one another. A number of audit partners gave exam answers to other partners, and a
125
+ number also sent answers to and solicited answers from their subordinates. In addition, for a
126
+ period of time up to November 2015, certain audit professionals made unauthorized changes to
127
+ KPMG’s server instructions that allowed them to manually select the scores necessary to pass the
128
+ tests, which they often lowered to the point of passing exams with less than 25 percent of the
129
+ questions answered correctly. The exams related to a variety of subjects that were relevant to the
130
+ test-takers’ audit practices, and included additional training required by a 2017 Commission Order
131
+ after the Commission found that KPMG engaged in improper professional conduct and had caused
132
+ a client’s reporting violations.4
133
+ 6. After discovering the training-related misconduct, KPMG reported the matter to
134
+ Commission staff and appointed a Special Committee of its Board of Directors to oversee an
135
+ internal investigation. During that investigation, two now-former partners who had shared exam
136
+ answers deleted relevant documents. One of those partners and certain other audit professionals
137
+ made misrepresentations to the firm’s investigators.
138
+ 7. KPMG is required, both by PCAOB rules and by the Code of Conduct of the
139
+ American Institute of Certified Public Accountants (“AICPA”), to act with integrity in connection
140
+
141
+ 4 In August 2017, KPMG agreed to settle charges it engaged in improper professional conduct with respect
142
+ to the audit of the financial statements of an oil and gas client and caused the company’s reporting violations. As
143
+ part of the settlement, the Commission ordered KPMG to ensure its audit staff complete specific training programs
144
+ in various areas related to the Commission’s findings in that proceeding. KPMG LLP and John Riordan, CPA,
145
+ Exchange Act Release No. 81396 (Aug. 15, 2017). KPMG has required all personnel subject to that training
146
+ undertaking to re-test to ensure full compliance with the Commission’s 2017 Order.
147
+
148
+ 4
149
+ with the professional services it provides its clients.5 Certified public accountants are required to
150
+ “be, among other things, honest and candid within the constraints of client confidentiality.”6 By
151
+ the misconduct described herein, these professionals caused KPMG’s failure to act with the
152
+ integrity required of a public company auditor.7
153
+ 8. As indicated above, KPMG’s Board of Directors has formed a Special Committee
154
+ led by an independent board member to oversee an investigation of the misconduct relating to
155
+ training examinations. The Special Committee has retained an outside law firm to investigate the
156
+ extent of such conduct within the past three years, and will recommend employment actions to
157
+ KPMG management as appropriate. As set forth in the Undertakings below, KPMG will retain an
158
+ independent consultant to review and assess the Special Committee’s investigation and whether
159
+ the firm has taken appropriate employment actions or other remedial steps, and to ensure the firm
160
+ has designed and implemented quality controls that reasonably assure compliance with all
161
+ professional standards relating to ethics and integrity.
162
+ RESPONDENT
163
+
164
+ 9. KPMG LLP is a Delaware limited liability partnership and PCAOB-registered
165
+ accounting firm. Headquartered in New York, New York, KPMG is the U.S. member firm of
166
+ KPMG International Cooperative, a Swiss entity.
167
+ OTHER RELEVANT PERSONS
168
+
169
+ 10. David Middendorf, 54, of Marietta, Georgia, was KPMG’s National Managing
170
+ Partner for AQPP until March 2017, and was separated from the firm the following month.
171
+ Middendorf is licensed as a CPA in Georgia, New York, and Ohio and was previously licensed in
172
+ Texas. The Commission has charged Middendorf for his role in the misconduct described in this
173
+ Order.
174
+ 11. Thomas Whittle, 55, of Gladstone, New Jersey, was KPMG’s National Partner-In-
175
+ Charge for Quality Measurement until March 2017, and was separated from the firm the following
176
+ month. Whittle is licensed as a CPA in New York and New Jersey and was previously licensed in
177
+
178
+ 5 PCAOB Rule 3500T requires KPMG to maintain integrity when performing any professional service in
179
+ connection with the preparation or issuance of any audit report. As an AICPA member, KPMG was required to
180
+ comply with the AICPA’s Code of Professional Conduct, which requires the firm to maintain integrity in connection
181
+ with all professional services. The AICPA also prohibits members from committing acts “discreditable to the
182
+ profession.” See AICPA Code of Conduct 1.400.001 (“Acts Discreditable Rule”).
183
+
184
+ 6 See “Principles of Professional Conduct,” ET Section 54 (available at
185
+ https://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocuments/2011June1CodeOfProfessiona
186
+ lConduct.pdf). Codified as AICPA Code 0.300.040.
187
+
188
+ 7 KPMG’s conduct also failed to conform to the requirements of PCAOB Quality Control Standards (“QC”)
189
+ requiring registered firms to “have a system of quality control for its accounting and auditing practice” that provides
190
+ “reasonable assurance that (a) personnel . . . perform all professional responsibilities with integrity.” QC 20.01 and
191
+ 20.09.
192
+ 5
193
+ Pennsylvania and Connecticut. The Commission has charged Whittle for his role in the
194
+ misconduct described in this Order.
195
+ 12. David Britt, 55, of New Canaan, Connecticut, was a Partner in KPMG’s
196
+ Department of Professional Practice within AQPP, in which he was the Banking and Capital
197
+ Markets Group Co-Leader until March 2017, and was separated from the firm the following
198
+ month. Britt is licensed as a CPA in New York and California and was previously licensed in the
199
+ District of Columbia. The Commission has charged Britt for his role in the misconduct described
200
+ in this Order.
201
+
202
+ 13. Brian Sweet, 41, of Fresno, California, was a Partner in KPMG’s Department of
203
+ Professional Practice-Inspections group until March 2017. He was separated from the firm at the
204
+ end of March 2017. Prior to joining KPMG, Sweet was an Associate Director in the PCAOB’s
205
+ inspections group from March 2014 until April 2015. Sweet was previously licensed as a CPA in
206
+ New York, Illinois, and California. The Commission has charged Sweet for his role in the
207
+ misconduct described in this Order.
208
+ 14. Cynthia Holder, 52, of Houston, Texas was an Executive Director in KPMG’s
209
+ Department of Professional Practice-Inspections group from August 2015 until April 2017, and
210
+ was separated from the firm the following month. Prior to joining KPMG, Holder was an
211
+ Inspections Leader at the PCAOB from December 2011 until August 2015. Holder was previously
212
+ licensed as a CPA in Texas and New Jersey. The Commission has charged Holder for her role in
213
+ the misconduct described in this Order.
214
+ 15. Jeffrey Wada, 43, of Tustin, California was an Inspections Leader at the PCAOB
215
+ from February 2012 until February 2017. Wada is no longer at the PCAOB. Wada is licensed as a
216
+ CPA in California. The Commission has charged Wada for his role in the misconduct described in
217
+ this Order.
218
+ FACTS
219
+
220
+ I. THE MISAPPROPRIATION OF CONFIDENTIAL PCAOB INFORMATION
221
+
222
+ A. The PCAOB’s Inspections Process and KPMG’s Efforts to Improve Its Results
223
+
224
+ 16. The PCAOB was created as part of the Sarbanes-Oxley Act of 2002 to oversee the
225
+ audits of public companies that are subject to the federal securities laws in order to protect the
226
+ interests of investors and further the public interest in the preparation of informative, accurate, and
227
+ independent audit reports.
228
+ 17. One of the essential ways in which the PCAOB fulfills this mission is by inspecting
229
+ audits of public companies conducted by registered public accounting firms. Through these
230
+ inspections, the PCAOB assesses the audit firms’ compliance with the statutes, regulations, and
231
+ professional standards governing the accounting profession. The PCAOB typically selects the
232
+ audit engagements it will inspect based on confidential internal analyses and thereafter notifies
233
+ firms of which audits it will inspect. The PCAOB typically issues inspection reports, only parts of
234
+ 6
235
+ which are made public, after all the inspections for a firm in a given cycle are complete. To ensure
236
+ the integrity of the inspection process, the PCAOB closely guards the confidentiality of both its
237
+ inspection targets prior to firm notification and its methodology for selecting those targets.
238
+ 18. In September 2014, the PCAOB issued a report regarding its 2013 inspections of
239
+ KPMG audits. The report found that out of 50 audits the PCAOB inspected, 23 had deficiencies.
240
+ This 46 percent deficiency rate reflected a significant decline from KPMG’s 34 percent deficiency
241
+ rate the previous year. David Middendorf, who then oversaw the National Office’s audit quality
242
+ and professional practice work understood then that the Commission’s Office of the Chief
243
+ Accountant had been highly critical of KPMG’s worsening inspection results.
244
+ B. The Use of Confidential PCAOB Information Misappropriated by Sweet
245
+
246
+ 19. As part of its efforts to improve its PCAOB inspection results, KPMG hired Brian
247
+ Sweet, an Associate Director at the PCAOB who had worked on the team inspecting KPMG
248
+ audits. Sweet joined KPMG as a partner in the group within the firm’s National Office responsible
249
+ for PCAOB inspections. Sweet reported to Thomas Whittle, who was then the KPMG partner
250
+ responsible for overseeing the PCAOB’s inspections of the firm. Whittle, in turn, reported to
251
+ Middendorf.
252
+ 20. In April 2015, shortly before leaving the PCAOB, Sweet copied from an internal
253
+ database to his office computer various confidential inspection-related materials he believed might
254
+ be of use to him when he joined KPMG. On his final day at the PCAOB, Sweet transferred these
255
+ materials, along with the other files on his PCAOB computer, to a personal hard drive that he took
256
+ with him. Sweet also took from the PCAOB hard copy documents and retained other confidential
257
+ PCAOB documents he had previously brought home.
258
+ 21. The documents Sweet improperly took included PCAOB inspection planning
259
+ information, inspection guides and manuals, and drafts of confidential inspection comment forms.
260
+ The planning materials included the confidential list of KPMG audit engagements the PCAOB
261
+ intended to inspect in 2015, the focus areas for each inspection, and a list of all the quantitative and
262
+ qualitative criteria the Board used in deciding which KPMG audit engagements to inspect.
263
+ 22. Upon joining KPMG in May 2015, Sweet transferred the PCAOB documents from
264
+ his personal hard drive to his computer at the firm.
265
+ The Use of the PCAOB’s Confidential List of 2015 Inspections
266
+
267
+ 23. On his first day at the firm in May 2015, Sweet had lunch with Middendorf and
268
+ other partners in KPMG’s National Office, including David Britt, who was then a Partner in the
269
+ National Office’s Department of Professional Practice and co-leader of KPMG’s Banking and
270
+ Capital Markets Group. Over lunch, Sweet’s new colleagues asked him various questions about
271
+ the PCAOB’s inspections of KPMG. Sweet testified that one of the questions Middendorf asked
272
+ Sweet was whether the PCAOB intended to inspect a specific KPMG banking client that year.
273
+ Without answering directly, Sweet indicated the PCAOB planned to do so. Sweet testified that
274
+ Middendorf told him the next day that Sweet needed “to share insight and add value and be fully
275
+ 7
276
+ open when it came to that type of information,” and to “remember where [your] paycheck came
277
+ from” and that Sweet had to be “completely loyal to KPMG and KPMG only.”
278
+ 24. Several days later, at Middendorf’s direction, Whittle asked Sweet to provide him
279
+ the list of the PCAOB’s planned inspections for 2015.8 Sweet testified that he showed Whittle a
280
+ hard copy of a PCAOB inspection planning document listing the KPMG banking and financial
281
+ service audits the PCAOB intended to inspect that year.
282
+ 25. The next day, Whittle emailed Sweet, asking him to have an assistant “scan and
283
+ send me the banking selection list,” i.e. KPMG’s bank holding company clients the PCAOB had
284
+ selected for inspection. Sweet complied by sending Whittle the complete list of planned
285
+ inspections and asked Whittle to exercise discretion given the nature of the information. Whittle
286
+ forwarded this information to Middendorf the same day, writing, “The complete list. Obviously,
287
+ very sensitive. We will not be broadcasting this.”
288
+ 26. Though Whittle immediately assigned Sweet to review the workpapers of one of
289
+ the inspection targets, it does not appear that any workpapers were changed in response to Sweet
290
+ providing the 2015 inspection list. At the time Sweet provided this information to Middendorf and
291
+ Whittle, KPMG had, pursuant to its policy, already locked the audit workpapers for all but two of
292
+ the engagements from editing absent special circumstances.
293
+ 27. Whittle also instructed Sweet to speak to certain engagement partners responsible
294
+ for audits on the 2015 list to explain the reasons for their selection. By learning why they were
295
+ selected, engagement partners could better tailor their responses to questions from PCAOB
296
+ inspectors to mitigate concerns. Middendorf and Whittle also assigned Sweet to one of the firm’s
297
+ large audit engagements on the 2015 list to help prepare for the inspection. Internal training
298
+ materials KPMG created for audit staff undergoing PCAOB inspection stressed the importance of
299
+ replying to inspectors’ questions – especially during the critical first meeting with PCAOB staff –
300
+ with the “best first answer.” KPMG’s National Office believed the audit staff’s ability to respond
301
+ effectively to inspectors’ questions had a significant impact on whether the PCAOB would find
302
+ deficiencies in the audit.
303
+ 28. In June 2015, Sweet identified for Britt a number of KPMG banking clients the
304
+ PCAOB planned to inspect in 2015. The next day, Britt asked Sweet to review his notes so he
305
+ could give Britt the “last 3 Bank names.” Sweet shared this information later that day, asking Britt
306
+ to note its sensitivity and “use your discretion with this info.”
307
+ The Use of the PCAOB’s Confidential Process for Selecting Audits to Inspect
308
+
309
+ 29. In April 2015, KPMG engaged an outside consultant to help it predict which audit
310
+ engagements the PCAOB would inspect in 2016. Sweet recalls that in June 2015 Middendorf and
311
+ Whittle directed Sweet to share with the outside consultant everything he knew about how the
312
+
313
+ 8 By that time, the PCAOB had informed KPMG of less than half of the audit engagements it intended to
314
+ inspect in 2015.
315
+
316
+ 8
317
+ PCAOB selected audits to inspect, including the confidential information Sweet had taken. Sweet
318
+ understood this to be an instruction to give the consultant all of the information he took from the
319
+ PCAOB.
320
+ 30. Sweet complied with Middendorf and Whittle’s directive by providing information
321
+ about the Board’s selection criteria to a Director in KPMG’s National Office, who then gave that
322
+ information to the consultant. In September 2015, Sweet spoke directly with the consultant and
323
+ gave the consultant additional confidential information regarding the inspections selection process,
324
+ including how the PCAOB’s Inspections group used confidential information received from others
325
+ at the Board and the Commission. At the end of September, Sweet reported to Middendorf and
326
+ Whittle that he had “spent quite a bit of time with [the outside consultant] trying to guide their
327
+ modeling efforts.”
328
+ The Use of Confidential PCAOB Information Regarding Another Audit Firm
329
+
330
+ 31. Sweet also provided confidential PCAOB information to an audit partner (who is
331
+ no longer at KPMG) who was preparing a client pitch for a Spanish bank’s audit business.
332
+ Securing this audit business was a high priority for KPMG.
333
+ 32. In April 2016, Sweet sent the audit partner confidential PCAOB comment forms
334
+ related to the Board’s inspection of another Spanish bank’s audit, writing that he had attached
335
+ “some examples of the types of issues that have been raised in the past. I hope this helps!” The
336
+ comment forms discuss specific ways in which that bank’s auditor had failed to adequately test the
337
+ valuation of its Allowance for Loan and Lease Losses.
338
+ C. The Solicitation of Confidential PCAOB Information from Holder
339
+
340
+ 33. Before he left the PCAOB, Sweet had discussed with Cynthia Holder, a friend who
341
+ was then a PCAOB Inspections Leader, the prospect of her joining him at KPMG. On Sweet’s
342
+ first day at KPMG (May 4, 2015), he informed Holder that he would be meeting with Whittle to
343
+ push the firm to hire her. On May 11, 2015, Sweet told Holder he was going to hand-deliver her
344
+ resume to Whittle and “make a sell again” in person.
345
+ 34. On May 12, 2015, Sweet asked Holder to send him a confidential PCAOB
346
+ document reflecting comments he had written about KPMG’s audits while he was at the Board. At
347
+ that time, KPMG personnel were preparing for a meeting with the PCAOB to discuss the firm’s
348
+ performance on its audits, during which KPMG would make a presentation on the root causes of
349
+ audit deficiencies. Sweet asked Holder for a document he had written while he was at the PCAOB
350
+ so he could review it before helping his KPMG colleagues with that presentation. That day,
351
+ Holder sent Sweet the confidential document he requested.
352
+ 35. On June 17, 2015, Holder again shared confidential PCAOB information with
353
+ Sweet, telling him that the Board had decided to cancel its planned inspection of a KPMG audit
354
+ client for 2015, and that the Board did not intend to replace it with another selection. Sweet
355
+ immediately relayed this information to Whittle.
356
+ 9
357
+ 36. KPMG sent Holder an employment offer in July 2015. She joined the firm the
358
+ following month as an Executive Director in KPMG’s National Office, performing internal
359
+ inspections and advising banking engagement teams on their audits.
360
+ D. The Use of Confidential PCAOB Information Obtained from Wada in 2016
361
+
362
+ 37. In early March 2016, Jeffrey Wada, an Inspections Leader at the PCAOB who had
363
+ previously performed work on KPMG inspections but was then assigned to inspect another audit
364
+ firm, learned that he had not been selected for a promotion. Wada reacted angrily, telling a
365
+ colleague the PCAOB had “screwed” him by passing him over.
366
+ 38. On March 28, 2016, Wada, who remained friends with Holder after she left the
367
+ PCAOB, called her and read to her the names of thirteen KPMG clients the Board planned to
368
+ inspect.9 Holder provided this information to Sweet, who then immediately relayed the list to
369
+ Middendorf, Whittle, and Britt, informing them that it had come from a former colleague at the
370
+ PCAOB.
371
+ 39. Wada sent the list of the PCAOB’s planned inspections at a critical time. In early
372
+ February 2016, Middendorf and other members of KPMG’s leadership team had met with staff
373
+ from the Commission’s Office of the Chief Accountant. During that meeting, Commission
374
+ personnel expressed significant concerns about the firm’s audit quality and questioned whether
375
+ KPMG was adequately addressing these issues. Middendorf told Whittle, Sweet, and Britt they
376
+ should use the list of inspection targets Wada had sent to protect KPMG from further criticism by
377
+ its regulators.
378
+ 40. Middendorf, Whittle, Britt, and Sweet believed they could use Wada’s list in this
379
+ way because they had learned of the audits that would be inspected at a time when firm personnel
380
+ were still able to access and revise audit workpapers. Though KPMG had already issued audit
381
+ reports for each of these engagements, it was within the 45-day period in which professional audit
382
+ standards and firm policy allowed audit teams to complete the administrative process of
383
+ assembling final audit files.10 At the end of this 45-day period, KPMG locked audit workpapers
384
+ from editing absent special circumstances.11
385
+
386
+ 9 Of the 13 clients, 11 were bank holding or other financial services companies and 2 were other issuers that
387
+ Wada appears to have thought were also bank holding or other financial services companies. It appears that Wada
388
+ identified these engagements for Holder because her responsibilities at KPMG included advising banking
389
+ engagement teams.
390
+
391
+ 10 See Auditing Standard No. 3, Audit Documentation, paragraph 15. “Prior to the report release date, the
392
+ auditor must have completed all necessary auditing procedures and obtained sufficient evidence to support the
393
+ representations in the auditor’s report. A complete and final set of audit documentation should be assembled for
394
+ retention as of a date not more than 45 days after the report release date (documentation completion date).”
395
+ References to PCAOB standards are to those that were in effect at the time of the relevant conduct.
396
+
397
+ 11 KPMG has since revised its audit documentation policies, requiring electronic workpapers to be assembled
398
+ and locked within two business days of issuance of the report.
399
+
400
+ 10
401
+ 41. Recognizing that the workpapers had not yet been locked per KPMG’s policy,
402
+ Middendorf, Whittle, and Britt agreed to have Sweet and others conduct an additional review of
403
+ the audit workpapers for the seven banks on the list Wada had provided that were part of a key
404
+ monitoring program run by the National Office to determine whether anything could be done to
405
+ minimize the risk of receiving inspection comments from the PCAOB.12 Middendorf and Whittle
406
+ instructed that no one in the briefing should disclose that they had obtained confidential PCAOB
407
+ information.
408
+ 42. To conceal the true purpose of their efforts, Britt falsely told others at KPMG that
409
+ they were performing work in the ordinary course of business on all 35 banking engagements in
410
+ the ALLL monitoring program. On March 28, 2016, Britt sent the engagement partners for these
411
+ audits an email stating that, “[a]s part of our wrap up and reporting of the results of the ALLL
412
+ monitoring program we need to gather some additional information” from the audit workpapers.13
413
+ 43. Over the next few weeks, Sweet, Holder, and various partners and managing
414
+ directors in the National Office engaged in a review of the audit workpapers of the seven banks in
415
+ the monitoring program that were on the list Wada provided. The National Office professionals
416
+ suggested edits and proposed revisions to the engagement teams, which then decided what
417
+ revisions to incorporate into the final audit workpapers.14
418
+ 44. In contrast to prior years, KPMG’s 2016 inspection results did not include any
419
+ comments related to the general Allowance for Loan and Lease Losses – an area where KPMG had
420
+ historically received criticism related to financial services audits. The PCAOB did not publish the
421
+ results because KPMG reported the misconduct to the PCAOB before the PCAOB issued the 2016
422
+ report. However, the PCAOB had designated two of the bank audits in the ALLL monitoring
423
+ program whose workpapers Sweet had reviewed as “positive quality events,” which meant they
424
+ were so successful the PCAOB wanted to understand the factors driving the audit’s quality.
425
+ Indeed, the level of improvement in the inspection results led Whittle to be concerned that if
426
+
427
+
428
+ 12 As the PCAOB found an increasing number of audit deficiencies by KPMG beginning in 2013, KPMG’s
429
+ National Office implemented “monitoring programs” that worked with audit engagement teams and reviewed
430
+ workpapers to improve compliance with professional standards. One of these progra ms focused on the audits of
431
+ certain banking clients’ Allowance for Loan and Lease Losses. KPMG further developed this monitoring program
432
+ in 2015 in response to numerous deficiencies the PCAOB had identified in this area. The success of this program
433
+ was especially important to KPMG because the firm had promoted it as proof of the seriousness with which the firm
434
+ was working to improve its audit quality.
435
+
436
+ 13 Britt also asked a subordinate who previously had been in the Department of Professional Practice and was
437
+ then assigned to an audit engagement on the list to conduct his own “stealth” review of workpapers for one KPMG
438
+ audit client.
439
+
440
+ 14 Middendorf, Whittle, Sweet, and Britt had agreed that Sweet would lead a team of National Office
441
+ professionals to review the workpapers of the banks in the monitoring program, and that Middendorf, Whittle, and
442
+ Britt would handle the other issuers on the list they received from Wada.
443
+
444
+ 11
445
+ KPMG could not obtain confidential PCAOB information for the next inspection cycle, there could
446
+ be a return of audit deficiencies that would be difficult to explain.
447
+ 45. After the misconduct was discovered, the PCAOB conducted inspections of ten
448
+ additional banks for the 2016 inspection cycle to replace the ones for which improper advance
449
+ notice had been obtained. The PCAOB found that six of these audits had deficiencies with respect
450
+ to auditing the ALLL.
451
+ E. The Use of Confidential PCAOB Information Obtained from Wada in 2017
452
+
453
+ 46. In early January 2017, Wada provided Holder a “preliminary” list of PCAOB
454
+ inspection targets for 2017. On January 9, Holder relayed the names of the clients on the list to
455
+ Sweet, and together, they briefed Whittle. That night, Sweet, Whittle, and Britt discussed this
456
+ information. After that meeting, Sweet contacted the engagement partners for two of the audits on
457
+ the January 2017 list to warn them about the potential inspections. Whittle also discussed the
458
+ January 2017 list with Middendorf. As a result of that discussion, Middendorf and Whittle
459
+ assigned additional National Office resources to assist with two of the active audits on that list.15
460
+ 47. In early February 2017, Wada conveyed to Holder a list of 47 ticker symbols that
461
+ Holder understood to be the final list of KPMG audits the PCAOB would inspect that year. Wada
462
+ also provided Holder the inspection focus areas for the banks on the list (as well as for another
463
+ KPMG engagement), and the PCAOB’s list of KPMG engagement partners with “poor
464
+ performance evaluations.”
465
+ 48. Holder relayed the information to Sweet, who then shared it with Middendorf,
466
+ Whittle, and Britt. Though Sweet questioned what to do with that information, Middendorf
467
+ replied, “this is information that’s too good not to use.” Unlike the prior lists of PCAOB
468
+ inspection targets, the audits on the February 2017 list were ongoing, thus providing substantially
469
+ greater ability to improve the audit workpapers.
470
+ 49. Whittle instructed Sweet to warn certain engagement partners about the impending
471
+ inspections. Though Whittle had warned Sweet to be circumspect in how he communicated this to
472
+ KPMG colleagues, Sweet’s notice to one KPMG engagement partner caused her to suspect that the
473
+ firm may have received confidential PCAOB information. These concerns were subsequently
474
+ reported to the firm’s management, which then reported the matter to the PCAOB, and KPMG
475
+ began an investigation.
476
+ II. AUDIT PROFESSIONALS IMPROPERLY SHARED TRAINING EXAM ANSWERS
477
+
478
+ A. Professional Education Requirements for KPMG Auditor Personnel
479
+
480
+
481
+ 15 Middendorf was the Engagement Quality Review partner on one of those audits. In this role, he was
482
+ responsible for evaluating the significant judgments and related conclusions the audit team made in reaching the
483
+ overall conclusion reflected in the audit report.
484
+
485
+ 12
486
+ 50. As accountants licensed by state accountancy boards, many KPMG audit
487
+ professionals are required to complete a minimum number of continuing professional education
488
+ (“CPE”) courses periodically – typically 120 hours every three years. KPMG requires its audit
489
+ professionals to complete additional training in excess of state requirements. These training
490
+ requirements vary by position, role, and industry, and are designed by the firm to be relevant to the
491
+ audit work its professionals are performing.
492
+ 51. In addition to state accountancy boards’ and KPMG’s own continuing education
493
+ requirements, the Commission ordered KPMG audit professionals to complete a minimum of 12
494
+ hours of training in specific audit areas as part of an August 2017 settlement of charges that KPMG
495
+ failed to properly audit the financial statements of an oil and gas client.16
496
+ 52. To help its audit professionals satisfy these requirements, KPMG administers its
497
+ own set of online training programs that also qualify for CPE credit. KPMG requires its auditors to
498
+ pass an examination at the conclusion of each online training program. Audit professionals are
499
+ given three opportunities to pass each examination. If one of KPMG’s audit professionals is
500
+ unable to pass after two attempts, their Performance Management Leader is notified. If they are
501
+ unable to pass after three attempts, the consequences are more significant: they are required to re-
502
+ take the training; they are prohibited from conducting audit work until they pass the exam; and
503
+ others at the firm may be notified. Audit professionals also understood that failing to pass an exam
504
+ could lead to their compensation being reduced.
505
+ B. KPMG Audit Professionals Shared Answers to Training Exams
506
+
507
+ 53. On numerous occasions, KPMG audit professionals who had passed training exams
508
+ sent their answers to colleagues to help them pass those exams. They sent colleagues images of
509
+ their answers primarily by email or printed their answers and gave them to their colleagues. This
510
+ conduct was committed by audit professionals at all levels of seniority, including lead audit
511
+ engagement partners who were responsible for compliance with PCAOB standards in auditing
512
+ their clients’ financial statements. A number of lead audit engagement partners not only sent exam
513
+ answers to other partners, but also solicited answers from and sent answers to their subordinates.17
514
+ 54. Upon learning of the potential cheating, KPMG leadership alerted the Commission
515
+ staff and began an internal investigation. Soon after, the firm’s Board of Directors formed a
516
+ Special Committee led by an independent board member to oversee an independent investigation
517
+ of this conduct. The Special Committee hired an outside law firm to conduct this review. The
518
+ investigation has revealed extensive sharing of exam answers, with the bulk of this misconduct
519
+ occurring among junior personnel. While many of those who shared and/or received exam
520
+ answers engaged in misconduct only once, others sent or received answers to multiple exams.
521
+
522
+ 16 KPMG LLP and John Riordan, CPA, Exchange Act Release No. 81396 (Aug. 15, 2017).
523
+
524
+ 17 As KPMG itself has recognized, “[t]hose who manage others act as role models.” KPMG Transparency
525
+ Report (January 2019), available at https://audit.kpmg.us/content/dam/audit/pdfs/2018/2018-transparency-
526
+ report1.pdf.
527
+
528
+ 13
529
+ Prior to the firm’s investigation, no one reported the improper sharing of exam answers to the
530
+ firm’s Ethics and Compliance Hotline. The firm has been taking disciplinary action against certain
531
+ partners and other audit professionals in connection with its investigation.
532
+ 55. After KPMG began to investigate the misconduct, certain now-former audit
533
+ professionals, including a few lead audit engagement partners, attempted to conceal what they had
534
+ done. For example, in September 2018, one engagement partner who is no longer with KPMG
535
+ (“Former Partner 1”) solicited from a junior partner answers to the exam for a training program
536
+ relating to leases. The now-former junior partner sent Former Partner 1 the answers from his exam
537
+ by text message. After receiving a document preservation notice from the firm, Former Partner 1
538
+ deleted the text messages the junior partner sent him, and encouraged his colleague to do the same.
539
+ Former Partner 1 also encouraged the junior partner to say, falsely, that the texts were deleted by
540
+ accident. When Former Partner 1 was asked in a written questionnaire in December 2018 whether
541
+ he had received any answers to KPMG training exams, he answered “no.”
542
+ 56. In another example, a lead audit engagement partner who is no longer with the firm
543
+ (“Former Partner 2”) also answered “no” to the December 2018 questionnaire that asked whether
544
+ he had sent or received answers to KPMG training programs. In fact, Former Partner 2 had
545
+ received answers to training exams on seven occasions and sent answers to training exams on three
546
+ occasions – all within eight months of completing the survey, and all with junior members of his
547
+ engagement team.
548
+ C. KPMG Audit Professionals Manipulated the Scoring of Training Exams
549
+ 57. In addition to sharing answers to training examinations, certain audit professionals
550
+ also manually changed the scores required to pass certain exams. Prior to November 2015, KPMG
551
+ hosted exams to training programs on an internal server with software provided by a third party.
552
+ KPMG sent participants in training programs a hyperlink that directed them to the applicable
553
+ exams. Embedded in the hyperlink was an instruction to the server that specified the score
554
+ necessary to pass the exam. Thus, the characters “MasteryScore=70” meant participants were
555
+ required to answer at least 70 percent of the answers accurately to pass the exam.18 By changing
556
+ the number in the hyperlink, audit professionals could change the score required to pass.
557
+ 58. For a period of time up to November 2015, certain audit professionals, including
558
+ one partner, altered the URLs for their exams to lower the scores required to pass. Twenty-eight of
559
+ these auditors did so on four or more occasions. Certain audit professionals lowered the required
560
+ score to the point of passing exams while answering less than 25 percent of the questions correctly.
561
+ VIOLATIONS
562
+
563
+ 59. As a result of the conduct of personnel described above, KPMG willfully violated
564
+ PCAOB Rule 3500T, which requires KPMG and associated persons to comply with ethics
565
+ standards, including to maintain integrity, as described in the AICPA’s Code of Professional
566
+
567
+ 18 Some exams required a higher score to pass, while others allowed a lower score.
568
+
569
+ 14
570
+ Conduct when performing any professional service in connection with the preparation or issuance
571
+ of any audit report,19 within the meaning of Section 4C(a)(3) of the Exchange Act and Rule
572
+ 102(e)(1)(iii) of the Commission’s Rules of Practice.
573
+ 60. The AICPA Code of Conduct requires that a member not commit any act
574
+ discreditable to the profession. AICPA Code of Conduct 1.400.001. As a result of the conduct of
575
+ personnel described above, KPMG failed to comply with AICPA Code of Conduct 1.400.001
576
+ within the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the
577
+ Commission’s Rules of Practice.
578
+ 61. PCAOB Quality Control Standards require that a registered firm “shall have a
579
+ system of quality control for its accounting and auditing practice.” QC 20.01. Those quality
580
+ control standards require further that firms should establish policies and procedures to provide
581
+ “reasonable assurance that (a) personnel ... perform all professional responsibilities with integrity.”
582
+ QC 20.09. As a result of the conduct described above, KPMG failed to comply with QC 20 within
583
+ the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s
584
+ Rules of Practice.
585
+ FINDINGS
586
+
587
+ 62. Based on the foregoing, the Commission finds that KPMG willfully violated
588
+ PCAOB Rule 3500T within the meaning of Section 4C(a)(3) of the Exchange Act and Rule
589
+ 102(e)(1)(iii) of the Commission’s Rules of Practice.
590
+ 63. Based on the foregoing, the Commission finds that KPMG engaged in conduct that
591
+ provides a basis to impose remedies against the firm pursuant to Section 4C(a)(2) of the Exchange
592
+ Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.
593
+
594
+ COOPERATION AND REMEDIAL EFFORTS
595
+
596
+ 64. In determining to accept KPMG’s Offer, the Commission considered that KPMG
597
+ reported these matters to the Commission and/or to the PCAOB, initiated an investigation of the
598
+ testing matter under the oversight of a Special Committee of the Board of Directors, has
599
+ cooperated with the Commission staff, and has undertaken various remedial measures, including:
600
+ revising its audit documentation policies to require that electronic workpapers be assembled and
601
+ locked within two business days of issuance of the report notwithstanding the 45-day period
602
+ allowed under professional auditing standards; retaining an advisory firm to conduct an
603
+
604
+ 19 The rule requires auditors to comply with the AICPA’s Code of Professional Conduct Rule 102, and
605
+ interpretations and rulings thereunder, as in existence on April 16, 2003. Although PCAOB Rule 3500T references
606
+ the AICPA Code as in existence on April 16, 2003, the definition of integrity remains identical to the current
607
+ definitions in the Code of Professional Conduct promulgated by the AICPA and applicable to current members of
608
+ the AICPA.
609
+
610
+ 15
611
+ independent cultural assessment; and retaining a learning and development consultant to conduct a
612
+ current state assessment.
613
+ UNDERTAKINGS
614
+
615
+ KPMG has undertaken to complete the following actions:
616
+
617
+ 65. KPMG’s Review. Within 120 days after the entry of this Order, KPMG shall
618
+ evaluate (“KPMG’s Review”) the sufficiency and adequacy of its quality controls relevant to ethics
619
+ and integrity (hereinafter referred to as KPMG’s “Policies and Procedures”) to determine whether
620
+ they are designed and implemented in a manner that provides reasonable assurance of compliance
621
+ with all professional standards relating to ethics and integrity. KPMG’s evaluation shall include
622
+ assessing:
623
+ a. the adequacy and sufficiency of ethics and integrity training and guidance,
624
+ including regarding anti-retaliation and whistleblowing;
625
+ b. whether KPMG’s culture is supportive of ethical and compliant conduct,
626
+ including strong, explicit, and visible support and commitment by the firm’s management and
627
+ Board of Directors; and
628
+ c. whether KPMG deploys proper resources and oversight for compliance
629
+ with ethics and integrity requirements, including seniority of executives and managers responsible
630
+ for implementation and oversight of these responsibilities, reporting lines, autonomy and
631
+ independence, compensation and rewards, consistent discipline, access to information and
632
+ personnel.
633
+ 66. KPMG Report to the Commission. Within 60 days of completing KPMG’s
634
+ Review, KPMG shall deliver to the Commission staff a detailed written report (���KPMG Report to
635
+ the Commission”) summarizing its review and any changes it has made to KPMG’s Policies and
636
+ Procedures relating to the subjects described in paragraph 65. The KPMG Report to the
637
+ Commission shall provide written evidence of how the Policies and Procedures, including any
638
+ changes, are designed and implemented in a manner that provides reasonable assurance of
639
+ compliance with all professional standards relating to ethics and integrity in the form of a narrative
640
+ and be supported by exhibits. The Commission staff may request further evidence of how the
641
+ Policies and Procedures provide such assurance, and KPMG agrees to provide such evidence.
642
+ The KPMG Report to the Commission shall set forth the results of its assessment of the adequacy
643
+ and sufficiency of its ethics and integrity training, including a description of the training. The
644
+ KPMG Report to the Commission should also include a description of any training courses added
645
+ or modified as a result of the assessment conducted under this paragraph.
646
+
647
+ 67. KPMG’s Special Committee Review. Within 360 days after the entry of this Order,
648
+ a committee composed of independent members of KPMG’s Board of Directors and non-Audit
649
+ Partners (the “Special Committee”) shall complete the steps reasonably necessary to identify, and
650
+ to determine the extent to which, audit professionals violated ethics and integrity requirements in
651
+ 16
652
+ connection with training examinations within the past three years (“Special Committee
653
+ Investigation”), and to recommend any employment actions or other remedial steps to KPMG
654
+ management that the Special Committee deems appropriate.
655
+ 68. Special Committee Report of Investigation. Within 60 days of completing the
656
+ Special Committee Investigation, the Special Committee shall deliver to KPMG’s Board of
657
+ Directors and Chief Executive Officer a detailed report (“Special Committee Report of
658
+ Investigation”) summarizing the investigative steps it has taken and any employment actions or
659
+ other remedial steps it recommends be taken.
660
+ 69. Independent Consultant Review. KPMG shall retain, within 60 days after the
661
+ entry of this Order, an independent consultant (“Independent Consultant”), not unacceptable to
662
+ the Commission staff. The Independent Consultant shall have, at a minimum, the following
663
+ qualifications: (i) demonstrated expertise conducting ethics and integrity investigations; and (ii)
664
+ experience designing or reviewing compliance policies, procedures, and controls relating to
665
+ ethics and integrity. KPMG shall provide to the Commission staff a copy of the engagement
666
+ letter detailing the scope of the Independent Consultant’s responsibilities. KPMG shall deliver to
667
+ the Independent Consultant the KPMG Report to the Commission at the same time as KPMG
668
+ provides such report to the Commission staff as specified in paragraph 66. The Special
669
+ Committee shall deliver to the Independent Consultant the Special Committee Report of
670
+ Investigation at the same time as it provides such report to KPMG’s Board of Directors and
671
+ Chief Executive Officer as specified in paragraph 68. KPMG shall require that the Independent
672
+ Consultant:
673
+ a. perform a review (the “IC Review of Quality Controls”) of KPMG’s
674
+ Policies and Procedures to determine whether they are designed and being implemented in a
675
+ manner that provides reasonable assurance of compliance with all professional standards relating
676
+ to ethics and integrity, including whether the firm’s ethics and integrity training and guidance is
677
+ adequate and sufficient; the culture is supportive of ethical and compliant conduct, and KPMG is
678
+ deploying proper resources and oversight for compliance with ethics and integrity requirements;
679
+ and
680
+
681
+ b. review and assess (the “IC Review of Investigation”) the Special
682
+ Committee Investigation and whether KPMG (i) has taken reasonable steps to identify, and to
683
+ determine the extent to which, those audit professionals who engaged in improper exam sharing
684
+ within the past three years, and (ii) has followed the Special Committee’s recommended
685
+ employment actions or other remedial steps.
686
+
687
+ KPMG shall cooperate fully with the Independent Consultant and shall provide reasonable access
688
+ to information and records as the Independent Consultant may reasonably request, subject to
689
+ KPMG’s right to withhold from disclosure any information or records protected by any applicable
690
+ protection or privilege such as the attorney-client privilege or the attorney work product doctrine.
691
+ The Independent Consultant shall have the right to interview any partner, employee, agent, or
692
+ consultant of KPMG concerning any matter within or relating to the IC Review of Quality Controls
693
+ or the IC Review of Investigation.
694
+
695
+ 17
696
+ 70. Reports of IC Reviews. After the IC Review of Quality Controls and the IC
697
+ Review of Investigation are completed, but no later than 90 days after receiving the KPMG Report
698
+ to the Commission and the Special Committee Report of Investigation, the Independent Consultant
699
+ shall issue a detailed written report (the “IC Report”) to KPMG: (i) summarizing its work; (ii)
700
+ making recommendations, as the Independent Consultant deems appropriate, reasonably designed
701
+ to ensure that KPMG’s Policies and Procedures relating to the topics discussed in paragraph 65 are
702
+ adequate and sufficient to provide reasonable assurance of compliance with all relevant
703
+ professional standards relating to ethics and integrity; (iii) describing its review of KPMG’s
704
+ training and making additional recommendations, as the Independent Consultant deems
705
+ appropriate, regarding ethics and integrity training; (iv) making recommendations, as the
706
+ Independent Consultant deems appropriate, reasonably designed to ensure that the Special
707
+ Committee Investigation has taken reasonable steps to identify, and to determine the extent to
708
+ which, audit professionals who engaged in improper exam sharing within the past three years,
709
+ including recommending additional investigative steps for the Special Committee to take; and (v)
710
+ making recommendations, where appropriate, reasonably designed to ensure that KPMG has taken
711
+ appropriate employment actions or other remedial steps in light of the findings of the Special
712
+ Committee Investigation. KPMG shall require the Independent Consultant to provide a copy of the
713
+ IC Report to the Commission staff and the PCAOB staff when the IC Report is issued.
714
+ 71. KPMG shall adopt, as soon as practicable, all recommendations of the Independent
715
+ Consultant in the IC Report. Provided, however, that within 30 days of issuance of the IC Report,
716
+ KPMG may advise the Independent Consultant in writing of any recommendation that it considers
717
+ to be unnecessary, unjust, outside the scope of this Order, unduly burdensome, or impractical.
718
+ KPMG need not adopt any such recommendation at that time, but instead may propose in writing
719
+ to the Independent Consultant an alternative approach designed to achieve the same objective or
720
+ purpose. If KPMG’s written proposal relates to an alternative policy, procedure, or investigative
721
+ step, it will submit its proposal to the Commission staff at the same time. KPMG and the
722
+ Independent Consultant shall engage in good-faith negotiations in an effort to reach agreement on
723
+ any recommendations objected to by KPMG. In the event that the Independent Consultant and
724
+ KPMG are unable to agree on an alternative proposal within 60 days of the issuance of the IC
725
+ Report, KPMG shall abide by the determinations of the Independent Consultant.
726
+ 72. Ethics and Integrity Training. For the period immediately following the completion
727
+ of KPMG’s assessment of the adequacy and sufficiency of its ethics training and guidance as
728
+ specified in paragraph 65, and ending no earlier than 36 months after submission of the final CEO
729
+ certification required by paragraph 73, all audit professionals are required to complete a minimum
730
+ of 12 hours of ethics and integrity training each year, with a minimum 3 hours of such training
731
+ occurring every 3 months.
732
+ 73. Certification by Chief Executive Officer. Within 60 days of issuance of the IC
733
+ Report, but not sooner than 30 days after a copy of the IC Report is provided to the Commission
734
+ staff, KPMG’s Chief Executive Officer must certify to the Commission staff in writing that (i)
735
+ KPMG has adopted and has implemented or will implement all recommendations of the
736
+ Independent Consultant, if any; and (ii) the Independent Consultant agrees with KPMG’s adoption
737
+ and implementation of the recommendations. To the extent that KPMG has not implemented all
738
+ recommendations of the Independent Consultant within 60 days of issuance of the IC Report,
739
+ 18
740
+ KPMG’s Chief Executive Officer must certify to the Commission staff in writing, 30 days after
741
+ their implementation, that (i) KPMG has adopted and has implemented all recommendations of the
742
+ Independent Consultant; and (ii) the Independent Consultant agrees that the recommendations have
743
+ been adequately adopted and implemented by KPMG. The certifications by KPMG’s Chief
744
+ Executive Officer shall provide written evidence of the implementation of the Independent
745
+ Consultant’s recommendations in the form of a narrative, and be supported by exhibits. The
746
+ Commission staff may request further evidence of the implementation of the Independent
747
+ Consultant’s recommendations, and KPMG agrees to provide such evidence.
748
+ 74. Hiring Authority. The Independent Consultant shall have the authority to employ
749
+ legal counsel, consultants, investigators, experts, and other personnel necessary to assist in the
750
+ proper discharge of the Independent Consultant’s duties.
751
+ 75. The Independent Consultant’s compensation and expenses shall be borne
752
+ exclusively by KPMG. To ensure the independence of the Independent Consultant, KPMG: (i)
753
+ shall not have the authority to terminate the Independent Consultant or substitute another
754
+ independent compliance consultant for the initial Independent Consultant, without the prior written
755
+ approval of the Commission staff; and (ii) shall compensate the Independent Consultant and
756
+ persons engaged to assist the Independent Consultant for services rendered pursuant to this Order
757
+ at their reasonable and customary rates.
758
+ 76. KPMG shall require the Independent Consultant to enter into an agreement that
759
+ provides that, for the period of engagement and for a period of two years from completion of the
760
+ engagement, the Independent Consultant shall not enter into any employment, consultant, attorney-
761
+ client, auditing or other professional relationship with KPMG, or any of its present or former
762
+ affiliates, directors, officers, employees, or agents acting in their capacity as such. The agreement
763
+ shall also provide that the Independent Consultant will require that any firm with which he/she is
764
+ affiliated or of which he/she is a member, and any person engaged to assist the Independent
765
+ Consultant in performance of his/her duties under this Order shall not, without prior written
766
+ consent of the Division of Enforcement, enter into any employment, consultant, attorney-client,
767
+ auditing or other professional relationship with KPMG, or any of its present or former affiliates,
768
+ directors, officers, employees, or agents acting in their capacity as such for the period of the
769
+ engagement and for a period of two years after the engagement.
770
+ 77. KPMG shall not be in, and shall not have an attorney-client relationship with the
771
+ Independent Consultant and shall not seek to invoke the attorney-client privilege or any other
772
+ doctrine or privilege to prevent the Independent Consultant from transmitting any information,
773
+ reports, or documents to Commission staff.
774
+ 78. KPMG shall inform its audit professionals of the terms of the Order within ten
775
+ business days after entry of the Order.
776
+ 79. By no later than 15 months after the entry of this Order, unless otherwise extended
777
+ by the Commission staff, KPMG’s Chief Executive Officer shall certify, in writing, compliance
778
+ with the undertakings set forth above. The certification shall provide written evidence of
779
+ compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate
780
+ 19
781
+ compliance. The Commission staff may request further evidence of compliance, and KPMG
782
+ agrees to provide such evidence.
783
+ 80. Annual Certification. With respect to calendar years 2020 and 2021, KPMG’s
784
+ Chief Executive Officer shall certify that KPMG has assessed whether KPMG’s Policies and
785
+ Procedures relating to the topics discussed in paragraph 65 are adequate and sufficient to provide
786
+ reasonable assurance of compliance with all professional standards relating to ethics and integrity
787
+ by, among other things, testing the firm’s implementation of KPMG’s Policies and Procedures
788
+ during the twelve (12) months preceding the certification (“Annual Certification”). The Annual
789
+ Certification shall describe the nature and scope of KPMG’s testing. The Annual Certification
790
+ shall represent that the Chief Executive Officer has reviewed and evaluated the firm’s assessment
791
+ and testing process and that, based on belief and after reasonable inquiry, the Chief Executive
792
+ Officer believes that KPMG’s Policies and Procedures relating to the topics discussed in paragraph
793
+ 65 are adequate and sufficient to provide reasonable assurance of compliance with all professional
794
+ standards relating to ethics and integrity. If the Chief Executive Officer cannot represent that
795
+ KPMG’s Policies and Procedures are adequate and sufficient, then the Chief Executive Officer
796
+ shall describe in reasonable detail the reasons for the inability to so certify. The Chief Executive
797
+ Officer shall provide the Annual Certifications to the Commission’s staff within 60 days of the end
798
+ of the annual period. KPMG shall preserve and retain all documentation regarding the Chief
799
+ Executive Officer’s Annual Certification for seven (7) years and will make it available to the staffs
800
+ of the Commission or the PCAOB upon request.
801
+ 81. All reports and certifications mentioned in these undertakings shall be submitted to
802
+ Melissa Hodgman, Associate Director, Division of Enforcement, Securities and Exchange
803
+ Commission, 100 F Street, NE, Washington, DC 20549, or such other person as the Commission
804
+ staff may request, with a copy to the Office of Chief Counsel of the Enforcement Division.
805
+ 82. For good cause shown, the Commission staff may extend any of the procedural
806
+ dates relating to the undertakings. Deadlines for procedural dates shall be counted in calendar
807
+ days, except that if the last day falls on a weekend or federal holiday, the next business day shall be
808
+ considered to be the last day.
809
+ IV.
810
+
811
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
812
+ agreed to in Respondent KPMG’s Offer.
813
+
814
+ Accordingly, it is hereby ORDERED, effective immediately, that:
815
+
816
+ A. KPMG shall cease and desist from committing or causing any violations and any
817
+ future violations of PCAOB Rule 3500T.
818
+
819
+ B. KPMG be, and hereby is, censured.
820
+
821
+ C. KPMG shall comply with the undertakings enumerated in paragraphs 65 through 82
822
+ above.
823
+ 20
824
+
825
+ D. KPMG shall, within 10 days of the entry of this Order, pay a civil money penalty in
826
+ the amount of $50 million to the Securities and Exchange Commission for transfer to the general
827
+ fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment
828
+ is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717.
829
+
830
+ E. Payment must be made in one of the following ways:
831
+
832
+ (1) Respondent may transmit payment electronically to the Commission,
833
+ which will provide detailed ACH transfer/Fedwire instructions upon
834
+ request;
835
+
836
+ (2) Respondent may make direct payment from a bank account via Pay.gov
837
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
838
+
839
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
840
+ States postal money order, made payable to the Securities and Exchange
841
+ Commission and hand-delivered or mailed to:
842
+
843
+ Enterprise Services Center
844
+ Accounts Receivable Branch
845
+ HQ Bldg., Room 181, AMZ-341
846
+ 6500 South MacArthur Boulevard
847
+ Oklahoma City, OK 73169
848
+
849
+ Payments by check or money order must be accompanied by a cover letter
850
+ identifying KPMG as a Respondent in these proceedings, and the file number of these proceedings;
851
+ a copy of the cover letter and check or money order must be sent to Melissa Hodgman, Division of
852
+ Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549.
853
+
854
+ F. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be
855
+ treated as penalties paid to the government for all purposes, including all tax purposes. To
856
+ preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
857
+ Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any
858
+ award of compensatory damages by the amount of any part of Respondent’s payment of a civil
859
+ penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a
860
+ Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting
861
+ the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the
862
+ Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed
863
+ an additional civil penalty and shall not be deemed to change the amount of the civil penalty
864
+ imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a
865
+
866
+ 21
867
+ private damages action brought against Respondent by or on behalf of one or more investors based
868
+ on substantially the same facts as alleged in the Order instituted by the Commission in this
869
+ proceeding.
870
+
871
+ By the Commission.
872
+
873
+
874
+
875
+
876
+
877
+
878
+ Vanessa A. Countryman
879
+ Acting Secretary
raw/aaer/2019/AAER-4052.txt ADDED
@@ -0,0 +1,94 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+ UNITED STATES OF AMERICA
3
+ Before the
4
+ SECURITIES AND EXCHANGE COMMISSION
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 86123 / June 17, 2019
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4052 / June 17, 2019
10
+ ADMINISTRATIVE PROCEEDING
11
+ File No. 3-15645
12
+
13
+ In the Matter of
14
+ Stephen D. Cheaney, CPA
15
+
16
+ :
17
+ :
18
+ :
19
+ :
20
+ :
21
+ :
22
+ ORDER GRANTING APPLICATION FOR
23
+ REINSTATEMENT TO APPEAR AND PRACTICE
24
+ BEFORE THE COMMISSION AS AN ACCOUNTANT
25
+
26
+ On December 12, 2013, Stephen D. Cheaney, CPA (“Cheaney”) was denied the privilege
27
+ of appearing or practicing as an accountant before the Commission as a result of settled public
28
+ administrative proceedings instituted by the Commission against Cheaney pursuant to Rule
29
+ 102(e)(1) of the Commission’s Rules of Practice.1 This order is issued in response to Cheaney’s
30
+ application for reinstatement to appear and practice before the Commission as an accountant.
31
+
32
+ The Commission’s order involved misconduct by Cheaney in completing a surprise exam
33
+ pursuant to Section 206(4) of the Advisers Act of 1940 and Rule 206(4)-2 thereunder (the
34
+ “Custody Rule”). Freedom One Investment Advisors, Inc. (“Freedom One”), a formerly
35
+ registered investment adviser, had custody of client assets and was required by the Custody Rule
36
+ to have an independent public accountant conduct annual surprise exams to verify those assets.
37
+ For 2006 and 2008, Freedom One engaged UHY LLP to perform the surprise exams. Cheaney
38
+ was a member of the engagement team for the 2008 surprise exam. For his role in the failure to
39
+ to complete the surprise exam (i.e. conduct fieldwork, prepare and issue a surprise exam report,
40
+ and file Forms ADV-E), Cheaney engaged in improper professional conduct and caused
41
+ Freedom One to violate the Custody Rule.
42
+
43
+ Cheaney has met all of the conditions set forth in the original order and, in his capacity as
44
+ an independent accountant, has stated that he will comply with all requirements of the
45
+ Commission and the Public Company Accounting Oversight Board, including, but not limited to
46
+
47
+ 1 See Accounting and Auditing Enforcement Release No. 3518 dated December 12, 2013. Cheaney was permitted,
48
+ pursuant to the order, to apply for reinstatement after two years upon making certain showings.
49
+ all requirements relating to registration, inspections, concurring partner reviews and quality
50
+ control standards. In his capacity as a preparer or reviewer, or as a person responsible for the
51
+ preparation or review, of financial statements of a public company to be filed with the
52
+ Commission, Cheaney attests that he will undertake to have his work reviewed by the
53
+ independent audit committee of any company for which he works, or in some other manner
54
+ acceptable to the Commission, while practicing before the Commission in this capacity.
55
+
56
+ Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for
57
+ reinstatement, and provides that the Commission may reinstate the privilege to appear and
58
+ practice before the Commission “for good cause shown.”2 This “good cause” determination is
59
+ necessarily highly fact specific.
60
+
61
+ On the basis of the information supplied, representations made, and undertakings agreed
62
+ to by Cheaney, it appears that he has complied with the terms of the December 12, 2013 order
63
+ denying him the privilege of appearing or practicing before the Commission as an accountant,
64
+ that no information has come to the attention of the Commission relating to his character,
65
+ integrity, professional conduct, or qualifications to practice before the Commission that would be
66
+ a basis for adverse action against him pursuant to Rule 102(e) of the Commission’s Rules of
67
+ Practice, and that Cheaney, by undertaking to have his work reviewed by the independent audit
68
+ committee of any company for which he works, or in some other manner acceptable to the
69
+ Commission, in his practice before the Commission as a preparer or reviewer of financial
70
+ statements required to be filed with the Commission, and that Cheaney, by undertaking to
71
+ comply with all requirements of the Commission and the Public Company Accounting Oversight
72
+ Board, including, but not limited to, all requirements relating to registration, inspections,
73
+ concurring partner reviews and quality control standards, in his practice before the Commission
74
+ as an independent accountant has shown good cause for reinstatement. Therefore, it is
75
+ accordingly,
76
+
77
+ ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that
78
+ Stephen D. Cheaney, CPA is hereby reinstated to appear and practice before the Commission as
79
+ an accountant.
80
+
81
+ By the Commission.
82
+
83
+
84
+
85
+ Vanessa A. Countryman
86
+ Acting Secretary
87
+
88
+
89
+ 2 Rule 102(e)(5)(i) provides:
90
+
91
+ “An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3)
92
+ of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a heari ng;
93
+ however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the
94
+ Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i).
raw/aaer/2019/AAER-4054.txt ADDED
@@ -0,0 +1,584 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+ 1
3
+
4
+ UNITED STATES OF AMERICA
5
+ Before the
6
+ SECURITIES AND EXCHANGE COMMISSION
7
+
8
+
9
+ SECURITIES EXCHANGE ACT OF 1934
10
+ Release No. 86159 / June 20, 2019
11
+
12
+ ACCOUNTING AND AUDITING ENFORCEMENT
13
+ Release No. 4054 / June 20, 2019
14
+
15
+ ADMINISTRATIVE PROCEEDING
16
+ File No. 3-19207
17
+
18
+
19
+ In the Matter of
20
+
21
+ WALMART INC.,
22
+
23
+ Respondent.
24
+
25
+
26
+ ORDER INSTITUTING CEASE-AND-
27
+ DESIST PROCEEDINGS PURSUANT TO
28
+ SECTION 21C OF THE SECURITIES
29
+ EXCHANGE ACT OF 1934, MAKING
30
+ FINDINGS, AND IMPOSING A CEASE-
31
+ AND-DESIST ORDER
32
+
33
+ I.
34
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that cease-
35
+ and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities
36
+ Exchange Act of 1934 (“Exchange Act”), against Walmart Inc. (“Walmart,” “the Company,” or
37
+ “Respondent”).
38
+ II.
39
+ In anticipation of the institution of these proceedings, Walmart has submitted an Offer of
40
+ Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of
41
+ these proceedings and any other proceedings brought by or on behalf of the Commission, or to
42
+ which the Commission is a party, Respondent admits the Commission’s jurisdiction over
43
+ Respondent and the subject matter of these proceedings, and consents to the entry of this Order
44
+ Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act
45
+ of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below.
46
+ III.
47
+ On the basis of this Order and Respondent’s Offer, the Commission finds1 that:
48
+
49
+ 1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any
50
+ other person or entity in this or any other proceeding.
51
+
52
+ 2
53
+
54
+ Summary
55
+ 1. This matter concerns violations of the books and records and internal accounting
56
+ controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Walmart, a global retailer.
57
+ From in or around July 2000 through in or around April 2011, Walmart’s subsidiaries in Brazil,
58
+ China, India, and Mexico operated without a system of sufficient anti-corruption related internal
59
+ accounting controls. As a result, during this time period, those Walmart subsidiaries paid certain
60
+ third-party intermediaries (“TPIs”) without reasonable assurances that certain transactions were
61
+ consistent with their stated purpose or consistent with the prohibition against making improper
62
+ payments to government officials. Additionally, during this time period, when Walmart learned of
63
+ certain anti-corruption risks, the Company did not either sufficiently investigate the allegations or
64
+ sufficiently mitigate the known risks.
65
+ Respondent
66
+ 2. Walmart is a Delaware corporation with its principal place of business located in
67
+ Bentonville, Arkansas. Walmart had a class of securities registered under Section 12(b) of the
68
+ Exchange Act during the relevant time period. The Company’s shares trade on the New York
69
+ Stock Exchange under the ticker symbol “WMT.”
70
+ Other Relevant Entities and Individuals
71
+ 3. Mexico Subsidiary is a Walmart subsidiary that operates retail stores in Mexico.
72
+ Walmart has a majority equity stake in Mexico Subsidiary with the remaining shares traded on the
73
+ Mexican Stock Exchange.
74
+ 4. China Subsidiary is Walmart’s wholly owned subsidiary that operates Walmart’s
75
+ stores in China.
76
+ 5. Brazil Subsidiary was Walmart’s wholly owned subsidiary that operated
77
+ Walmart’s stores in Brazil.
78
+ 6. India Joint Venture was a joint venture with India Partner that was majority
79
+ owned and controlled by Walmart and operated wholesale stores and distribution centers in India.
80
+ 7. India Retail Business was a franchisee of Walmart that operated retail stores in
81
+ India.
82
+ 8. India Subsidiary was Walmart’s wholly owned subsidiary that was the franchisor
83
+ of India Retail Business.
84
+ 9. India Partner was India Subsidiary’s Joint Venture partner and the owner of India
85
+ Retail Business.
86
+ 10. Walmart Executive was a Walmart International senior real estate employee.
87
+ 11. Walmart Lawyer was a Walmart International senior attorney.
88
+
89
+ 3
90
+
91
+ 12. Walmart Compliance Employee was a Walmart International compliance
92
+ employee.
93
+ 13. Walmart Investigator was a Walmart special investigator.
94
+ 14. Mexico Subsidiary Executive A was a Mexico Subsidiary senior officer.
95
+ 15. Mexico Subsidiary Executive B was a Mexico Subsidiary senior real estate
96
+ executive.
97
+
98
+ 16. Mexico Subsidiary Lawyer A was a Mexico Subsidiary real estate attorney.
99
+ 17. Mexico Subsidiary Lawyer B was a Mexico Subsidiary senior attorney.
100
+ 18. Mexico Subsidiary Internal Auditor was a Mexico Subsidiary senior audit
101
+ employee.
102
+ 19. Outside Lawyer was an attorney retained by Walmart to investigate certain anti-
103
+ corruption allegations in Mexico.
104
+ 20. Brazil Construction Firm was a construction firm retained by Brazil Subsidiary to
105
+ build and renovate certain stores in Brazil.
106
+ FACTS
107
+ Background
108
+ 21. At the end of Walmart’s fiscal year 1990, the Company had 1,528 stores which had
109
+ generated annual sales of $26 billion—all within the United States. Walmart, recognizing that
110
+ international expansion could help it become the world’s largest retailer, entered its first foreign
111
+ market, Mexico, in 1991. In 1993, Walmart established Walmart International as an operating
112
+ segment, headquartered in Bentonville, Arkansas, responsible for overseeing the Company’s
113
+ operations outside the United States. Between 1994 and 1996, the Company established additional
114
+ outposts in other countries, including Brazil and China. During fiscal year 2010, the year in which
115
+ Walmart opened its first Indian wholesale outlet, the Company operated stores in 14 foreign
116
+ countries, with international sales of approximately $100 billion.
117
+
118
+ 22. Walmart’s formula for success centered on Everyday Low Prices and Everyday
119
+ Low Cost. Walmart’s rapid international growth, combined with its low-cost philosophy,
120
+ contributed to the Company’s insufficient anti-corruption related internal accounting controls in
121
+ Walmart’s subsidiaries in Mexico, India, China, and Brazil from in or around July 2000 until in or
122
+ around April 2011.
123
+ Early Corruption Warnings
124
+ 23. In or around 2002 and 2003, Walmart received a request for FCPA training from
125
+ China Subsidiary and also a request for a detailed FCPA policy covering TPIs and joint venture
126
+ partners for China Subsidiary. Walmart did not immediately provide widespread anti-corruption
127
+
128
+ 4
129
+
130
+ training to China Subsidiary or implement TPI and joint venture anti-corruption policies at China
131
+ Subsidiary.
132
+ 24. In or around June 2003, China Subsidiary identified a potentially troubling
133
+ historical payment made by a certain China Subsidiary joint venture. In 1999 or 2000, the joint
134
+ venture had entered into an agreement to pay RMB 500,000 (approximately $60,000) to the
135
+ landlord of a China Subsidiary store for government relationship consulting services and various
136
+ permits. The permit costs should have likely been nominal but China Subsidiary did not further
137
+ inquire into the matter at the time.
138
+ 25. In or around October 2003, China Subsidiary’s internal audit team analyzed gifts
139
+ with an average dollar value of less than $20 given to Chinese government officials by China
140
+ Subsidiary corporate affairs employees and small amounts of cash provided to other Chinese
141
+ officials for travel and meal expenses related to business meetings by the Chinese partner of a
142
+ China Subsidiary joint venture. China Subsidiary’s internal audit team observed that these
143
+ transactions appeared to be inconsistent with corporate policy. China Subsidiary’s internal audit
144
+ team also observed that certain China Subsidiary anti-corruption related internal accounting
145
+ controls had weaknesses. In response, Walmart did not promptly implement all of China
146
+ Subsidiary internal audit’s suggested remedial actions.
147
+ Walmart’s First Anti-Corruption Compliance Program
148
+ 26. In or around 2001, Walmart’s anti-corruption policy consisted of a paragraph in the
149
+ Company’s Statement of Ethics. The paragraph summarized the FCPA’s prohibitions and
150
+ described the statute’s facilitating payment exception and the procedure for making such payments.
151
+ In or around July 2002, Walmart planned to implement a worldwide comprehensive anti-
152
+ corruption compliance and training program within a few months. In or around 2003, Walmart
153
+ prepared draft anti-corruption compliance materials. However, nearly a year passed before the
154
+ Company took additional steps to revise the proposed anti-corruption compliance program.
155
+ 27. Walmart published its International Anti-Corruption Policy and Procedures on or
156
+ around March 21, 2005, and distributed them to the Company’s foreign markets. In or around
157
+ November 2005, the implementation of Walmart’s anti-corruption compliance program was
158
+ formally put on hold until further notice.
159
+ Mexico
160
+ 28. On or around September 21, 2005, Mexico Subsidiary Lawyer A, who had been
161
+ separated from Mexico Subsidiary over a year earlier, wrote an email to Walmart Lawyer. In the
162
+ email, Mexico Subsidiary Lawyer A stated that he was responsible for many real estate projects in
163
+ Mexico from 1975 through 2004 and wrote, “[I]f you’re interested to know confidential details
164
+ about the way we achieved 300 projects…contact me and in that case, I would ask you do it before
165
+ you contact [Mexico Subsidiary] because the kind of issues (for instance, we used to undercover
166
+ expenses identified with a code known and authorized by the highest levels).”
167
+ 29. Walmart retained Outside Lawyer to advise the Company in response to Mexico
168
+ Subsidiary Lawyer A’s allegations. During the first half of October 2005, Outside Lawyer
169
+ interviewed Mexico Subsidiary Lawyer A twice. Mexico Subsidiary Lawyer A alleged that during
170
+
171
+ 5
172
+
173
+ his last six to seven years at Mexico Subsidiary, Mexico Subsidiary had very aggressive growth
174
+ goals that required new stores to open in record time. He further alleged that Mexico Subsidiary
175
+ frequently employed TPIs, known as gestores, who in some cases made improper payments to
176
+ Mexican government officials to obtain licenses, permits, and other approvals for certain store
177
+ projects in Mexico. He also detailed several projects where he claimed Mexico Subsidiary made
178
+ improper payments to obtain licenses, permits, and other approvals.
179
+ 30. Mexico Subsidiary Lawyer A alleged the scheme worked in the following manner:
180
+ a. Mexico Subsidiary would determine which government officials
181
+ needed to receive an improper payment to obtain a permit or license.
182
+ Mexico Subsidiary Lawyer A would then tell one of the gestores
183
+ which official to make an improper payment to and then obtained
184
+ checks from Mexico Subsidiary payable to the gestores.
185
+ b. The gestores cashed the checks and delivered the agreed-upon
186
+ improper payments.
187
+ c. Occasionally, the officials preferred to deal only with Mexico
188
+ Subsidiary Lawyer A. In those instances, according to Mexico
189
+ Subsidiary Lawyer A, the gestores provided cash to Mexico
190
+ Subsidiary Lawyer A who made the improper payments himself.
191
+ d. Mexico Subsidiary Lawyer A and Mexico Subsidiary Executive B
192
+ developed a system of three-digit codes, or claves, which were typed
193
+ or handwritten on the gestores’ invoices and tracked the improper
194
+ benefits obtained by Mexico Subsidiary.
195
+ e. The clave descriptions included: “avoidance or omission of
196
+ requirement;” “influence, control, or knowledge of privileged
197
+ information in the head of the governmental office;” and “payments
198
+ to eliminate fines.”
199
+ f. Mexico Subsidiary Lawyer A claimed that Mexico Subsidiary
200
+ Executive A, Mexico Subsidiary Internal Auditor, and Mexico
201
+ Subsidiary Lawyer B—who had been named Mexico Subsidiary’s
202
+ compliance officer after Mexico Subsidiary Lawyer A left Mexico
203
+ Subsidiary—also participated in the scheme.
204
+ 31. Mexico Subsidiary’s use of real estate gestores stopped after Mexico Subsidiary
205
+ Lawyer A was separated from the Company in or around August 2004 and before Walmart’s 2005
206
+ investigation into the gestores allegations.
207
+ 32. Walmart retained a law firm to initially advise the Company regarding Mexico
208
+ Subsidiary Lawyer A’s allegations and decided to use internal audit and corporate investigations
209
+ employees to conduct an investigation in Mexico. In mid-November 2005, these “preliminary
210
+ inquiry” teams spent two weeks in Mexico investigating the allegations. While there, they
211
+ identified a draft March 2004 Mexico Subsidiary internal audit review of gestoria payments that
212
+
213
+ 6
214
+
215
+ had not previously been shared with Walmart internal audit executives and employees in the
216
+ United States. The final report that was sent to Walmart in December 2004 omitted references,
217
+ contained in earlier versions, to MXN $45.6 million (approximately USD $4 million) paid to one
218
+ of the gestores that Mexico Subsidiary Lawyer A alleged was corrupt. While the draft report stated
219
+ that the transactions reviewed were reasonably appropriate, complied with documentation and
220
+ classification standards, and were compliant with local policies, legislation and generally accepted
221
+ accounting principles, it also described “unusual” and “facilitating” payments made in connection
222
+ with Mexico Subsidiary’s use of gestores. The final report provided to Walmart in December 2004
223
+ had also omitted these references to suspicious transactions.
224
+ 33. In or around November 2005, a Mexico Subsidiary employee explained to
225
+ investigators that when problems arose when obtaining licenses, Mexico Subsidiary typically
226
+ negotiated a payment with the relevant official to resolve the problem. The same employee,
227
+ although unsure whether improper payments were made to government officials, said that Mexico
228
+ Subsidiary utilized gestores to “smooth out the road” so that “there would not be any bumps during
229
+ the request for a license.” The employee also conceded that it was unusual that Mexico Subsidiary
230
+ paid the gestores when most of the payments were supported by only one invoice and that no
231
+ records showed what work they did, with whom they met, or how many hours they worked.
232
+ 34. In or around December 2005, Walmart Investigator circulated a report concerning
233
+ the Mexico Subsidiary allegations that stated that laws had been potentially violated, and
234
+ recommended several additional investigative steps.
235
+ 35. Walmart internal audit produced its own report one week later, which indicated that
236
+ the work performed constituted only a preliminary review of the gestoria payments and that the
237
+ auditors were unable to determine how the gestores used the funds received from Mexico
238
+ Subsidiary. The report also made several recommendations for investigative next steps.
239
+ 36. Walmart did not follow the investigators’ proposed action plans. On or around
240
+ February 7, 2006, Walmart tasked Mexico Subsidiary Lawyer B with leading the remainder of the
241
+ investigation.
242
+ 37. In March 2006, Mexico Subsidiary Lawyer B prepared his investigative report,
243
+ which concluded that the corruption allegations were unsubstantiated. However, it did
244
+ acknowledge that certain of Mexico Subsidiary’s anti-corruption related internal accounting
245
+ controls were deficient and, although some improvements had been made, certain additional anti-
246
+ corruption related internal accounting controls were recommended. Walmart did not address those
247
+ recommendations by implementing sufficient anti-corruption related internal accounting controls
248
+ until in or around April 2011.
249
+ 38. Another corruption risk identified was Mexico Subsidiary’s practice of donations in
250
+ the form of checks, cash, and merchandise to Mexican municipalities and local government
251
+ entities. In some instances, the donations were made around the time Mexico Subsidiary obtained
252
+ permits and licenses or other government approvals. Some of the goods donated, such as cars and
253
+ computers, were capable of being converted to personal use. Mexico Subsidiary did not implement
254
+ sufficient internal accounting controls regarding the use of donations until in or around April 2011.
255
+
256
+ 7
257
+
258
+ China
259
+ 39. Between in or around 2006 to in or around early 2011, China Subsidiary’s internal
260
+ audit team identified certain weaknesses in anti-corruption related internal accounting controls. In
261
+ January 2006, it observed: China Subsidiary’s draft anti-corruption policy and procedures were
262
+ inconsistent with the policy adopted by Walmart in or around March 2005; China Subsidiary’s
263
+ policy excluded employees of state-owned and state-controlled enterprises from the definition of
264
+ “government official;” and formal anti-corruption training at China Subsidiary had not yet been
265
+ provided and most Chinese managers were unfamiliar with the FCPA and misunderstood the
266
+ concept of facilitating payments. Other anti-corruption related internal accounting controls
267
+ weaknesses at China Subsidiary observed by China Subsidiary internal audit included lack of TPI
268
+ retention procedures and lack of a charitable donation policy. Although internal audit raised
269
+ recurring issues during this time period, China Subsidiary’s anti-corruption related internal
270
+ accounting controls were not improved until in or around April 2011.
271
+ India
272
+ 40. In or around late 2006, Walmart conducted a review of India Partner. The initial
273
+ due diligence, while generally positive, raised certain anti-corruption red flags about doing
274
+ business in India. One report stated that Walmart would “be targeted by corrupt individuals and
275
+ organizations seeking bribes or kickbacks in exchange for favorable business relationships or the
276
+ easing of bureaucratic restrictions.” The report also said that corruption would likely cause
277
+ Walmart “delays in the processing of permits, licenses and other paperwork.” The report suggested
278
+ that Walmart could mitigate its corruption risk with “[s]trict adherence” to the FCPA and by
279
+ establishing “strong internal controls and management oversight.”
280
+ 41. In or around November 2006, prior to the formation of India Joint Venture, a
281
+ Walmart real estate employee wrote to Walmart Executive that he had received a “wink and nod”
282
+ when he “brought up transparency and clean transactions relative to the FCPA” with an employee
283
+ of India Partner. The India Partner employee also admitted that “speed payments” were used in the
284
+ past by India Partner. Walmart did not sufficiently address the Walmart real estate employee’s
285
+ warning prior to forming India Joint Venture.
286
+ 42. Because of certain anti-corruption related red flags, Walmart obtained additional
287
+ due diligence reports and reviewed their results.
288
+ 43. Walmart entered the Indian market in partnership with India Partner. Due to foreign
289
+ direct investment restrictions, Walmart proposed that retail operations initially be franchised to
290
+ India Partner with a wholesale business structured as a joint venture majority owned by Walmart.
291
+ In or around August 2007, Walmart and India Partner executed franchise and joint venture
292
+ agreements. Walmart tasked its partner with obtaining all licenses, permits, certifications, and
293
+ zoning for retail stores in India.
294
+ 44. Between in or around March 2009 and in or around January 2011, Walmart’s
295
+ internal audit team in India conducted at least three reviews of India Subsidiary and India Joint
296
+ Venture. All of those reviews identified certain weaknesses in anti-corruption related internal
297
+ accounting controls that required remediation, which were not immediately addressed. During this
298
+
299
+ 8
300
+
301
+ time period, Walmart continued to rely on India Partner for permitting, licensing, and real estate
302
+ matters for retail stores in India.
303
+ 45. In or around July 23, 2011, an anonymous source sent an email to certain Walmart
304
+ executives alleging several issues. According to the anonymous email, an employee of India Joint
305
+ Venture and an employee of India Retail Business were involved in a scheme to make improper
306
+ payments to government officials to obtain store operating permits and licenses, and that a senior
307
+ legal employee of India Joint Venture knew about the scheme. Although one executive requested
308
+ that Walmart investigators examine the allegations, Walmart did not conduct an inquiry at that
309
+ time.
310
+ 46. Despite the audit reports discussing control deficiencies and the anonymous email
311
+ alleging improper payments to government officials, Walmart did not begin to implement and
312
+ maintain a system of sufficient internal accounting controls related to anti-corruption to address
313
+ corruption concerns in India until in or around April 2011.
314
+ 47. Because of Walmart’s failure to implement sufficient internal accounting controls
315
+ related to anti-corruption, from in or about 2009 through in or about at least 2011, India Joint
316
+ Venture and India Retail Business were able to retain TPIs that made improper payments to
317
+ government officials in order to obtain store operating permits and licenses during that period.
318
+ These improper payments were then recorded in India Joint Venture’s books and records with
319
+ vague descriptions like “misc fees,” “miscellaneous,” “professional fees,” “incidental,” and
320
+ “government fee.”
321
+ Brazil
322
+ 48. Despite certain observations from Brazil Subsidiary internal audit regarding the
323
+ Brazil Subsidiary anti-corruption related internal accounting controls weaknesses, Brazil
324
+ Subsidiary continued to retain certain high-risk TPIs. Starting in or around 2008 to in or around
325
+ April 2012, Brazil Subsidiary employed Brazil Construction Firm to build or renovate eight stores
326
+ and obtain all required construction permits. Although certain Brazil Subsidiary employees were
327
+ aware of the Brazil Construction Firm’s reputation for corruption, no due diligence was conducted
328
+ until in or around 2009, a year after Brazil Construction Firm was engaged. That due diligence
329
+ review cited allegations that Brazil Construction Firm had made improper payments to Brazilian
330
+ officials for non-Walmart projects and engaged in other illegal acts for non-Walmart projects.
331
+ Citing these allegations, the report recommended that Brazil Subsidiary not renew Brazil
332
+ Construction Firm’s contract. Notwithstanding the due diligence results, Walmart continued to use
333
+ Brazil Construction Firm until in or around April 2012.
334
+ 49. One of the Brazil Subsidiary projects that Brazil Construction Firm worked on was
335
+ the construction of a new Walmart store that was originally scheduled to open on or around
336
+ November 19, 2009. Brazil Subsidiary tasked Brazil Construction Firm with obtaining the
337
+ construction permit and with handling all aspects of the store’s construction in May 2009. Later,
338
+ because Brazil Construction Firm was unable to timely obtain all permits, the grand opening was
339
+ delayed until mid-December. On or around December 7, 2009, Brazil Subsidiary’s real estate
340
+ committee met and discussed the store project, which was on the committee’s agenda due to its
341
+ missing operating license. At the meeting, a Brazil Subsidiary executive stated that the store
342
+
343
+ 9
344
+
345
+ needed an “extraordinary process” to obtain the license. That same day, certain members of Brazil
346
+ Subsidiary management approved hiring another TPI—indirectly through Brazil Construction
347
+ Firm—to secure the license. Nine days later, the TPI obtained all governmental approvals for the
348
+ store. The TPI received approximately $127,000, an amount greater than Brazil Subsidiary’s other
349
+ permitting consultants, for the TPI’s efforts with these permits and certain operating permits
350
+ obtained after the store opened.
351
+ 50. Certain Brazil Subsidiary employees expressed their concerns regarding the TPI to
352
+ Brazil Subsidiary management prior to the TPI’s engagement. Their concerns included the
353
+ possibility that the TPI was a government official and that the TPI did not have a formal
354
+ corporation to accept payment. A former employee of Brazil Construction Firm later stated that the
355
+ TPI told him at that time that when the TPI was working on obtaining the construction permit
356
+ under the direction of Brazil Construction Firm, 1) the TPI needed cash which the TPI had
357
+ requested from Brazil Construction Firm and had received from the former employee; and 2) the
358
+ TPI stated the money was for “people I have to pay,” which the former employee stated he
359
+ understood to mean would be used to provide improper payments to Brazilian government
360
+ officials. That former Brazil Construction Firm employee later stated that he made improper
361
+ payments himself, without the knowledge of Brazil Subsidiary, in connection with two other Brazil
362
+ Subsidiary stores.
363
+ 51. In or around 2010, Brazil Subsidiary planned to open two other stores in the same
364
+ area. As with the earlier project, Brazil Subsidiary engaged the same TPI at year-end to assist with
365
+ stores that had been delayed due to licensing problems. The TPI again commanded an unusually
366
+ high fee for the TPI’s services—approximately $400,000—and was paid indirectly through Brazil
367
+ Subsidiary’s contractor. Despite earlier corruption concerns, no due diligence was conducted on
368
+ the TPI prior to the TPI’s work. The TPI’s ability to obtain licenses and permits quickly earned the
369
+ TPI the nickname “sorceress” or “genie” within Brazil Subsidiary.
370
+ Walmart’s Subsequent Anti-Corruption Compliance Programs
371
+ 52. Although certain Walmart executives discussed revising the anti-corruption policy
372
+ and procedures shortly after their publication in March 2005, the Company did not announce the
373
+ launch of a “new and enhanced” anti-corruption program until on or around February 8, 2007. The
374
+ program would feature a revised policy, new procedures, and improved auditing and investigative
375
+ protocols—with an emphasis on training and TPI due diligence. Its rollout was scheduled to begin
376
+ two months later and conclude in or around 2008.
377
+ 53. Walmart published the revised anti-corruption program as Company policy on or
378
+ around December 12, 2008. However, this policy was not sufficiently implemented at that time.
379
+ Shortly thereafter, Walmart appointed Walmart Compliance Employee as the Company’s first vice
380
+ president of international compliance and tasked him with updating the anti-corruption compliance
381
+ program.
382
+ 54. In or around April 2009, Walmart informed its foreign subsidiaries that it would
383
+ soon promulgate anti-corruption standards that would be more flexible and easier and quicker to
384
+ implement. Instead of taking a centralized approach, each country would be required to devise its
385
+ own program based on the standards. On or around June 11, 2009, Walmart circulated to the
386
+
387
+ 10
388
+
389
+ subsidiaries a one-page document entitled Global Anti-Corruption Standards that: 1) summarized
390
+ the FCPA; 2) acknowledged that in certain instances Walmart may provide gifts, meals, travel, and
391
+ entertainment to government officials; 3) noted that the standards applied to TPIs; and 4) provided
392
+ contact information for the Company’s global ethics office. The markets were instructed to design
393
+ and implement risk-based internal accounting controls, procedures, and training to ensure the
394
+ standards were met.
395
+ 55. Walmart’s fiscal year 2010 FCPA reviews in Brazil, India, and Mexico identified
396
+ certain of its anti-corruption related internal accounting controls had weaknesses in each
397
+ subsidiary.
398
+ 56. By around April 2011, Walmart recognized that its existing anti-corruption
399
+ compliance program was not sufficient and hired an international law firm and an international
400
+ consulting firm to conduct a worldwide anti-corruption compliance review for the purpose of
401
+ reviewing and testing Walmart’s anti-corruption compliance program in various foreign
402
+ subsidiaries around the world, including in Mexico, India, Brazil, and China.
403
+ Legal Standards and Violations
404
+ 57. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease-
405
+ and-desist order upon any person who is violating, has violated, or is about to violate any provision
406
+ of the Exchange Act or any regulation thereunder, and upon any other person that is, was, or would
407
+ be a cause of the violation, due to an act or omission the person knew or should have known would
408
+ contribute to such violation.
409
+ FCPA Violations
410
+ Books and Records Violations
411
+ 58. As a result of the conduct described above, Walmart violated Section 13(b)(2)(A)
412
+ of the Exchange Act, which requires issuers that have a class of securities registered pursuant to
413
+ Section 12 of the Exchange Act and issuers with reporting obligations pursuant to Section 15(d) of
414
+ the Exchange Act to make and keep books, records, and accounts which, in reasonable detail,
415
+ accurately and fairly reflect their transactions and dispositions of their assets.
416
+ Internal Accounting Controls Violations
417
+ 59. As a result of the conduct described above, Walmart violated Section 13(b)(2)(B) of
418
+ the Exchange Act, which requires issuers that have a class of securities registered pursuant to
419
+ Section 12 of the Exchange Act and issuers with reporting obligations pursuant to Section 15(d) of
420
+ the Exchange Act to devise and maintain a system of internal accounting controls sufficient to
421
+ provide reasonable assurances that (i) transactions are executed in accordance with management’s
422
+ general or specific authorization; (ii) transactions are recorded as necessary (I) to permit
423
+ preparation of financial statements in conformity with generally accepted accounting principles or
424
+ any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii)
425
+ access to assets is permitted only in accordance with management’s general or specific
426
+ authorization; and (iv) the recorded accountability for assets is compared with the existing assets at
427
+ reasonable intervals and appropriate action is taken with respect to any differences.
428
+
429
+ 11
430
+
431
+ Walmart’s Disclosures, Cooperation, and Remediation
432
+ 60. In determining to accept the Offer, the Commission considered Walmart’s
433
+ disclosures, cooperation, and remedial efforts.
434
+ 61. Walmart made an initial self-disclosure of the potential FCPA violations in Mexico
435
+ to the Commission’s staff in November 2011, after it retained outside counsel to conduct an
436
+ internal investigation under the direction of the Audit Committee of Walmart’s Board of Directors.
437
+ Subsequently, Walmart voluntarily expanded its investigation and disclosed its findings concerning
438
+ Brazil, China, and India to the Commission staff, although such disclosure was after the
439
+ Commission staff had already begun investigating the Company related to conduct in Mexico.
440
+ 62. Walmart further cooperated by identifying issues and facts that would likely be of
441
+ interest to the Commission and the staff and providing regular updates to the staff; making regular
442
+ factual presentations to the staff and sharing information that would not have been otherwise
443
+ readily available to the staff; making foreign-based employees available for interviews in the
444
+ United States; producing translations of relevant documents; and obtaining cooperation of former
445
+ employees and third parties, including their consent to interviews.
446
+ 63. Walmart’s remedial measures include: (1) hiring a Global Chief Ethics &
447
+ Compliance Officer , an International Chief Ethics & Compliance Officer, and a dedicated Global
448
+ Anti-Corruption Officer, with separate reporting lines to the Audit Committee of Walmart’s Board
449
+ of Directors; (2) adding dedicated regional and market Chief Ethics & Compliance Officers,
450
+ foreign market anti-corruption directors, and anti-corruption compliance personnel at Walmart’s
451
+ home office and in Walmart’s foreign markets; (3) conducting, across each of Walmart’s markets,
452
+ enhanced monthly and quarterly anti-corruption monitoring; (4) enhancing on-site global anti-
453
+ corruption audits to test adherence to enhanced anti-corruption related internal accounting controls
454
+ and procedures; (5) enhancing anti-corruption related internal accounting controls on the selection
455
+ and use of third parties; (6) enhancing global anti-corruption training and awareness programs; (7)
456
+ implementing an automated global license management system for obtaining and renewing
457
+ licenses and permits and a global donation management system, which enhances controls relating
458
+ to charitable donations; and (8) terminating business relationships with third parties involved in the
459
+ conduct at issue.
460
+ Non-Prosecution Agreement
461
+ 64. Walmart has entered into a non-prosecution agreement with the United States
462
+ Department of Justice that acknowledges responsibility for criminal conduct relating to certain
463
+ findings in the Order.
464
+ Non-Imposition of a Civil Penalty
465
+ 65. Respondent acknowledges that the Commission is not imposing a civil penalty
466
+ based upon Walmart’s payment of a $137,955,249 monetary fine as part of Walmart’s resolution
467
+ with the United States Department of Justice.
468
+
469
+
470
+ 12
471
+
472
+ IV.
473
+ Undertakings
474
+ 66. Respondent undertakes to cooperate fully with the Commission in any and all
475
+ investigations, litigation, or other proceedings relating to or arising from the matters described in
476
+ this Order. In connection with such cooperation, Respondent shall:
477
+ A. Produce, without service of a notice or subpoena, any and all non-privileged
478
+ documents and other information requested by the Commission staff subject to any
479
+ restrictions under the law of any foreign jurisdiction;
480
+ B. Use its best efforts to cause its current or former officers, employees, and
481
+ directors to be interviewed by Commission staff at such times and places as the
482
+ Commission staff reasonably may direct; and
483
+ C. Use its best efforts to cause its current or former officers, employees, and
484
+ directors to appear and testify without service of a notice or subpoena in such
485
+ investigations, depositions, hearings, or trials as may be requested by the Commission staff.
486
+ 67. Respondent undertakes to report to the Commission staff periodically, at no less
487
+ than one-year intervals, during a two-year period from the date of this Order on the status of
488
+ Respondent’s remediation and implementation of anti-corruption related compliance measures.
489
+ During this two-year period, Respondent shall (1) submit an initial report, and (2) conduct and
490
+ prepare one follow-up review and report, as described below:
491
+ A. Respondent shall submit to the Commission staff a written report within
492
+ twelve (12) months from the date of entry of this Order setting forth a complete
493
+ description of its FCPA and anti-corruption related remediation efforts to date, its
494
+ proposals reasonably designed to improve its policies and procedures for ensuring
495
+ compliance with the FCPA and other applicable anti-corruption laws, and the parameters
496
+ of the subsequent review (“Initial Report”). The Initial Report shall be transmitted to
497
+ Charles Cain, Chief, FCPA Unit, Division of Enforcement, Securities and Exchange
498
+ Commission, 100 F Street, N.E., Washington, DC 20549. Respondent may extend the
499
+ time period for issuance of the Initial Report with prior written approval of the
500
+ Commission staff.
501
+ B. Respondent shall undertake one follow-up review, incorporating any
502
+ comments provided by the Commission staff on the Initial Report, to further monitor and
503
+ assess whether the policies and procedures of Respondent are reasonably designed to
504
+ detect and prevent violations of the FCPA and other applicable anti-corruption laws (the
505
+ “Follow-Up Report”).
506
+
507
+ C. The Follow-Up Report shall be completed no later than twelve (12)
508
+ months after the Initial Report. Respondent may extend the time period for issuance of
509
+ the Follow-Up Report with prior written approval of the Commission staff.
510
+
511
+ 13
512
+
513
+ 68. The Initial Report, Follow-up Report, supporting documentation, and any related
514
+ communications, presentations, and certifications submitted by Respondent may include
515
+ proprietary, financial, confidential, and competitive business information. Public disclosure of
516
+ the reports could discourage cooperation, impede pending or potential government investigations
517
+ or undermine the objectives of the reporting requirement. For these reasons, among others, the
518
+ reports and contents thereof are intended to remain and shall remain nonpublic, except (1)
519
+ pursuant to court order, (2) as agreed by the parties in writing, (3) to the extent that the
520
+ Commission determines in its sole discretion that disclosure would be in furtherance of the
521
+ Commission’s discharge of its duties and responsibilities, or (4) is otherwise required by law.
522
+ 69. Should Respondent, during the two-year period from the date of this Order,
523
+ discover credible evidence, not already reported to the Commission staff, that corrupt payments
524
+ or corrupt transfers of property or interests may have been offered, promised, paid, or authorized
525
+ by a Respondent entity or person, or any entity or person while working directly for Respondent,
526
+ or that related false books and records have been maintained, Respondent shall promptly report
527
+ such conduct to the Commission staff.
528
+ 70. During this two-year period from the date of this Order, Respondent shall provide
529
+ its external auditors with its annual internal audit plan and reports of the results of internal audit
530
+ procedures and, subject to Respondent’s attorney-client privilege and attorney work product
531
+ protections, its assessment of its anti-corruption compliance policies and procedures.
532
+ 71. During this two-year period from the date of this Order, Respondent shall provide
533
+ the Commission staff with any written reports or recommendations provided by Respondent’s
534
+ external auditors in response to Respondent’s annual internal audit plan, reports of the results of
535
+ internal audit procedures, and its assessment of its anti-corruption compliance policies and
536
+ procedures.
537
+ 72. Respondent shall certify, in writing, compliance with the undertakings set forth
538
+ above. The certification shall identify the undertaking(s), provide written evidence of compliance
539
+ in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance.
540
+ The Commission staff may make reasonable requests for further evidence of compliance, and
541
+ Respondent agrees to provide such evidence. The certification and supporting materials shall be
542
+ submitted to Charles Cain, Chief, FCPA Unit, Division of Enforcement, with a copy to the
543
+ Office of the Chief Counsel of the Division of Enforcement, Securities and Exchange
544
+ Commission, 100 F Street, N.E., Washington, DC 20549, no later than 60 days from the date of
545
+ the completion of the undertakings.
546
+ 73. In determining whether to accept the Offer, the Commission has considered these
547
+ undertakings.
548
+ V.
549
+ Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that:
550
+ A. Respondent cease and desist from committing or causing any violations and any
551
+ future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, 15 U.S.C. §§
552
+ 78m(b)(2)(A) and 78m(b)(2)(B).
553
+
554
+ 14
555
+
556
+ B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of
557
+ $119,647,735 and prejudgment interest of $25,043,437 for a total payment of $144,691,172, to the
558
+ Securities and Exchange Commission for transfer to the general fund of the United States
559
+ Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional
560
+ interest shall accrue pursuant to SEC Rule of Practice 600. Payment must be made in one of the
561
+ following ways:
562
+ (1) Respondent may transmit payment electronically to the Commission, which
563
+ will provide detailed ACH transfer/Fedwire instructions upon request;
564
+ (2) Respondent may make direct payment from a bank account via Pay.gov
565
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
566
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
567
+ States postal money order, made payable to the Securities and Exchange
568
+ Commission and hand-delivered or mailed to:
569
+ Enterprise Services Center
570
+ Accounts Receivable Branch
571
+ HQ Bldg., Room 181, AMZ-341
572
+ 6500 South MacArthur Boulevard
573
+ Oklahoma City, OK 73169
574
+ Payments by check or money order must be accompanied by a cover letter identifying
575
+ Walmart as the Respondent in these proceedings, and the file number of these proceedings; a copy
576
+ of the cover letter and check or money order must be sent to Charles Cain, Chief, FCPA Unit,
577
+ Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC
578
+ 20549.
579
+ C. Respondent shall comply with the undertakings enumerated in Section IV,
580
+ paragraphs 67 through 72 above.
581
+ By the Commission.
582
+
583
+ Vanessa A. Countryman
584
+ Acting Secretary
raw/aaer/2019/AAER-4055.txt ADDED
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1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES EXCHANGE ACT OF 1934
6
+ Release No. 86239 / June 28, 2019
7
+
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4055 / June 28, 2019
10
+
11
+ ADMINISTRATIVE PROCEEDING
12
+ File No. 3-19224
13
+ ORDER INSTITUTING PUBLIC
14
+ In the Matter of ADMINISTRATIVE AND CEASE-AND-DESIST
15
+ PROCEEDINGS PURSUANT TO SECTIONS 4C
16
+ AND 21C OF THE SECURITIES EXCHANGE
17
+ R. GORDON JONES, CPA, ACT OF 1934 AND RULE 102(e) OF THE
18
+ COMMISSION’S RULES OF PRACTICE,
19
+ MAKING FINDINGS, AND IMPOSING
20
+ Respondent.
21
+
22
+ REMEDIAL SANCTIONS AND A CEASE-
23
+ AND-DESIST ORDER
24
+
25
+ I.
26
+
27
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
28
+ administrative and cease-and-desist proceedings be, and hereby are, instituted against R. Gordon
29
+ Jones, CPA (“Respondent” or “Jones”) pursuant to Sections 4C1 and 21C of the Securities
30
+ Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of
31
+ Practice.2
32
+
33
+
34
+ 1 Section 4C provides, in relevant part, that:
35
+
36
+ The Commission may censure any person, or deny, temporarily or permanently, to any
37
+ person the privilege of appearing or practicing before the Commission in any way, if that
38
+ person is found . . . (3) to have willfully violated, or willfully aided and abetted the
39
+ violation of, any provision of the securities laws or the rules and regulations issued
40
+ thereunder.
41
+
42
+ 2 Rule 102(e)(1)(iii) provides, in pertinent part, that:
43
+
44
+ The Commission may . . . deny, temporarily or permanently, the privilege of appearing or
45
+ practicing before it . . . to any person who is found…to have willfully violated, or
46
+ willfully aided and abetted the violation of any provision of the Federal securities laws or
47
+ the rules and regulations thereunder.
48
+ 2
49
+ II.
50
+
51
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
52
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
53
+ purposes of these proceedings and any other proceedings brought by or on behalf of the
54
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
55
+ herein, except as to the Commission’s jurisdiction over him and the subject matter of these
56
+ proceedings, which are admitted, and except as provided herein in Section V, Respondent consents
57
+ to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings
58
+ Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the
59
+ Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease-
60
+ and-Desist Order (“Order”), as set forth below.
61
+
62
+ III.
63
+
64
+ On the basis of this Order and Respondent’s Offer, the Commission finds3 that:
65
+
66
+ Summary
67
+
68
+ 1. These proceedings arise out of Jones’s improper application of generally accepted
69
+ accounting principles (“GAAP”) and participation in the preparation of materially misstated
70
+ financial statements included in Blue Earth, Inc.’s (“Blue Earth”) periodic reports filed with the
71
+ Commission for at least the reporting periods ended September 30, 2013 through December 31,
72
+ 2014. Blue Earth used Jones, an accounting consultant, to make GAAP determinations and assist in
73
+ preparing the company’s financial statements.
74
+
75
+ 2. Jones failed to comply with GAAP in determining the accounting treatment of the
76
+ company’s most significant transactions. His actions resulted in the company improperly recording
77
+ on its books and records and reporting in its financial statements a purported $44 million
78
+ “Construction in Progress” asset, instead of allocating almost the entirety of that amount to
79
+ goodwill. The asset comprised 56% and 51% of the company’s reported assets in the financial
80
+ statements included in the company’s Form 10-Q for the third quarter of 2013, filed in November
81
+ 2013, and its 2013 Form 10-K, filed in March 2014, respectively.
82
+
83
+ 3. Jones further compounded the improper application of GAAP when he
84
+ recharacterized the improperly classified “Construction in Progress” to “Property and Equipment”
85
+ on the company’s balance sheets included in the company’s Forms 10-Q for the first and second
86
+ quarters of 2014, filed in May and August 2014, respectively.
87
+
88
+ 4. Lastly, Jones failed to comply with GAAP in determining that a fully vested share-
89
+ based payment award issued pursuant to an employment contract, the cost of which, in this instance,
90
+
91
+ 3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding
92
+ on any other person or entity in this or any other proceeding.
93
+ 3
94
+ should have been immediately expensed, could be recorded as an asset and amortized over three
95
+ years. This resulted in the company improperly recording on its books and records and reporting in
96
+ its financial statements a purported $4.6 million asset that should have been expensed. The
97
+ improper accounting resulted in Blue Earth understating its expenses by approximately $4.3 million,
98
+ which constituted a 43% understatement of its net income (loss) before taxes and of its net loss, in
99
+ its financial statements included in the Form 10-Q for the first quarter of 2014, and a 10%
100
+ understatement of its net income (loss) before taxes, a 9.4% understatement of its net loss and 3.4%
101
+ overstatements of assets in the financial statements included in the company’s Form 10-K for the
102
+ year ending December 31, 2014.
103
+
104
+ 5. As a result, Jones knowingly generated misstated books, records and accounts for
105
+ Blue Earth. Jones also aided and abetted and caused Blue Earth’s failure to make and keep books,
106
+ records, and accounts which fairly and accurately reflected the company’s transactions, to maintain
107
+ a system of internal accounting controls, and to file accurate periodic reports with the Commission.
108
+
109
+ Respondent
110
+
111
+ 6. R. Gordon Jones, age 64, resides in Farmington, Utah. Jones has been licensed as
112
+ a Certified Public Accountant (“CPA”) in the State of Utah since June 1980. He was licensed as a
113
+ CPA in Oklahoma from December 1995 until June 2001, at which time his license was cancelled
114
+ at his request. During the relevant period, he provided accounting services to public and private
115
+ companies, including making accounting determinations and preparing financial statements in
116
+ accordance with GAAP.
117
+
118
+ On May 4, 2001, the Commission issued a consent order against Jones pursuant to Rule
119
+ 102(e)(1)(ii) of the Commission’s Rules of Practice which denied him the privilege of appearing or
120
+ practicing before the Commission as an accountant based on his failure to perform an independent
121
+ audit according to the Generally Accepted Auditing Standards, with a right to apply for
122
+ reinstatement after three years. In the Matter of R. Gordon Jones, CPA and Mark F. Jensen, Ex.
123
+ Act Rel. No. 44265 (May 4, 2001) (“2001 SEC Order”). In 2015, the U.S. District Court for the
124
+ District of Utah found in a contempt proceeding that Jones had violated the 2001 SEC Order and
125
+ ordered him to comply with the 2001 SEC Order and disgorge $600,000 in fees associated with
126
+ prohibited work he engaged in after entry of the Order, including fees earned from Blue Earth
127
+ through mid-2012.
128
+
129
+ Relevant Entity
130
+
131
+ 7. Blue Earth, Inc., a company incorporated in Nevada and headquartered in
132
+ Henderson, Nevada during the relevant period, purported to be a comprehensive provider of
133
+ renewable and energy efficient services for small and medium-sized commercial and industrial
134
+ facilities. During the relevant period up to August 28, 2014, the company had a class of common
135
+ stock registered with the Commission pursuant to Exchange Act Section 12(g) which was quoted
136
+ on the OTC Bulletin Board. Effective August 28, 2014, the company registered its common stock
137
+ with the Commission pursuant to Section 12(b) of the Exchange Act, and the stock was listed on
138
+ the NASDAQ Capital Market. On March 21, 2016, Blue Earth filed for Chapter 11 bankruptcy.
139
+ 4
140
+ The NASDAQ suspended trading in Blue Earth’s common stock on March 28, 2016 and then
141
+ delisted the stock effective April 18, 2016. Blue Earth filed with the Commission a Form 15
142
+ terminating the registration of its common stock under Section 12(g) of the Exchange Act on
143
+ August 1, 2016 and a Form 15 suspending its periodic reporting obligations under Section 15(d) of
144
+ the Exchange Act on January 4, 2017.
145
+
146
+ $44 Million “Construction in Progress” Asset
147
+
148
+ 8. Since 2010, Jones, a contract accountant, had prepared Blue Earth’s financial
149
+ statements and made all GAAP determinations for the company, with limited substantive review
150
+ by others in the company. During the relevant period, Jones assisted the company in devising and
151
+ maintaining the company’s internal accounting controls.
152
+
153
+ 9. On July 15, 2013, Blue Earth acquired a subsidiary it eventually renamed Blue
154
+ Earth CHP (“BE CHP”).4 Through BE CHP, Blue Earth intended to enter into agreements with
155
+ customers pursuant to which Blue Earth would develop, build, own, and operate combined heat
156
+ and power (“CHP”) plants on land leased from the customer. The plants would generate steam and
157
+ electricity for the customer at below market rates, and Blue Earth would sell the excess electricity
158
+ to the local utility. Blue Earth paid for BE CHP with 15,500,000 shares of restricted company
159
+ stock. To determine the purchase price, the company multiplied the number of shares transferred
160
+ by the share price resulting in $44,035,500.
161
+
162
+ 10. Shortly after the acquisition, BE CHP entered into seven non-binding term sheets
163
+ with a major meat processing company. At the insistence of the meat processing company, the
164
+ term sheets expressly stated that they were non-binding. The meat processing company would be
165
+ bound only when the parties signed a “definitive agreement” for each facility, meaning: (i) a
166
+ ground lease allowing Blue Earth access to the premises for purposes of constructing and operating
167
+ the plant and (ii) a power purchase agreement obligating BE CHP to sell, and meat processing
168
+ company to buy, steam and electricity at a set price. No such contract was signed until August
169
+ 2014, when Blue Earth and the meat processing company executed a definitive agreement for one
170
+ plant. Blue Earth and the customer signed a definitive agreement for a second, smaller plant in
171
+ December 2014. Definitive agreements were not executed for any other plants.
172
+
173
+ 11. The GAAP provision governing accounting for business combinations, Accounting
174
+ Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), generally requires the
175
+ accounting acquirer to: (a) determine the purchase price which, in the case of a stock-for-stock
176
+ acquisition is the fair market value of the shares transferred by the acquirer (unless the acquiree’s
177
+ share price is more reliably measured); (b) identify all assets acquired, including intangible assets,
178
+ and liabilities assumed; (c) determine the fair value of each such asset and liability; (d) allocate the
179
+ purchase price to each identified asset and liability; and (e) allocate the residual to goodwill.
180
+
181
+ 4 Blue Earth initially acquired and combined two affiliated private entities to form BE CHP. BE
182
+ CHP is used herein to refer to the pre-merger entities and the single post-merger subsidiary into
183
+ which they were combined.
184
+ 5
185
+
186
+ 12. Applying ASC 805 to its acquisition of BE CHP, Blue Earth should have identified
187
+ all the assets acquired, including any intangible assets; determined the fair value of those assets;
188
+ and then allocated the purchase price to the acquired assets, liabilities, and, if there was any
189
+ residual, to goodwill.
190
+
191
+ 13. Jones knew the explicitly set forth requirements of ASC 805, but he deviated from
192
+ them in several respects in accounting for the acquisition during the third quarter of 2013. First,
193
+ Jones took the position that, because BE CHP had no customer base or revenues at the time Blue
194
+ Earth acquired it, it could have no goodwill. Accordingly, Jones concluded that no portion of the
195
+ $44 million could be allocated to goodwill. Second, he had the entire purchase price recorded as
196
+ an asset he named “Construction in Progress”, with no portion of the purchase price allocated to
197
+ the immaterial tangible assets and liabilities. Third, Jones did not determine whether Blue Earth
198
+ obtained any identifiable intangible assets in the acquisition. Fourth, Jones did not obtain a fair
199
+ value of any identifiable intangible asset prior to his having the entire $44 million recorded on Blue
200
+ Earth’s books as “Construction in Progress.”
201
+
202
+ 14. After the asset was booked in the company’s internal records, Jones sought from
203
+ the company’s Chief Financial Officer (“CFO”) support for the $44 million “Construction in
204
+ Progress” asset in connection with the year-end audit.
205
+
206
+ 15. In October 2013, the CFO provided to Jones a discounted cash flow (the “October
207
+ 2013 DCF”) the CFO had prepared which purportedly supported the $44 million “Construction in
208
+ Progress” asset valuation. It purported to be a DCF of the cash flows anticipated from constructing
209
+ and operating non-existent and speculative CHP plants at seven of the meat processing company’s
210
+ sites and from the sale of steam and electricity to the facilities and local utility companies over a
211
+ more than 10-year period. The DCF was based on two assumptions: (a) that definitive agreements
212
+ existed in relation to all seven sites; and (b) that full financing was available to BE CHP to
213
+ construct and operate the seven plants. Neither assumption was based in fact.
214
+
215
+ 16. Jones knew that the October 2013 DCF purported to value the equity cash flows of
216
+ the BE CHP enterprise, and not any discrete asset or assets of the acquired business. He knew
217
+ from the face of the October 2013 DCF that it was based on cash flows from CHP plants at seven
218
+ sites for which definitive agreements had not been signed. Nonetheless, the company provided the
219
+ October 2013 DCF to the auditor in connection with the year-end audit. Jones made additional
220
+ inquiries about the status of the contracts prior to Blue Earth’s filing of its 2013 Form 10-K with
221
+ the Commission in March 2014, and he learned that definitive agreements still were not signed for
222
+ any site.
223
+
224
+ 17. Despite knowing all of this, Jones proceeded to assist in the preparation of financial
225
+ statements included in the third quarter Form 10-Q filed with the Commission in November 2013
226
+ and fiscal year 2013 Form 10-K filed in March 2014 that listed the $44 million “Construction in
227
+ Progress” asset under “Other Assets” on the balance sheet and allocated nothing to goodwill. The
228
+ $44 million “Construction in Progress” asset represented 56% and 51% of Blue Earth’s total assets
229
+ on its balance sheet for the reporting period ended September 30, 2013 and December 31, 2013,
230
+ 6
231
+ respectively.
232
+
233
+ 18. In the first and second quarters of 2014, Jones improperly recharacterized the $44
234
+ million “Construction in Progress” asset originally under “Other Assets” as “Construction in
235
+ Progress” under “Property and Equipment” on the company’s books and records and on the
236
+ balance sheet of the company’s financial statements reported with the Forms 10-Q filed in May
237
+ and August 2014.
238
+
239
+ Improper Capitalization of Compensation Expense
240
+
241
+ 19. In February 2014, Blue Earth hired an individual to run its capital formation
242
+ subsidiary pursuant to a three-year employment agreement for a salary of $120,000 per year. At
243
+ the same time, Blue Earth separately issued to the individual 1,725,000 shares of Blue Earth
244
+ restricted common stock, with no vesting schedule, valued at approximately $4.6 million. The
245
+ value of the shares should have been expensed in the quarter they were issued as a compensation
246
+ expense under ASC 718 Compensation — Stock Compensation (“ASC 718”). Instead, Blue Earth
247
+ recorded the $4.6 million as an asset, capitalized it, and amortized it over three years.
248
+
249
+ 20. The shares were issued to the individual pursuant to a so-called “Sale of Goodwill”
250
+ agreement under which Blue Earth purported to purchase the executive’s “Seller’s Goodwill”
251
+ which included, among other things, an agreement that the individual share information about
252
+ certain of his relationships, recommend Blue Earth to his contacts in the energy efficiency and
253
+ clean tech industry, and enter into an employment agreement with Blue Earth. Under the “Sale of
254
+ Goodwill” agreement, Blue Earth issued the shares to the individual upon the execution of the
255
+ agreement. There were no conditions to the individual receiving the shares, nor was there any
256
+ vesting period.
257
+
258
+ 21. Although it was characterized as a purchase of “Seller’s Goodwill,” the purpose of
259
+ the transaction was to secure the services of the individual. The value Blue Earth derived from the
260
+ transaction was the individual’s services, namely the executive’s contacts within the industry and
261
+ his potential use of that information to raise funds for Blue Earth.
262
+
263
+ 22. Under ASC 718, the $4.6 million fair value of the shares issued should have been
264
+ treated as stock compensation. As stock compensation, without a vesting period, the $4.6 million
265
+ share payment from Blue Earth to the individual should have expensed in the period it was made,
266
+ instead of being capitalized as an asset and amortized over three years.
267
+
268
+ 23. Jones, who was charged with determining the appropriate accounting treatment
269
+ under GAAP, knew the facts set forth in Paragraph 21. However, instead of recognizing the $4.6
270
+ million expense in the year incurred, Jones improperly had it recorded as an asset which Jones
271
+ determined should be amortized over three years.
272
+
273
+ 24. Jones also proceeded to assist in the preparation of financial statements included in
274
+ the Forms 10-Q filed with the Commission in May, August, and November 2014 and in the 2014
275
+ Form 10-K filed in March 2015 that listed the asset, reduced to nearly $3.2 million through
276
+ 7
277
+ amortization. In the financial statements included in the Form 10-Q for the first quarter of 2014,
278
+ this accounting error resulted in Blue Earth understating its expenses by approximately $4.3
279
+ million, which constituted a 43% understatement of its net income (loss) before taxes and of its net
280
+ loss. In the financial statements included in the 2014 Form 10-K, this resulted in a Blue Earth
281
+ understating its expenses by nearly $3.2 million, which constituted a 10% understatement of its net
282
+ income (loss) before taxes and 9.4% understatement of its net loss, and overstatement of its assets
283
+ by 3.1%.
284
+
285
+ 25. In February 2016, the company restated its financial statements for the year ending
286
+ December 31, 2014, after concluding that the $4.6 million originally recorded as an asset should
287
+ have been expensed in the quarter during which it was paid.
288
+
289
+ Violations
290
+
291
+ 26. Section 13(b)(5) of the Exchange Act provides that no person shall knowingly
292
+ falsify any book, record, or account subject to Section 13(b)(2)(A). Rule 13b2-1 under the
293
+ Exchange Act provides that no person shall, directly or indirectly, falsify or cause to be falsified
294
+ any book, record or account subject to Section 13(b)(2)(A).
295
+
296
+ 27. As a result of Jones’s conduct described above, certain assets and expenses were
297
+ misrecorded on Blue Earth’s books, records, and accounts. Jones willfully violated Section
298
+ 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder by, directly or indirectly, knowingly
299
+ falsifying Blue Earth’s books, records, and accounts.
300
+
301
+ 28. Section 13(b)(2)(A) of the Exchange Act requires issuers with a class of securities
302
+ registered under Exchange Act Section 12 to make and keep books, records, and accounts which in
303
+ reasonable detail accurately and fairly reflect the transactions and dispositions of their assets.
304
+ Section 13(b)(2)(B) of the Exchange Act requires issuers with a class of securities registered under
305
+ Exchange Act Section 12 to devise and maintain a system of internal accounting controls sufficient
306
+ to provide reasonable assurances that transactions are recorded as necessary to permit preparation
307
+ of financial statements in conformity with GAAP.
308
+
309
+ 29. Blue Earth violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act by
310
+ failing to keep books, records and accounts that accurately and fairly reflected the above-described
311
+ transactions and failed to maintain a system of internal accounting controls. Jones improperly
312
+ applied GAAP to the above-described transactions, as a result of which assets and expenses were
313
+ misrecorded on Blue Earth’s books, records, and accounts. Jones knew, or was reckless in not
314
+ knowing, that by engaging in the conduct described above, he provided substantial assistance to
315
+ Blue Earth in its violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. As a
316
+ result, Jones willfully aided and abetted and caused Blue Earth’s violations of Sections 13(b)(2)(A)
317
+ and 13(b)(2)(B) of the Exchange Act.
318
+
319
+ 30. Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder
320
+ require issuers with a class of securities registered under Section 12 of the Exchange Act to file
321
+ quarterly and annual reports with the Commission and to keep this information current. The
322
+ 8
323
+ obligation to file such reports embodies the requirement that they be true and correct. See, e.g.,
324
+ SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978).
325
+
326
+ 31. Blue Earth included materially misstated financial statements in its quarterly and
327
+ annual reports for periods ended September 30, 2013 through December 31, 2014 in violation of
328
+ Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. The materially
329
+ misstated financials resulted from Jones improperly applying GAAP to the above-described
330
+ transactions. Jones knew, or was reckless in not knowing, that by engaging in the conduct
331
+ described above, he provided substantial assistance to Blue Earth in its violation of Section 13(a)
332
+ of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. As a result, Jones willfully
333
+ aided and abetted and caused Blue Earth’s violations of Section 13(a) and Rules 12b-20, 13a-1 and
334
+ 13a-13 thereunder.
335
+
336
+ Findings
337
+
338
+ Based on the foregoing, the Commission finds that Jones: (a) willfully violated Section
339
+ 13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder; and (b) willfully aided and abetted and
340
+ caused Blue Earth’s violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange
341
+ Act, and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder.
342
+
343
+ IV.
344
+
345
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
346
+ agreed to in Respondent Jones’s Offer.
347
+
348
+ Accordingly, it is hereby ORDERED, effective immediately, that:
349
+
350
+ A. Jones shall cease and desist from committing or causing any violations of and any
351
+ future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and
352
+ Rules 12b-20, 13a-1, 13a-13, and 13b2-1 promulgated thereunder.
353
+
354
+ B. Jones be, and hereby is, denied the privilege of appearing or practicing before the
355
+ Commission as an accountant.
356
+
357
+ C. Jones shall, within 10 days of the entry of this Order, pay a civil money
358
+ penalty in the amount of $70,000 to the Securities and Exchange Commission for transfer to
359
+ the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If
360
+ timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717.
361
+
362
+ Payment must be made in one of the following ways:
363
+
364
+ (1) Respondent may transmit payment electronically to the Commission, which
365
+ will provide detailed ACH transfer/Fedwire instructions upon request;
366
+
367
+ 9
368
+ (2) Respondent may make direct payment from a bank account via Pay.gov
369
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
370
+
371
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
372
+ States postal money order, made payable to the Securities and Exchange
373
+ Commission and hand-delivered or mailed to:
374
+
375
+ Enterprise Services Center
376
+ Accounts Receivable Branch
377
+ HQ Bldg., Room 181, AMZ-341
378
+ 6500 South MacArthur Boulevard
379
+ Oklahoma City, OK 73169
380
+
381
+ Payments by check or money order must be accompanied by a cover letter identifying R.
382
+ Gordon Jones as a Respondent in these proceedings, and the file number of these proceedings; a
383
+ copy of the cover letter and check or money order must be sent to Carolyn M. Welshhans, Division
384
+ of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549.
385
+
386
+ D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be
387
+ treated as penalties paid to the government for all purposes, including all tax purposes. To
388
+ preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
389
+ Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any
390
+ award of compensatory damages by the amount of any part of Respondent’s payment of a civil
391
+ penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a
392
+ Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting
393
+ the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the
394
+ Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed
395
+ an additional civil penalty and shall not be deemed to change the amount of the civil penalty
396
+ imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a
397
+ private damages action brought against Respondent by or on behalf of one or more investors based
398
+ on substantially the same facts as alleged in the Order instituted by the Commission in this
399
+ proceeding.
400
+
401
+ V.
402
+
403
+ It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section
404
+ 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by
405
+ Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other
406
+ amounts due by Respondent under this Order or any other judgment, order, consent order, decree
407
+
408
+
409
+
410
+
411
+
412
+
413
+ 10
414
+
415
+ or settlement agreement entered in connection with this proceeding, is a debt for the violation by
416
+ Respondent of the federal securities laws or any regulation or order issued under such laws, as set
417
+ forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19).
418
+
419
+ By the Commission.
420
+
421
+
422
+ Vanessa A. Countryman
423
+ Secretary
424
+
425
+
426
+
raw/aaer/2019/AAER-4057.txt ADDED
@@ -0,0 +1,351 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+ UNITED STATES OF AMERICA
4
+ Before the
5
+ SECURITIES AND EXCHANGE COMMISSION
6
+
7
+ SECURITIES EXCHANGE ACT OF 1934
8
+ Release No. 86252 / July 1, 2019
9
+
10
+ ACCOUNTING AND AUDITING ENFORCEMENT
11
+ Release No. 4057 / July 1, 2019
12
+
13
+ ADMINISTRATIVE PROCEEDING
14
+ File No. 3-19226
15
+
16
+
17
+
18
+ In the Matter of
19
+
20
+ THOMAS CHANG, CPA
21
+
22
+ Respondent.
23
+
24
+ ORDER INSTITUTING PUBLIC
25
+ ADMINISTRATIVE AND CEASE-AND-
26
+ DESIST PROCEEDINGS PURSUANT TO
27
+ SECTIONS 4C AND 21C OF THE
28
+ SECURITIES EXCHANGE ACT OF 1934
29
+ AND RULE 102(e) OF THE COMMISSION’S
30
+ RULES OF PRACTICE, MAKING
31
+ FINDINGS, AND IMPOSING REMEDIAL
32
+ SANCTIONS AND A CEASE-AND-DESIST
33
+ ORDER
34
+
35
+
36
+ I.
37
+
38
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
39
+ administrative and cease-and-desist proceedings be, and hereby are, instituted against Thomas
40
+ Chang (“Respondent” or “Chang”) pursuant to Sections 4C1 and 21C of the Securities Exchange
41
+ Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2
42
+
43
+ 1 Section 4C provides, in relevant part, that:
44
+
45
+ The Commission may censure any person, or deny, temporarily or permanently, to any person the
46
+ privilege of appearing or practicing before the Commission in any way, if that person is found . . .
47
+ (1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character or
48
+ integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully
49
+ violated, or willfully aided and abetted the violation of, any provision of the securities laws or the
50
+ rules and regulations thereunder.
51
+
52
+ 2 Rule 102(e)(1)(ii) provides, in pertinent part, that:
53
+
54
+ The Commission may censure any person, or deny, temporarily or permanently, the privilege of
55
+ appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical or
56
+ improper professional conduct.
57
+
58
+ 2
59
+ II.
60
+
61
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
62
+ of Settlement (“Offer”), which the Commission has determined to accept. Solely for the
63
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
64
+ Commission, or to which the Commission is a party, and without admitting or denying the
65
+ findings herein, except as to the Commission ’s jurisdiction over him and the subject matter of
66
+ these proceedings, which are admitted, and except as provided herein in Section V, Respondent
67
+ consents to the entry of this Order Instituting Public Administrative and Cease -and-Desist
68
+ Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule
69
+ 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
70
+ Sanctions and a Cease-and-Desist Order (“Order”), as set forth below.
71
+
72
+ III.
73
+
74
+ On the basis of this Order and Respondent’s Offer, the Commission finds3 that:
75
+
76
+ Summary
77
+
78
+ 1. This matter arises from violations of the auditor independence rules caused by
79
+ Chang between April 2016 and August 2018. These violations stem from a business relationship
80
+ between Chang’s auditing firm, KCCW Accountancy Corp. (“KCCW”), and Entity A, a company
81
+ that created and maintained an inventory of public companies that it made available to its
82
+ customers. In 2008, KCCW began a business relationship with Entity A whereby it agreed to pay
83
+ Entity A a percentage of the audit fees it earned from audit clients referred by Entity A.
84
+
85
+ 2. Starting in April 2016, Entity A’s owner and an employee—its marketing director—
86
+ retained KCCW on multiple occasions, through Chang, to audit public shell companies in their
87
+ control. From April 2016 to August 2018, KCCW served as the purportedly independent auditor
88
+ for at least five public companies controlled by the Entity A-related individuals while maintaining a
89
+ business relationship with them as defined by Rule 2-01(c)(3) of Regulation S-X. As detailed
90
+ below, Chang caused the firm to issue audit reports stating that the audits were performed in
91
+ accordance with Public Company Accounting Oversight Board standards, thereby causing KCCW
92
+ to violate Rule 2-02(b) of Regulation S-X.
93
+
94
+ Respondent
95
+
96
+ 3. Thomas Chang, age 42, resides in Pasadena, California. During the relevant
97
+ period, he was a 50% equity partner in KCCW and the engagement partner for the audits of the
98
+ public shell companies discussed herein. He has been a CPA licensed in California since 2007.
99
+
100
+ 3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any
101
+ other person or entity in this or any other proceeding.
102
+
103
+
104
+ 3
105
+ Other Relevant Entities
106
+
107
+ 4. KCCW Accountancy Corp. (“KCCW”), incorporated in California with offices in
108
+ California and Taiwan, is a Public Company Accounting Oversight Board (“PCAOB”) registered
109
+ public accounting firm. It has three partners, including Chang. According to its most recent
110
+ PCAOB annual report, KCCW had approximately 60 public issuer audit clients. KCCW also
111
+ provided audit and tax services to private companies.
112
+
113
+ 5. Entity A was a Delaware corporation with its principal place of business in Beverly
114
+ Hills, California that assisted companies in going public. Entity A created and maintained an
115
+ inventory of public shell companies that it made available to its customers. Entity A’s owner and
116
+ marketing director served as the officers, directors, and fifty percent shareholders of the public
117
+ shell companies.
118
+
119
+ Facts
120
+
121
+ 6. As Chang started his practice in 2008, KCCW and Entity A entered into an oral
122
+ agreement (the “referral agreement”) through which KCCW paid Entity A a referral fee for audit
123
+ clients that it introduced to KCCW. The referral agreement entitled Entity A to 30% of the total
124
+ first-year fees KCCW received from any audit client referred by Entity A. KCCW agreed to pay
125
+ Entity A 20% of fees for the second year and 10% of fees for subsequent years. Pursuant to the
126
+ referral agreement, from October 2009 through January 2016, KCCW paid Entity A a total of
127
+ $70,725 and, from January 2016 through March 2017, accrued another $25,278 in unpaid referral
128
+ fees.
129
+
130
+ 7. Prior to April 2016, Entity A introduced KCCW to at least nine audit clients,
131
+ pursuant to the referral agreement.
132
+
133
+ 8. As part of Entity A’s business, its owner and marketing director maintained control
134
+ of public shell companies that Entity A made available to its customers. Prior to transferring
135
+ control of a public shell to an Entity A customer, the owner and marketing director served as the
136
+ officers, directors, and fifty-percent shareholders of each public shell. At times, certain public
137
+ shells would remain in their control for more than one year and require an audit in connection with
138
+ the public shells’ obligations to file with the Commission annual reports on Form 10-K.
139
+
140
+ 9. Starting in April 2016, Entity A’s owner and its marketing director engaged KCCW
141
+ to conduct year-end audits of the public shells that they controlled. In parallel, KCCW continued
142
+ to accrue referral fees with respect to companies not controlled by Entity A and maintained its
143
+ business relationship with Entity A pursuant to the referral agreement. Chang failed to identify the
144
+ independence concerns raised by this arrangement.
145
+
146
+ 10. KCCW, by and through Chang, signed audit reports for five public companies
147
+ between April 2016 and August 2018 that Entity A’s owner and marketing director controlled, and
148
+ for which they were the only officers and directors. The audit reports stated that the audits were
149
+
150
+ 4
151
+ performed in accordance with the standards of the PCAOB. During these audits, and at the time
152
+ the audit reports were signed, the referral agreement was still in effect and Entity A was accruing
153
+ referral fees from KCCW.
154
+
155
+ 11. In determining to accept the Offer, the Commission considered remedial acts
156
+ promptly undertaken by Respondent. Specifically, after being approached by Commission staff
157
+ during the investigation, Chang discontinued the referral agreement with Entity A.
158
+
159
+ Legal Analysis
160
+
161
+ 12. Regulation S-X Section 2-01(c)(3) states that an auditor is not independent if, “at
162
+ any point during the audit and professional engagement period, the accounting firm or any covered
163
+ person in the firm has any direct or material indirect business relationship with an audit client, or
164
+ with persons associated with the audit client in a decision-making capacity, such as an audit
165
+ client’s officers, directors, or substantial stockholders.” KCCW’s referral agreement with Entity
166
+ A—whose owner and marketing director were the only officers, directors, and shareholders of the
167
+ public shell companies—rendered KCCW not independent of the five audit clients for the audits
168
+ described in Paragraph 10.
169
+
170
+ 13. As a result of the conduct described above, Chang caused KCCW to violate Rule 2-
171
+ 02(b) of Regulation S-X, which requires an accountant’s report to “state whether the audit was
172
+ made in accordance with generally accepted auditing standards” [“GAAS”] which, in turn, require
173
+ auditors to maintain independence—both in fact and appearance—from their audit clients.4 Thus,
174
+ the audit reports signed by KCCW, by and through Chang, for the five public companies from
175
+ April 2016 to August 2018 incorrectly stated that they were performed in accordance with PCAOB
176
+ Standards.
177
+
178
+ 14. As a result of the conduct described above, Chang engaged in improper
179
+ professional conduct under Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the
180
+ Commission’s Rules of Practice, which provide, in pertinent part, that the Commission may
181
+ “censure a person or deny, temporarily or permanently, the privilege of appearing or practicing
182
+ before it... to any person who is found... to have engaged in... improper professional conduct.”
183
+ Such conduct can be established by, inter alia, negligence in the form of either “a single instance
184
+ of highly unreasonable conduct … in circumstances [warranting] heightened scrutiny” or of
185
+ “repeated instances of unreasonable conduct...” See Rule 102(e)(1)(iv)(B)(1) and (2).
186
+
187
+
188
+ 4 Securities Act Release No. 33-8422 (May 14, 2004) states that reference to GAAS should be understood to mean
189
+ the standards of the PCAOB plus any applicable rules of the Commission. PCAOB Rule 3520 states that a
190
+ “registered public accounting firm and its associated persons must be independent of the firm’s audit client
191
+ throughout the audit and professional engagement period.” Note 1 to Rule 3520 further clarifies that independence
192
+ “with respect to an audit client encompasses not only an obligation to satisfy the independence criteria applicable to
193
+ the engagement set out in the rules and standards of the PCAOB, but also an obligation to satisfy all other
194
+ independence criteria applicable to the engagement, including the independence criteria se t out in the rules and
195
+ regulations of the Commission under the federal securities laws.”
196
+
197
+
198
+ 5
199
+ Findings
200
+
201
+ 15. Based on the foregoing, the Commission finds that Respondent engaged in
202
+ improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule
203
+ 102(e)(1)(ii) of the Commission’s Rules of Practice , and caused a violation of Rule 2-02(b) of
204
+ Regulation S-X.
205
+
206
+ IV.
207
+
208
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
209
+ agreed to in Respondent’s Offer.
210
+
211
+ Accordingly, pursuant to Sections 4C and 21C of the Exchange Act, and Rule 102(e)(1)(ii)
212
+ of the Commission’s Rules of Practice, it is hereby ORDERED that:
213
+
214
+ A. Respondent Chang shall cease and desist from committing or causing any violations
215
+ and any future violations of Rule 2-02(b) of Regulation S-X.
216
+
217
+ B. Respondent Chang is denied the privilege of appearing or practicing before the
218
+ Commission as an accountant.
219
+
220
+ C. After one (1) year from the date of this order, Respondent Chang may request
221
+ that the Commission consider his reinstatement by submitting an application (attention:
222
+ Office of the Chief Accountant) to resume appearing or practicing before the Commission as:
223
+
224
+ 1. a preparer or reviewer, or a person responsible for the preparation or review,
225
+ of any public company’s financial statements that are filed with the
226
+ Commission (other than as a member of an audit committee, as that term is
227
+ defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such
228
+ an application must satisfy the Commission that Respondent Chang’s work
229
+ in his practice before the Commission as an accountant will be reviewed
230
+ either by the independent audit committee of the public company for which
231
+ he works or in some other acceptable manner, as long as he practices before
232
+ the Commission in this capacity; and/or
233
+
234
+ 2. a preparer or reviewer, or a person responsible for the preparation or review,
235
+ of any public company’s financial statements that are filed with the
236
+ Commission as a member of an audit committee, as that term is defined in
237
+ Section 3(a)(58) of the Securities Exchange Act of 1934. Such an
238
+ application will be considered on a facts and circumstances basis with
239
+ respect to such membership, and the applicant’s burden of demonstrating
240
+ good cause for reinstatement will be particularly high given the role of the
241
+ audit committee in financial and accounting matters; and/or
242
+
243
+
244
+ 6
245
+ 3. an independent accountant.
246
+
247
+ Such an application must satisfy the Commission that:
248
+
249
+ (a) Respondent Chang, or the public accounting firm with which he is
250
+ associated, is registered with the PCAOB in accordance with the
251
+ Sarbanes-Oxley Act of 2002, and such registration continues to be
252
+ effective;
253
+
254
+ (b) Respondent Chang, or the registered public accounting firm with
255
+ which he is associated, has been inspected by the PCAOB and that
256
+ inspection did not identify any criticisms of or potential defects in
257
+ the respondent’s or the firm’s quality control system that would
258
+ indicate that Respondent Chang will not receive appropriate
259
+ supervision;
260
+ (c) Respondent Chang has resolved all disciplinary issues with the
261
+ PCAOB, and has complied with all terms and conditions of any
262
+ sanctions imposed by the PCAOB (other than reinstatement by the
263
+ Commission); and
264
+
265
+ (d) Respondent Chang acknowledges his responsibility, as long as he
266
+ appears or practices before the Commission as an independent
267
+ accountant, to comply with all requirements of the Commission
268
+ and the PCAOB, including, but not limited to, all requirements
269
+ relating to registration, inspections, concurring partner reviews and
270
+ quality control standards.
271
+
272
+ D. The Commission will consider an application by Respondent Chang to resume
273
+ appearing or practicing before the Commission provided that his state CPA license is current and
274
+ he has resolved all other disciplinary issues with the applicable state boards of accountancy.
275
+ However, if state licensure is dependent on reinstatement by the Commission, the Commission
276
+ will consider an application on its other merits. The Commission’s review may include
277
+ consideration of, in addition to the matters referenced above, any other matters relating to
278
+ Respondent Chang’s character, integrity professional conduct, or qualifications to appear or
279
+ practice before the Commission as an accountant. Whether an application demonstrates good
280
+ cause will be considered on a facts and circumstances basis with due regard for protecting the
281
+ integrity of the Commission’s processes.
282
+
283
+ E. Respondent Chang shall, within 10 days of the entry of this Order, pay
284
+ disgorgement of $13,000, representing audit fees earned from Entity A-controlled public shells,
285
+ prejudgment interest of $1,590.45, and a civil money penalty in the amount of $13,000 to the
286
+ Securities and Exchange Commission for transfer to the general fund of the United States Treasury,
287
+ subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional interest shall
288
+ accrue pursuant to SEC Rule of Practice 600 and 31 U.S.C. § 3717.
289
+
290
+ 7
291
+
292
+ Payment must be made in one of the following ways:
293
+
294
+ (1) Respondent may transmit payment electronically to the Commission, which
295
+ will provide detailed ACH transfer/Fedwire instructions upon request;
296
+
297
+ (2) Respondent may make direct payment from a bank account via Pay.gov
298
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
299
+
300
+ (3) Respondent may pay by certified check, bank cashier’s check, or United
301
+ States postal money order, made payable to the Securities and Exchange
302
+ Commission and hand-delivered or mailed to:
303
+
304
+ Enterprise Services Center
305
+ Accounts Receivable Branch
306
+ HQ Bldg., Room 181, AMZ-341
307
+ 6500 South MacArthur Boulevard
308
+ Oklahoma City, OK 73169
309
+
310
+ Payments by check or money order must be accompanied by a cover letter identifying
311
+ Respondent Chang as a Respondent in these proceedings, and the file number of these proceedings;
312
+ a copy of the cover letter and check or money order must be sent to Antonia Chion, Associate
313
+ Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE,
314
+ Washington, DC 20549.
315
+
316
+ G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be
317
+ treated as penalties paid to the government for all purposes, including all tax purposes. To
318
+ preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor
319
+ Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any
320
+ award of compensatory damages by the amount of any part of Respondent’s payment of a civil
321
+ penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a
322
+ Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting
323
+ the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the
324
+ Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed
325
+ an additional civil penalty and shall not be deemed to change the amount of the civil penalty
326
+ imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a
327
+ private damages action brought against Respondent by or on behalf of one or more investors based
328
+ on substantially the same facts as alleged in the Order instituted by the Commission in this
329
+ proceeding.
330
+
331
+ V.
332
+ It is further Ordered that, solely for purposes of exceptions to discharge set forth in
333
+ Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and
334
+ admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil
335
+
336
+ 8
337
+ penalty or other amounts due by Respondent under this Order or any other judgment, order,
338
+ consent order, decree or settlement agreement entered in connection with this proceeding, is a debt
339
+ for the violation by Respondent of the federal securities laws or any regulation or order issued
340
+ under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C.
341
+ § 523(a)(19).
342
+
343
+ By the Commission.
344
+
345
+
346
+ Vanessa A. Countryman
347
+ Secretary
348
+
349
+
350
+
351
+
raw/aaer/2019/AAER-4062.txt ADDED
@@ -0,0 +1,82 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 86564 / August 5, 2019
8
+
9
+ ACCOUNTING AND AUDITING ENFORCEMENT
10
+ Release No. 4062 / August 5, 2019
11
+
12
+ ADMINISTRATIVE PROCEEDING
13
+ File No. 3-19307
14
+ ______________________________
15
+ :
16
+ In the Matter of :
17
+ : ORDER OF SUSPENSION PURSUANT
18
+ NANDU THONDAVADI, : TO RULE 102(e)(2) OF THE
19
+ : COMMISSION’S RULES OF PRACTICE
20
+ Respondent. :
21
+ ______________________________:
22
+
23
+
24
+ I.
25
+
26
+ The Securities and Exchange Commission deems it appropriate to issue an order of
27
+ forthwith suspension of Nandu Thondavadi (“Thondavadi”) pursuant to Rule 102(e)(2) of the
28
+ Commission’s Rules of Practice [17 C.F.R. 201.102(e)(2)].1
29
+
30
+ II.
31
+
32
+ The Commission finds that:
33
+
34
+ 1. Thondavadi was the Chief Executive Officer of Quadrant 4 System Corp., an
35
+ Illinois corporation headquartered in Schaumburg, Illinois. At the time of Thondavadi’s
36
+ misconduct relevant to his guilty plea below, QFOR did not have any class of securities
37
+ registered with the Commission, but was a reporting company pursuant to Section 15(d) of the
38
+ Securities Exchange Act of 1934.
39
+
40
+ 2. On November 28, 2018, Thondavadi pleaded guilty to wire fraud in U.S. v. Nandu
41
+ Thondavadi and Dhru Desai, 16-cr-772, in the United States District Court for the Northern
42
+ District of Illinois. ECF No. 93. According to Thondavadi’s plea agreement, Thondavadi and
43
+ others “knowingly devised, intended to devise and participated in a scheme to defraud Quadrant
44
+
45
+ 1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a
46
+ misdemeanor involving moral turpitude shall be forthwith suspended from appearing or pr acticing before the
47
+ Commission.”
48
+
49
+
50
+
51
+ 2
52
+
53
+ 4 System Corporation (‘QFOR’) and QFOR’s shareholders, and to obtain money and property by
54
+ means of materially false and fraudulent pretenses, representations, and promises, and by
55
+ concealment of material facts. ECF No. 94 at 2.
56
+
57
+ 3. On June 6, 2019, Thondavadi was sentenced to 60 months in prison and $2.916
58
+ million in restitution. ECF No. 122 at 2, 7.
59
+
60
+ III.
61
+
62
+ In view of the foregoing, the Commission finds that Thondavadi has been convicted of a
63
+ felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice.
64
+
65
+ Accordingly, it is ORDERED, that Nandu Thondavadi is forthwith suspended from
66
+ appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s
67
+ Rules of Practice.
68
+
69
+
70
+
71
+ By the Commission.
72
+
73
+
74
+
75
+ Vanessa A. Countryman
76
+ Secretary
77
+
78
+
79
+
80
+
81
+
82
+
raw/aaer/2019/AAER-4063.txt ADDED
@@ -0,0 +1,111 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+ UNITED STATES OF AMERICA
4
+ Before the
5
+ SECURITIES AND EXCHANGE COMMISSION
6
+
7
+ SECURITIES EXCHANGE ACT OF 1934
8
+ Release No. 86594 / August 7, 2019
9
+
10
+ ACCOUNTING AND AUDITING ENFORCEMENT
11
+ Release No. 4063 / August 7, 2019
12
+
13
+ ADMINISTRATIVE PROCEEDING
14
+ File No. 3-19322
15
+
16
+
17
+
18
+ In the Matter of
19
+
20
+ THOMAS W. AVENT, JR.,
21
+ CPA, ESQ.
22
+
23
+ Respondent.
24
+
25
+
26
+
27
+
28
+
29
+ ORDER INSTITUTING PUBLIC
30
+ ADMINISTRATIVE PROCEEDINGS
31
+ PURSUANT TO RULE 102(e) OF THE
32
+ COMMISSION’S RULES OF PRACTICE,
33
+ MAKING FINDINGS, AND IMPOSING
34
+ REMEDIAL SANCTIONS
35
+
36
+
37
+
38
+ I.
39
+
40
+ The Securities and Exchange Commission (“Commission”) deems it appropriate and in the
41
+ public interest that public administrative proceedings be, and hereby are, instituted against Thomas
42
+ W. Avent, Jr., CPA, Esq. (“Respondent” or “Avent”) pursuant to Rule 102(e)(3)(i) of the
43
+ Commission’s Rules of Practice.1
44
+
45
+ II.
46
+
47
+
48
+ 1 Rule 102(e)(3)(i) provides, in relevant part, that:
49
+
50
+ The Commission, with due regard to the public interest and without preliminary hearing,
51
+ may, by order, . . . suspend from appearing or practicing before it any . . . attorney, accountant. . .
52
+ who has been by name . . . permanently enjoined by any court of competent jurisdiction, by
53
+ reason of his or her misconduct in an action brought by the Commission, from violating or aiding
54
+ and abetting the violation of any provision of the Federal securities laws or of the rules and
55
+ regulations thereunder.
56
+ 2
57
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
58
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
59
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
60
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
61
+ herein, e xcept as to the Commission’s jurisdiction over him and the subject matter of these
62
+ proceedings and the findings contained in paragraph III.2 below, which are admitted, Respondent
63
+ consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule
64
+ 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
65
+ Sanctions (“Order”), as set forth below.
66
+
67
+ III.
68
+
69
+ On the basis of this Order and Respondent’s Offer, the Commission finds that:
70
+
71
+ 1. Avent was a partner at KPMG between 1999 and 2016, and a partner at Rogers &
72
+ Wells from 1994 to 1999. Avent is a licensed certified public accountant in Mississippi and a
73
+ member of the Mississippi bar. Avent, age 67, is a resident of Oxford, Mississippi.
74
+
75
+ 2. On July 7, 2016, the Commission filed a complaint against Avent in Securities and
76
+ Exchange Commission v. Thomas W. Avent, Jr., et al., 1:16-cv-02459-WMR in the United States
77
+ District Court for the Northern District of Georgia. On August 2, 2019, the court entered an order
78
+ permanently enjoining Avent from violating the antifraud provisions of Sections 10(b) and 14(e) of
79
+ the Securities Exchange Act of 1934 and Rules 10b-5 and 14e-3 thereunder. The judgment also
80
+ orders Avent to pay a civil penalty of $125,000.
81
+
82
+ 3. The Commission’s complaint alleged, among other things, that, in connection with
83
+ the purchase or sale of securities, Avent misappropriated material, nonpublic information from
84
+ KPMG about three potential acquisitions of publicly traded companies while performing tax due
85
+ diligence work for three KPMG clients between 2011 and 2012. Avent tipped this information to
86
+ his registered representative at the time. Avent received a personal benefit from the registered
87
+ representative in exchange for sharing the material, nonpublic information.
88
+
89
+ IV.
90
+
91
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to
92
+ impose the sanctions agreed to in Respondent Avent’s Offer.
93
+
94
+ Accordingly, it is hereby ORDERED, effective immediately, that:
95
+
96
+
97
+
98
+
99
+
100
+
101
+ 3
102
+ Respondent Avent is suspended from appearing or practicing before the Commission as an
103
+ attorney or accountant.
104
+
105
+ By the Commission.
106
+
107
+
108
+
109
+
110
+ Vanessa A. Countryman
111
+ Secretary
raw/aaer/2019/AAER-4064.txt ADDED
@@ -0,0 +1,955 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+ UNITED STATES OF AMERICA
3
+ Before the
4
+ SECURITIES AND EXCHANGE COMMISSION
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 86720 / August 21, 2019
8
+
9
+ ACCOUNTING AND AUDITING ENFORCEMENT
10
+ Release No. 4064
11
+
12
+ ADMINISTRATIVE PROCEEDING
13
+ File No. 3-19368
14
+
15
+
16
+ In the Matter of
17
+
18
+ MICHAEL FILKOSKI, CPA,
19
+ and
20
+ SCOTT MAGNUSON, CPA,
21
+
22
+ Respondents.
23
+
24
+ ORDER INSTITUTING PUBLIC
25
+ ADMINISTRATIVE AND CEASE-AND-
26
+ DESIST PROCEEDINGS PURSUANT TO
27
+ SECTIONS 4C AND 21C OF THE
28
+ SECURITIES EXCHANGE ACT OF 1934
29
+ AND RULE 102(e) OF THE
30
+ COMMISSION’S RULES OF PRACTICE,
31
+ MAKING FINDINGS, AND IMPOSING
32
+ REMEDIAL SANCTIONS AND A CEASE-
33
+ AND-DESIST ORDER
34
+
35
+ I
36
+
37
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
38
+ administrative and cease-and-desist proceedings be, and hereby are, instituted against Michael
39
+ Filkoski and Scott Magnuson (collectively “Respondents.”), pursuant to Sections 4C1 and 21C of
40
+ the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 102(e)(1)(ii) and (iii) of the
41
+ Commission’s Rules of Practice. 2
42
+
43
+ 1 Section 4C provides, in pertinent part, that:
44
+ The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege
45
+ of appearing or practicing before the Commission in any way, if that person is found … (1) not to possess
46
+ the requisite qualifications to represent others; (2) to be lacking in character or integrity, or to have engaged
47
+ in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and
48
+ abetted the violation of any provision of the federal securities laws or the rules and regulations issued
49
+ thereunder.
50
+
51
+ 2 Rule 102(e)(1)(ii) provides, in pertinent part, that:
52
+ The Commission may censure a person or deny, temporarily or permanently, the privilege of appearin g or
53
+ practicing before it in any way to any person who is found … to have engaged in unethical or improper
54
+ professional conduct.
55
+
56
+ Rule 102(e)(1)(iii) provides, in pertinent part, that:
57
+
58
+
59
+ 2
60
+ II
61
+
62
+ In anticipation of the institution of these proceedings, Respondents have submitted Offers
63
+ of Settlement (the “Offers”), which the Commission has determined to accept. Solely for the
64
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
65
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
66
+ herein, except as to the Commission’s jurisdiction over them, and the subject matter of these
67
+ proceedings, which are admitted, and except as provided herein in Section V, Respondents consent
68
+ to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings
69
+ Pursuant to Exchange Act Sections 4C and 21C and Rule 102(e) of the Commission’s Rules of
70
+ Practice, Making Findings and Imposing Remedial Sanctions and a Cease-And-Desist Order
71
+ (“Order”), as set forth below.
72
+
73
+ III
74
+
75
+ On the basis of this Order and Respondents’ Offers, the Commission finds3 that:
76
+
77
+ A. SUMMARY
78
+
79
+ 1. Michael Filkoski and Scott Magnuson, two senior audit partners employed by GHP
80
+ Horwath P.C. (“GHP”), an independent audit firm, engaged in improper professional conduct,
81
+ within the meaning of Exchange Act Section 4C and Rule 102(e) of the Commission’s Rules of
82
+ Practice, during audits of Agria Corporation (“Agria”). In performing the audits of Agria’s 2012
83
+ and 2013 annual financial statements, Filkoski and Magnuson deviated from standards of the
84
+ Public Company Accounting Oversight Board (“PCAOB”) and ignored red flags indicating that
85
+ Agria’s financial statements and public filings contained material misstatements. Filkoski served
86
+ as the engagement partner on the 2012 and 2013 audits, and Magnuson served as the engagement
87
+ quality review partner.
88
+
89
+ 2. Filkoski and Magnuson also willfully aided and abetted and caused GHP to violate
90
+ Rule 2-02(b) of Regulation S-X. In connection with the 2012 and 2013 audits, GHP issued audit
91
+ reports in which it represented that GHP had conducted the audits in accordance with the standards
92
+ of the PCAOB, and further represented that, based on its opinion, Agria’s financial statements
93
+ presented fairly, in all material respects, the company’s financial condition and results of its
94
+ operations in accordance with Generally Accepted Accounting Principles (“GAAP”). Filkoski and
95
+ Magnuson each approved the issuance of GHP’s audit reports that contained unqualified opinions
96
+ when they knew or should have known that GHP’s representations were false because GHP’s
97
+ audits were not performed in accordance with PCAOB standards.
98
+
99
+ The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or
100
+ practicing before it in any way to any person who is found … to have willfully violated, or willfully aided
101
+ and abetted the violation of any provision of the federal securities laws or the rules and regulations
102
+ thereunder.
103
+
104
+ 3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other
105
+ person or entity in this or any other proceeding.
106
+
107
+ 3
108
+
109
+ B. RESPONDENTS
110
+
111
+ 3. Michael Filkoski, CPA, age 59, of Denver, Colorado, is a Certified Public
112
+ Accountant who, during the relevant period, was licensed to practice in Colorado, California and
113
+ Indiana. Filkoski served as the engagement partner for GHP’s audits of Agria’s financial
114
+ statements for fiscal years 2010 through 2013.
115
+
116
+ 4. Scott Magnuson, CPA, age 56, of Denver, Colorado, is a Certified Public
117
+ Accountant who, during the relevant period, was licensed to practice in Colorado, Nevada,
118
+ California, New York, Tennessee, Florida and Indiana. Magnuson served as the engagement
119
+ quality review partner for GHP’s audits of Agria’s financial statements for fiscal years 2010
120
+ through 2013.
121
+
122
+ C. RELATED ENTITIES
123
+
124
+ 5. GHP was a public accounting firm head-quartered in Denver, Colorado. GHP was
125
+ formed in November 1990 and operated until January 1, 2017, when GHP’s personnel and
126
+ operations were acquired by another public accounting firm. GHP was registered with the PCAOB
127
+ through August 29, 2017 and was dissolved as a standalone entity on April 25, 2018.
128
+
129
+ 6. Agria is a Cayman Islands company engaged in the agricultural business, with
130
+ operations in the People’s Republic of China, New Zealand, and Australia. Agria’s corporate
131
+ headquarters during the relevant period was in Hong Kong. Agria is a foreign private issuer whose
132
+ ordinary shares were registered with the Commission pursuant to Exchange Act Section 12(b).
133
+ Agria’s American Depository Shares (“ADSs”), each representing two ordinary shares, traded on
134
+ the New York Stock Exchange under the symbol “GRO.” The NYSE suspended trading in Agria
135
+ ADSs on November 3, 2016 and the ADSs were delisted on January 2, 2017.
136
+
137
+ 7. Taiyuan Primalights III Modernized Agricultural Development Co., Ltd.
138
+ (“P3A”) was a limited liability company established in China with three primary product lines:
139
+ corn seed, sheep breeding, and seedlings. Prior to its divestiture in July 2010, P3A served as
140
+ Agria’s primary operating entity in China, and P3A’s financial results were recorded in Agria’s
141
+ consolidated financial statements.
142
+
143
+ D. FACTS
144
+
145
+ i. Background
146
+
147
+ 8. GHP was engaged by Agria as its independent auditor in late 2010 to conduct an
148
+ audit of Agria’s fiscal year 2010 consolidated financial statements, which were prepared on the
149
+ basis of GAAP.
150
+
151
+
152
+ 4
153
+ 9. As the engagement partner, Filkoski had overall responsibility for the conduct of
154
+ the audits, including supervision of team members and compliance with PCAOB standards.4 As
155
+ the engagement quality review partner, Magnuson was required to evaluate the significant
156
+ judgments and conclusions made by the audit team and to evaluate whether, based on the
157
+ engagement documentation he reviewed, the engagement team responded appropriately to
158
+ significant risks and whether the documentation supported the audit team’s conclusions.
159
+
160
+ 10. The GHP audit team understood that Agria’s management expected the 2010
161
+ divestiture of P3A to have “significant implications” on the auditor’s approach to the audit. The
162
+ divestiture resulted in Agria discontinuing all of its sheep-breeding operations, leaving it to focus
163
+ on its seed business in China. The divestiture involved a related-party exchange: Agria
164
+ transferred its 100% ownership interest in P3A to P3A’s president, and in return P3A’s president
165
+ transferred his ownership of 11.5% of Agria’s outstanding shares. As part of the transaction,
166
+ Agria also received land use rights from P3A relating to 13,500 acres of leased agricultural
167
+ property in China.
168
+
169
+ a. Agria’s Fraudulent Accounting
170
+
171
+ 11. From the time Agria acquired the land use rights, it was clear to Agria’s
172
+ management that there were serious questions as to their valuation. The nine parcels of land,
173
+ covering 13,500 acres, were located in a remote area of Shanxi Province, far from Agria’s primary
174
+ bases of operations in Beijing and Shenzhen. The land itself was of poor soil quality, in an area
175
+ with little natural rainfall, serious water shortages, and no infrastructure for irrigation. Although
176
+ P3A had in the past used the land for sheep-breeding, Agria was no longer engaged in that
177
+ business. Agria was otherwise unable to use the lands for any revenue generating purposes. Nor
178
+ was Agria able to develop a business plan for the lands that would generate future cash flows. In
179
+ addition, legal defects precluded Agria from selling or subleasing the properties. Agria’s senior
180
+ management had been made aware of these defects in a legal opinion by Agria’s outside legal
181
+ counsel in July 2010, prior to the divestiture.
182
+
183
+ 12. The changes in use of the lands and the legal defects constituted impairment
184
+ indicators that required Agria to perform an impairment analysis to determine whether it would be
185
+ able to recover the carrying value of the land use rights. For the period 2010 through 2012, Agria’s
186
+ senior financial officers failed to perform the analysis and to impair the carrying value of the land
187
+ use rights.
188
+
189
+ 13. In early 2013, Agria performed an impairment analysis and wrote off the full $57.3
190
+ million carrying value of the land use rights. The impairment decision was based on facts that
191
+ were known or readily knowable in 2010: Agria was unable to use the land in an economically
192
+ viable manner, and the legal defects precluded Agria from realizing any salvage value through
193
+ resale. Because the facts giving rise to the impairment had existed since 2010, Agria’s decision
194
+ to record the impairment in 2013 rather than in 2010 was improper.
195
+
196
+
197
+ 4 Auditing standards referenced in this Order relate to PCAOB standards in effect when the audit was performed.
198
+
199
+ 5
200
+ 14. Agria’s delay in impairing the carrying value of the land use rights and its
201
+ subsequent failure to restate its 2010-2012 financial statements allowed it to hide the impact of
202
+ the impairment on its 2010 balance sheet and income statement and on its 2011 and 2012 balance
203
+ sheets. The prior period misstatements were material to Agria’s financial statements.
204
+
205
+ b. The 2010 Audit
206
+
207
+ 15. As part of their audit planning, the GHP audit team identified the valuation of the
208
+ land use rights as a significant issue and risk. The team identified “land use rights impairment
209
+ assessment” as a “significant audit and accounting consideration.” Additionally, in considering
210
+ potential fraud risks, the audit team noted the potential for the overvaluation of the land use rights
211
+ as a scenario with high likelihood, high significance, and high risk level. In order to address this
212
+ risk, the audit team recognized the need to “[i]ndependently assess management’s valuation” of the
213
+ asset. Both Filkoski and Magnuson participated in the audit planning and signed off on the
214
+ planned audit procedures.
215
+
216
+ 16. The auditors were aware that Agria had been unable to use the lands for any
217
+ economically viable revenue-generating purpose, even one year after the acquisition. In addition,
218
+ the auditors were aware that Agria was unable to resell or sublet the land use rights because it had
219
+ been unable either to perfect the legal defects in the land titles or to obtain written consent of the
220
+ lessors to the lease transfer agreements. These developments constituted significant adverse
221
+ changes indicating that the carrying value of the land use rights might not be recoverable.
222
+
223
+ 17. The GAAP guidance addressing impairment testing is set forth in Accounting
224
+ Standards Codification 360-10 (“ASC 360-10”), which provides that a long-lived asset shall be
225
+ tested for impairment whenever significant adverse changes in circumstances indicate that its
226
+ carrying value may not be recoverable. (ASC 360-10-35-21). The carrying value of an asset is
227
+ considered not recoverable if it exceeds the undiscounted cash flows expected to result from the
228
+ asset’s use and eventual disposition. (ASC 360-10-35-17).
229
+
230
+ 18. ASC 360-10-35-21 provides examples of impairment indicators, including:
231
+  a significant adverse change in the extent or manner in which a long-lived
232
+ asset is being used or in its physical condition;
233
+  a significant adverse change in legal factors or in the business climate that
234
+ could affect the value of a long-lived asset, indicating an adverse action or
235
+ assessment by a regulator.
236
+ (ASC 360-10-35-21b and c).
237
+
238
+ 19. Given the existence of two significant adverse changes, the controlling GAAP
239
+ guidance required Agria to estimate the future cash flows “directly associated with and …
240
+ expected to arise as a direct result of the use and eventual disposition of the asset” to determine
241
+ whether they exceeded the carrying amounts of the land use rights, and if not, how much the
242
+ carrying amounts should be impaired. (ASC 360-10-35-29). GHP’s audit manual checklist advised
243
+ the auditors to determine whether the company had performed such a cash flow analysis.
244
+
245
+
246
+ 6
247
+ 20. In Agria’s case, the auditors knew that the company was unable to develop cash
248
+ flow estimates. The company’s senior financial management told the auditors that, not only were
249
+ the land use rights not generating cash flows, but Agria was unable to develop cash flow estimates.
250
+ Further, in late June 2011 Agria’s then-CFO confirmed to the audit team that the company had not
251
+ yet been able to develop a feasible business plan for future economic use of the leased lands.
252
+ 21. The audit team was also warned that the company would not be able to realize cash
253
+ flow from selling or subleasing the land use rights to third parties. Having received a copy of the
254
+ written opinion issued by Agria’s outside legal counsel identifying legal defects in both the legal
255
+ titles obtained by P3A and the lease transfer agreements between P3A and Agria, the audit team
256
+ sought written confirmation from counsel that Agria could “legally sublease its rights to the leased
257
+ land to a third party.” The audit team was made aware that the legal counsel refused to sign such a
258
+ confirmation.
259
+
260
+ 22. The GHP audit team, with Filkoski and Magnuson’s knowledge and approval,
261
+ failed to perform audit procedures to determine whether and how Agria had assessed the potential
262
+ impairment of the land use rights. Instead, Filkoski and Magnuson simply accepted management’s
263
+ representation that the company intended to perform future testing of the leased lands and that
264
+ management believed the land use rights would be economically viable in the future.
265
+
266
+ 23. GHP and Filkoski issued and Magnuson concurred in the issuance of the audit
267
+ report that contained an unqualified audit opinion regarding Agria’s fiscal year 2010 financial
268
+ statements, including Agria’s representation that “there was no impairment identified as of
269
+ December 31, 2010.”
270
+
271
+ ii. The Failure to Audit the Impairment of Land Use Rights In the 2012 Audit
272
+
273
+ 24. Following a change in its fiscal year, Agria on December 16, 2011, filed a Form
274
+ 20-F Transition Report containing financial statements for the six months ended June 30, 2011.
275
+ On October 10, 2012, Agria filed its 2012 Form 20-F with audited financial statements covering
276
+ the year ended June 30, 2012 and the six months ended June 30, 2011.
277
+
278
+ 25. The impairment indicators that required an assessment in connection with the 2010
279
+ financial statements continued to exist in 2011 and 2012. Agria was still unable to use the land in a
280
+ commercially viable manner, was still unable to prepare any cash flow estimates based on future
281
+ use of the lands, and remained unable to realize any salvage value through resale. Nevertheless,
282
+ Agria failed to assess the land use rights for possible impairment for both its 2011 and 2012
283
+ financial statements and continued to record the amortized carrying values for the land use rights in
284
+ its financial statements for both reporting periods.
285
+
286
+ 26. GHP audit planning work papers identified land use rights as a “Key area of
287
+ focus.” The audit team conveyed a similar message to the audit committee: the audit committee
288
+ meeting minutes on April 6, 2012 identified “P3A clean up” and “Land use rights” as areas that
289
+ “GHP would focus on.” Both Filkoski and Magnuson participated in the audit planning
290
+ discussions for this period.
291
+
292
+
293
+ 7
294
+ 27. The audit planning documents identified the land use rights account as “significant
295
+ due to account balance, complexity of accounting method and possible misstatement due to
296
+ impairment and improper amortization.” The team viewed “the exposure to losses” based on “the
297
+ possibility of impairment issues and valuation issues” as “high.”
298
+
299
+ 28. Notwithstanding its recognition of the need to focus on the land use rights, the
300
+ audit team engaged in almost no audit procedures to assess the risk of an improper valuation.
301
+ Instead, the audit team simply recalculated the amortization of the land use rights’ carrying value
302
+ and made “a management inquiry with regard to the impairment analysis.” The auditors, led by
303
+ Filkoski, relied on management’s representation that they were still testing how to use the land.
304
+
305
+ 29. As he had done with the 2010 audit, Magnuson prepared a “Report on Audit
306
+ Engagement Quality Reviewer,” which checked off “Impairment of long-lived assets” as a
307
+ “selected key audit area[].”
308
+
309
+ 30. As they had done the prior period, GHP and Filkoski issued and Magnuson
310
+ approved the issuance of the audit report that contained an unqualified opinion regarding Agria’s
311
+ financial statements for fiscal year 2012.
312
+
313
+ iii. Agria Improperly Impaired the Land Use Rights in 2013 Rather than
314
+ Restating its Financial Statements for 2010 through 2012.
315
+
316
+ 31. On March 13, 2013, Agria filed a Form 6-K reporting its financial results for the
317
+ six months ended December 31, 2012. The company reported that it had recorded a full
318
+ impairment of the carrying value of the land use rights (US$57.3 million). In support of its
319
+ decision to fully impair the land use rights, the company had prepared an agricultural report
320
+ purporting to summarize the results of a multi-stage land testing program. Agria also prepared a
321
+ “white paper” entitled “Proposal of provision of impairment of Land Use Rights” and obtained a
322
+ valuation report from an independent valuation specialist.
323
+
324
+ 32. Agria based its decision to take a full impairment on two factors that were known
325
+ to exist at the time the company acquired the rights to the land: (i) The leased lands had no
326
+ expected future economic viability, primarily due to the poor soil quality, the lack of rainfall and
327
+ irrigation infrastructure, and the cost of fertilizer; and (ii) as determined by an independent
328
+ valuation specialist, the legal defects that Agria’s counsel had identified in 2010 “severely
329
+ affected” the land values and prevented the company from reselling the land use rights.
330
+
331
+ 33. Agria’s fiscal year 2013 financial statements incorporated the impairment of the
332
+ land use rights in both its balance sheet and income statement.
333
+
334
+ 34. Under GAAP a company is required to restate its prior year financial statements
335
+ to correct prior period material errors resulting from, among other things, oversight or misuse of
336
+ facts that existed at the time the financial statements were prepared. ASC 250-10.
337
+
338
+ 35. As confirmed by the company’s internal documentation, Agria’s decision to write
339
+ off the full carrying value of the land use rights was based on facts known or readily knowable at
340
+
341
+ 8
342
+ the time of the P3A divestiture. The prior period errors were material to Agria’s financial
343
+ statements in those earlier periods. Agria nevertheless failed to restate its prior financial
344
+ statements.
345
+
346
+ iv. The Audit Team’s Limited Procedures Failed to Address Red Flags of
347
+ Prior Period Impairment
348
+
349
+ 36. In December 2012, when Filkoski first learned of management’s intention to
350
+ impair the carrying value of the land use rights, he raised with management a concern that the SEC
351
+ might review the impairment’s timing. Filkoski advised Agria’s CFO to “fully document” the
352
+ basis for the impairment decision. Filkoski also cautioned that “[c]onsultations with specialists and
353
+ outside appraisals are often items that third parties (such as the SEC) may inquire about after the
354
+ fact.”
355
+
356
+ 37. On December 28, 2012, in a telephone conference with Agria’s management,
357
+ Filkoski repeated his warning that the SEC might examine the timing of the impairment. He urged
358
+ management to consider alternative uses for the leased lands in order to determine the recoverable
359
+ amount and noted that the impairment loss amount should be determined by valuation.
360
+
361
+ 38. Between January and March, 2013, the audit team conducted limited procedures
362
+ related to the company’s decision to impair the carrying values of the land use rights in the six
363
+ month period ending December 31, 2012, including review of both the white paper and the 2013
364
+ valuation report.
365
+
366
+ 39. The audit team, however, failed to address red flags in the company’s
367
+ documentation indicating that the impairment indicators had existed in prior periods. Specifically,
368
+ the white paper revealed that the land use rights had no economic viability due to soil and
369
+ weather conditions that predated the company’s testing; and both the white paper and valuation
370
+ report recorded that the land use rights had no salvage value because the legal defects identified
371
+ in July 2010 prevented the company from selling to third parties.
372
+
373
+ 40. Instead of advising management to address the red flags indicating that knowledge
374
+ of the impairment was known or knowable in prior periods, Filkoski provided Agria’s management
375
+ with comments on drafts of the white paper and suggested edits to a draft of Agria’s press release
376
+ announcing the impairment that changed the reported basis for the impairment decision, removed
377
+ or downplayed references to factors that had existed in earlier periods, and emphasized instead the
378
+ completion of testing in late 2012.
379
+
380
+ 41. GHP advised the audit committee in January 2013 that it was “in agreement with
381
+ [the] audit committee’s recommendation” to take the impairment in 2013. In March 2013, GHP
382
+ advised the committee that it “concurred with the conclusion of impairment provision for the P3A
383
+ land use right.”
384
+
385
+ v. The Failure to Audit the Timing of the Land Use Rights Impairment in
386
+ the 2013 Audit
387
+
388
+
389
+ 9
390
+ 42. Filkoski and the GHP audit team recognized that the company could not
391
+ appropriately impair the land use rights in 2013 unless the impairment had been based on new
392
+ information, rather than on information known to management in prior periods. The audit team
393
+ identified this risk in its audit planning but failed to perform audit procedures to address the risk or
394
+ to evaluate the evidence it obtained.
395
+
396
+ 43. In its audit planning and communications with the audit committee, the audit team
397
+ identified the impairment of the carrying value of the land use rights as a “significant audit and
398
+ accounting consideration.” Filkoski and Magnuson had previously reviewed the company’s white
399
+ paper and the 2013 valuation report and both participated in the audit planning sessions.
400
+
401
+ 44. A risk report prepared by the audit team in May/June 2013 identified the
402
+ possibility that the impairment could have been identified in prior periods. This was reported as a
403
+ “significant risk” with a resulting “high” risk of material misstatement. The risk report advised the
404
+ audit team to “obtain evidence surrounding timeline of events which led to the decision to impair
405
+ the assets and review for any indications that the information was available or known in prior
406
+ periods.” Filkoski signed off on the risk report.
407
+
408
+ 45. The audit team performed essentially no audit procedures regarding the timing of
409
+ Agria’s total write-off of the carrying value of the land use rights. The team did not prepare a
410
+ timeline of events and did not analyze the events to determine whether the basis for the impairment
411
+ had been available to management or known to exist in earlier periods. Instead, the audit team
412
+ merely “updated” the status of its earlier limited procedures, inquiring whether Agria’s
413
+ management had changed its intended use of the land and whether the land was “still abandoned
414
+ without any use, sublease or subsequent sale.”
415
+
416
+ 46. Moreover, in advising the audit committee of the auditor’s concurrence with
417
+ Agria’s full impairment of land use rights, Filkoski and the audit team misrepresented to the audit
418
+ committee that they had “tested the assumptions utilized on the valuation report.” In fact, no such
419
+ work had been performed.
420
+
421
+ 47. The audit team did not discuss with management whether the 2013 impairment
422
+ decision required a restatement of prior year financial statements.
423
+
424
+ vi. Filkoski Failed to Audit Agria’s 2012 Financial Statements in Accordance with
425
+ Professional Standards.
426
+
427
+ a. Filkoski Failed to Address Appropriately Risks of Material
428
+ Misstatements.
429
+
430
+ 48. Filkoski and the audit team identified risks of material misstatement relating to the
431
+ land use rights but failed to appropriately address those risks.
432
+
433
+ 49. The objective of PCAOB Standard AS No. 13, The Auditor’s Responses to the
434
+ Risks of Material Misstatement, is for the auditor to address the risks of material misstatements
435
+ through appropriate overall audit responses and audit procedures (AS 13.2). The auditor must
436
+
437
+ 10
438
+ design and implement audit responses that address the risks of material misstatements that are
439
+ identified and assessed in accordance with Auditing Standard No. 12, Identifying and Assessing
440
+ Risks of Material Misstatements. (AS 13.3)
441
+
442
+ 50. PCAOB Standard AU § 333, Management Representations, states that
443
+ representations from a company’s management “are part of the evidential matter the independent
444
+ auditor obtains, but they are not a substitute for the application of those auditing procedures
445
+ necessary to afford a reasonable basis for an opinion regarding the financial statements under
446
+ audit.” (AU § 333.02).
447
+
448
+ 51. The audit team identified and assessed risks of material misstatements arising from
449
+ the land use rights account. The audit team listed the land use rights as a key area of focus and
450
+ identified it as “significant due to the account balance, complexity of accounting method and
451
+ possible misstatement due to impairment.” However, Filkoski and the audit team did not design
452
+ and implement audit procedures needed to assess those risks. Instead, the audit team relied on
453
+ management’s representations that the company was still testing how to use the land.
454
+
455
+ 52. Reliance on management’s representations is not an appropriate substitute for the
456
+ required audit procedures. The audit team made no inquiry, performed no procedures on, and had
457
+ no understanding of the progress of the testing or the company’s efforts to develop a feasible
458
+ business plan. The audit team performed no procedures to analyze the recoverability of the
459
+ carrying values of the land use rights.
460
+
461
+ b. Filkoski Failed to Obtain Sufficient Appropriate Audit Evidence
462
+ or to Evaluate the Evidence Obtained.
463
+
464
+ 53. Filkoski and the audit team failed to obtain sufficient appropriate audit evidence
465
+ supporting Agria’s decision to maintain the carrying value of the land use rights and failed to
466
+ determine whether the audit evidence obtained supported the opinion expressed in the auditor’s
467
+ report.
468
+
469
+ 54. PCAOB Standard AS No. 15, Audit Evidence, requires the auditor to “plan and
470
+ perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable
471
+ basis for his or her opinion.” (AS 15.4). Appropriate audit evidence must be “both relevant and
472
+ reliable in providing support for the conclusions on which the auditor’s opinion is based.”
473
+ Relevance refers to the relationship of the audit evidence to the assertion or objective of the control
474
+ being tested; and reliability refers to the nature and source of the evidence and the circumstances
475
+ under which it is obtained. (AS 15.6-15.8).
476
+
477
+ 55. The objective of PCAOB Standard AS No. 14, Evaluating Audit Results, is for the
478
+ auditor to evaluate the results of the audit to determine whether the audit evidence obtained is
479
+ sufficient and appropriate to support the opinion to be expressed in the auditor’s report. (AS 14.2).
480
+ Factors that are relevant to the conclusion on whether sufficient appropriate audit evidence has
481
+ been obtained include the results of the audit procedures performed in the audit of the financial
482
+ statements and the appropriateness (i.e. the relevance and reliability) of the audit evidence
483
+ obtained. (AS No. 14.34).
484
+
485
+ 11
486
+
487
+ 56. The audit evidence obtained did not support the opinion that the financial
488
+ statements were in conformity with GAAP and that the audit was performed in accordance with
489
+ PCAOB standards. Filkoski and the audit team did not obtain evidence regarding cash flow
490
+ estimates to support the conclusions that the carrying value of the land use rights was recoverable
491
+ and that no impairment was warranted. The actions that the audit team did take -- i.e.,
492
+ recalculating the amortization of the carrying value and obtaining management’s representation
493
+ that land testing was ongoing -- were inadequate because they did not address the existence and
494
+ significance of the impairment indicators that had previously been presented to the audit team and
495
+ did not assess whether the carrying value was recoverable.
496
+
497
+ 57. Filkoski and the audit team also did not evaluate whether sufficient audit
498
+ procedures had been performed or whether the audit evidence obtained was sufficient and
499
+ appropriate to support the opinions in the audit report.
500
+
501
+ c. Filkoski Failed to Document Sufficient Findings or Issues.
502
+
503
+ 58. Filkoski and the audit team did not properly document the team’s significant
504
+ findings or issues regarding possible misstatement due to the impairment of the land use rights.
505
+
506
+ 59. PCAOB Standard AS No. 3, Audit Documentation, requires auditors to document
507
+ the procedures performed, the evidence obtained, and the conclusions reached with respect to
508
+ relevant financial statement assertions. (AS 3.6). Audit documentation must contain, among
509
+ other things, information sufficient to allow an experienced auditor with no connection to the
510
+ work to understand the procedures performed, evidence obtained, and conclusions reached and to
511
+ determine who performed the work, the date the work was completed, the person who reviewed
512
+ the work, and the date of the review. (AS 3.6).
513
+
514
+ 60. Filkoski and the audit team did not document the procedures they performed, if
515
+ any, to address the issue of possible misstatement due to potential impairment, or the significant
516
+ findings and conclusions regarding this issue that were reached by the audit team.
517
+
518
+ d. Filkoski Failed to Exercise Due Professional Care.
519
+
520
+ 61. Filkoski did not exercise due professional care in conducting the audit of Agria’s
521
+ financial statements.
522
+
523
+ 62. PCAOB Standard AU § 230, Due Professional Care in the Performance of Work,
524
+ requires auditors to exercise due professional care throughout the audit, including by “exercise of
525
+ professional skepticism.” Under this standard, “[p]rofessional skepticism is an attitude that
526
+ includes a questioning mind and a critical assessment of audit evidence,” (AU § 230.07) and one
527
+ that requires auditors to “consider the competency and sufficiency of the evidence.” (AU § 230.08)
528
+
529
+ 63. For the reasons outlined above, Filkoski failed to meet the standards of AU § 230.
530
+
531
+
532
+
533
+ 12
534
+ vii. Filkoski Failed to Audit Agria’s 2013 Financial Statements in
535
+ Accordance with Professional Standards.
536
+
537
+ a. Filkoski Failed to Design and Implement Appropriate Audit
538
+ Responses to Address the Risk of Material Misstatement.
539
+
540
+ 64. Filkoski and the audit team failed to design and implement audit responses that
541
+ address the risk of material misstatement related to the fiscal year 2013 impairment of the land use
542
+ rights. Even though the audit team’s risk report identified a high risk of a material misstatement
543
+ associated with the timing of the impairment and identified a proposed audit response, the audit
544
+ team prepared no timeline and performed no audit procedures to assess indications of impairment
545
+ in prior periods. As a result, Filkoski violated the PCAOB standards in AS 13.
546
+
547
+ b. Filkoski Failed to Obtain Sufficient Appropriate Audit Evidence
548
+ or to Evaluate the Evidence Obtained.
549
+
550
+ 65. In its 2013 audit, the audit team performed essentially no audit procedures
551
+ regarding the timing of the company’s total impairment of the carrying value of the land use rights.
552
+ The audit team merely updated the status of their earlier limited review, verifying only whether
553
+ Agria had changed its intentions with regard to future use of the leased lands. Filkoski and the
554
+ audit team thereby failed to obtain sufficient appropriate audit evidence supporting the timing of
555
+ the impairment, in violation of the professional audit standards reflected in AS 15.
556
+
557
+ 66. Contrary to the requirements of AS 14, Filkoski and the audit team also failed to
558
+ evaluate whether the evidence that was obtained regarding the company’s decision to abandon the
559
+ land use rights constituted sufficient appropriate audit evidence to support the decision to impair in
560
+ 2013, rather than earlier. Filkoski and the audit team made no assessment of whether Agria had
561
+ information available to it in earlier periods indicating that the land use rights should have been
562
+ impaired then.
563
+
564
+ c. Filkoski Ignored Multiple Red Flags of Prior Impairment and
565
+ Failed to Exercise Due Professional Care.
566
+
567
+ 67. Agria’s white paper and the valuation report both contained multiple red flags that
568
+ the carrying value of the land use rights was impaired in prior periods, but Filkoski and the audit
569
+ team ignored those warnings. The white paper concluded that the poor test results were due to
570
+ conditions that existed from the time Agria had acquired the land use rights. The valuation report
571
+ concluded that the land use rights had no salvage value because of legal defects that had been
572
+ identified in 2010.
573
+
574
+ 68. Despite the risks identified in the May/June 2013 risk report and the red flags of
575
+ prior impairment, Filkoski failed to exercise due professional care, including professional
576
+ skepticism in gathering and evaluating audit evidence in accordance with the standards of AU 230.
577
+
578
+
579
+
580
+ 13
581
+ d. Filkoski Failed to Document Sufficient Findings or Issues.
582
+
583
+ 69. As described above, Filkoski and the audit team did not properly document their
584
+ significant findings or issues regarding the appropriateness of the timing of the impairment. No
585
+ audit work papers reflected deliberation by the audit team of the issues considered, the evidence
586
+ obtained, and the conclusions reached. Filkoski thereby failed to conduct the audit in conformity
587
+ with the standards of AS 3.
588
+
589
+ e. Filkoski Failed to Consider Whether a Restatement of Agria’s
590
+ 2010 and 2012 Financial Information was Required.
591
+
592
+ 70. The white paper and the valuation report provided Filkoski and the audit team with
593
+ information existing at the time of the 2010 and 2012 audit reports that the land use rights were
594
+ potentially worthless. They made clear that the land had no economic viability due to pre-existing
595
+ topographical conditions at the time Agria acquired the rights. Similarly, the valuation report
596
+ provided reliable information that the rights had no salvage value due to the legal defects in
597
+ existence at the time of the 2010 audit. Further, the white paper and the agricultural report
598
+ provided additional information that by the time of the 2012 audit the first two stages of testing had
599
+ confirmed that the land had no economic viability.
600
+
601
+ 71. Despite this information, Filkoski and the audit team failed to consider whether a
602
+ restatement was required of the prior financial statements. No audit work papers reflected the audit
603
+ team’s consideration of the issue.
604
+
605
+ viii. Magnuson Failed to Conduct Adequate Engagement Quality Reviews
606
+ Regarding GHP’s Audit of Agria’s 2012 and 2013 Financial Statements.
607
+
608
+ 72. PCAOB Standard AS No. 7, Engagement Quality Review, sets the requirements for
609
+ an engagement quality review and concurring approval of issuance for each audit engagement.
610
+ The role of the engagement quality reviewer is to evaluate the significant judgments made by the
611
+ engagement team and the related conclusions reached in forming an overall conclusion on the
612
+ engagement, and in preparing the engagement report, in order to determine whether to provide
613
+ concurring approval of issuance. (AS 7.2)
614
+
615
+ 73. The engagement quality reviewer should also evaluate the significant judgments
616
+ that relate to audit planning and the engagement team’s assessment of, and audit responses to,
617
+ significant risks identified by the engagement team, including fraud risks. (AS 7.10) The
618
+ engagement quality reviewer should evaluate whether the engagement documentation reviewed
619
+ supports the engagement team’s conclusions. (AS 7.11.)
620
+
621
+ 74. Further, the engagement quality reviewer may provide concurring approval of
622
+ issuance only if, after performing with due professional care the review required by this standard,
623
+ he or she is not aware of a significant engagement deficiency. (AS 7.12). Under PCAOB Standard
624
+ AU § 230 due professional care requires that an auditor exercise professional skepticism, which is
625
+ an attitude that includes a questioning mind and a critical assessment of the audit evidence. (AU §
626
+ 230.07).
627
+
628
+ 14
629
+
630
+ a. Magnuson’s Engagement Quality Review Failures Regarding the
631
+ 2012 Audit
632
+
633
+ 75. Magnuson was part of the audit team’s audit planning discussions for the fiscal
634
+ year 2012 audit. He was aware that the audit team had identified land use rights as a key area of
635
+ focus and gave consideration to the continued existence and valuation of the land use rights.
636
+ Magnuson was aware of red flags regarding the overvaluation of land use rights and non-
637
+ recoverability of the carrying values and the existence of legal defects affecting the company’s
638
+ ability to sell the land use rights. While Magnuson was aware that the audit team had significant
639
+ discussions with management, he was not aware of specific discussions. Magnuson did not know
640
+ what work had been done regarding valuation of the land use rights, and he was not aware of any
641
+ documentation regarding the company’s testing of the lands or the company’s development of a
642
+ business plan for their use.
643
+
644
+ 76. Magnuson violated the standards of AS 7 when he provided his concurring
645
+ approval of issuance of the audit report that contained an unqualified 2012 opinion despite the
646
+ audit team’s failure to obtain sufficient appropriate audit evidence assessing the potential
647
+ impairment and overvaluation of the land use rights. Magnuson failed to identify significant
648
+ engagement deficiencies and failed to make adequate inquiries. Magnuson thereby violated the
649
+ standards AU § 230 by failing to exercise due professional care, including exercising a sufficient
650
+ level of professional skepticism in the performance of his work.
651
+
652
+ b. Magnuson’s Engagement Quality Review Failures Regarding the
653
+ 2013 Audit
654
+
655
+ 77. Prior to the commencement of the full year audit, Magnuson received and reviewed
656
+ Agria’s white paper and the 2013 valuation report. Magnuson was therefore aware that Agria’s
657
+ decision to fully impair the carrying value of the land use rights in fiscal year 2013 was based
658
+ almost entirely on facts that the company and the auditors knew existed in 2010.
659
+
660
+ 78. In planning for the full year audit, the audit team and Magnuson recognized that the
661
+ decision to write off the entirety of the carrying value in 2013 was a “significant accounting and
662
+ auditing issue.” Magnuson had participated in the audit planning discussions with the audit team.
663
+
664
+ 79. Notwithstanding his knowledge of red flags of prior impairment, Magnuson did not
665
+ question the audit team’s failure to perform audit procedures to assess the timing of the
666
+ impairment. Magnuson knew, for example, that the legal defects identified in the 2013 valuation
667
+ report had first been identified no later than 2010. Yet Agria’s audit work papers revealed no
668
+ evidence that management or the audit team had assessed the significance of these facts on the
669
+ timing of the impairment.
670
+
671
+ 80. Magnuson provided his concurring approval of issuance of the 2013 audit report
672
+ that contained an unqualified audit opinion despite the failure of the audit team to obtain sufficient
673
+ appropriate audit evidence assessing the timing of the impairment of the land use rights. As with
674
+ the 2012 audit, Magnuson failed to identify significant engagement deficiencies. Further, he failed
675
+
676
+ 15
677
+ to evaluate whether the audit team’s documentation supported the conclusion regarding the timing
678
+ of the impairment. Magnuson thereby failed to exercise due professional care in the performance
679
+ of his work.
680
+
681
+ ix. GHP’s Inaccurate Audit Reports
682
+
683
+ 81. Despite multiple departures from PCAOB standards, as described above, GHP,
684
+ through Filkoski, issued audit reports that contained unqualified opinions on Agria’s financial
685
+ statements. As the engagement quality review partner on the audits, Magnuson provided
686
+ concurring approval of the issuance of the 2012 and 2013 audit reports, without which GHP would
687
+ not have been able to grant permission to Agria to use GHP’s audit reports for its Forms 20-F.
688
+
689
+ 82. Filkoski and Magnuson knew that the GHP audit reports would be filed with the
690
+ Commission as part of Agria’s Forms 20-F. Those reports contained GHP’s opinion that Agria’s
691
+ financial statements presented fairly, in all material respects, the company’s financial position and
692
+ results of operations in accordance with GAAP, and GHP’s representation that its audits were
693
+ conducted in accordance with PCAOB standards.
694
+
695
+ 83. Filkoski and Magnuson knew or were reckless in not knowing that GHP’s audit
696
+ reports inaccurately stated that they had been made in accordance with PCAOB standards.
697
+
698
+ E. VIOLATIONS
699
+
700
+ 84. As a result of the conduct described above, Filkoski and Magnuson each engaged
701
+ in improper professional conduct within the meaning of Exchange Act Section 4C(a)(2) and Rule
702
+ 102(e)(1)(ii) of the Commission’s Rules of Practice. Section 4C(a)(2) and Rule 102(e)(1)(ii)
703
+ provide, in pertinent part, that the Commission may censure or deny, temporarily or permanently,
704
+ the privilege of appearing or practicing before the Commission to any person who is found by the
705
+ Commission to have engaged in improper professional conduct. Exchange Act Section 4C(b) and
706
+ Rule 102(e)(1)(iv) define improper professional conduct with respect to persons licensed to
707
+ practice as accountants as (1) a single instance of highly unreasonable conduct in circumstances for
708
+ which heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct that
709
+ indicate a lack of competence.
710
+
711
+ 85. As a result of the conduct described above, Filkoski and Magnuson each willfully
712
+ aided and abetted the violation of Rule 2-02(b) of Regulation S-X, which requires an audit report
713
+ to accurately state whether the audit was made in accordance with generally accepted auditing
714
+ standards. The phrase “generally accepted auditing standards” refers to the standards issued by the
715
+ PCAOB. Sec. Act Rel. No. 33-8422. Section 4C(a)(3) and Rule 102(e)(1)(iii) provide that the
716
+ Commission may censure or deny, temporarily or permanently, the privilege of appearing or
717
+ practicing before the Commission to any person who has willfully violated, or willfully aided and
718
+ abetted the violation of, any provision of the Federal securities laws or the rules and regulations
719
+ thereunder.
720
+
721
+
722
+ 16
723
+
724
+ F. FINDINGS
725
+
726
+ 86. Based on the foregoing, the Commission finds that Respondents Filkoski and
727
+ Magnuson engaged in improper professional conduct within the meaning of Exchange Act Section
728
+ 4C(a)(2) and Rules 102(e)(1)(ii) of the Commission’s Rules of Practice.
729
+
730
+ 87. Based on the foregoing, the Commission finds that Respondents Filkoski and
731
+ Magnuson willfully aided and abetted and caused GHP’s violations of Rule 2-02(b) of Regulation
732
+ S-X.
733
+
734
+ IV
735
+
736
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
737
+ agreed to in Respondents’ Offers.
738
+
739
+ Accordingly, it is hereby ORDERED, effectively immediately, that:
740
+
741
+ Michael Filkoski
742
+
743
+ A. Respondent Filkoski shall cease and desist from committing or causing any
744
+ violations or future violations of Rule 2-02(b) of Regulation S-X.
745
+
746
+ B. Respondent Filkoski is denied the privilege of appearing or practicing before the
747
+ Commission as an accountant.
748
+
749
+ C. After 3 years from the date of this order, Filkoski may request that the Commission
750
+ consider his reinstatement by submitting an application (attention: Office of the Chief Accountant)
751
+ to resume appearing or practicing before the Commission as:
752
+
753
+ 1. a preparer or reviewer, or a person responsible for the preparation or review,
754
+ of any public company’s financial statements that are filed with the
755
+ Commission (other than as a member of an audit committee, as that term is
756
+ defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such
757
+ an application must satisfy the Commission that Filkoski’s work in his
758
+ practice before the Commission as an accountant will be reviewed either by
759
+ the independent audit committee of the public company for which he works
760
+ or in some other acceptable manner, as long as he practices before the
761
+ Commission in this capacity; and/or
762
+
763
+ 2. a preparer or reviewer, or a person responsible for the preparation or review,
764
+ of any public company’s financial statements that are filed with the
765
+ Commission as a member of an audit committee, as that term is defined in
766
+ Section 3(a)(58) of the Securities Exchange Act of 1934. Such an
767
+ application will be considered on a facts and circumstances basis with
768
+ respect to such membership, and the applicant’s burden of demonstrating
769
+
770
+ 17
771
+ good cause for reinstatement will be particularly high given the role of the
772
+ audit committee in financial and accounting matters; and/or
773
+
774
+ 3. an independent accountant.
775
+
776
+ Such an application must satisfy the Commission that:
777
+
778
+ (a) Filkoski, or the public accounting firm with which he is associated,
779
+ is registered with the Public Company Accounting Oversight
780
+ Board (“Board”) in accordance with the Sarbanes-Oxley Act of
781
+ 2002, and such registration continues to be effective;
782
+
783
+ (b) Filkoski, or the registered public accounting firm with which he is
784
+ associated, has been inspected by the Board and that inspection did
785
+ not identify any criticisms of or potential defects in the
786
+ respondent’s or the firm’s quality control system that would
787
+ indicate that Filkoski will not receive appropriate supervision;
788
+ (c) Filkoski has resolved all disciplinary issues with the Board, and
789
+ has complied with all terms and conditions of any sanctions
790
+ imposed by the Board (other than reinstatement by the
791
+ Commission); and
792
+
793
+ (d) Filkoski acknowledges his responsibility, as long as he appears or
794
+ practices before the Commission as an independent accountant, to
795
+ comply with all requirements of the Commission and the Board,
796
+ including, but not limited to, all requirements relating to
797
+ registration, inspections, concurring partner reviews and quality
798
+ control standards.
799
+
800
+ D. The Commission will consider an application by Filkoski to resume appearing or
801
+ practicing before the Commission provided that his state CPA license is current and he has
802
+ resolved all other disciplinary issues with the applicable state boards of accountancy. However,
803
+ if state licensure is dependent on reinstatement by the Commission, the Commission will
804
+ consider an application on its other merits. The Commission’s review may include consideration
805
+ of, in addition to the matters referenced above, any other matters relating to Filkoski’s character,
806
+ integrity, professional conduct, or qualifications to appear or practice before the Commission as
807
+ an accountant. Whether an application demonstrates good cause will be considered on a facts
808
+ and circumstances basis with due regard for protecting the integrity of the Commission’s
809
+ processes.
810
+
811
+ E. Respondent Filkoski shall, within sixty (60) days of the entry of this Order, pay a
812
+ civil money penalty in the amount of $20,000 to the Securities and Exchange Commission for
813
+ transfer to the general fund of the United States Treasury, subject to Exchange Act Section
814
+ 21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C.
815
+ §3717.
816
+
817
+
818
+ 18
819
+ Scott Magnuson
820
+
821
+ F. Respondent Magnuson shall cease and desist from committing or causing any
822
+ violations or future violations of Rule 2-02(b) of Regulation S-X.
823
+
824
+ G. Respondent Magnuson is denied the privilege of appearing or practicing before the
825
+ Commission as an accountant.
826
+
827
+ H. After 1 year from the date of this order, Magnuson may request that the
828
+ Commission consider his reinstatement by submitting an application (attention: Office of the
829
+ Chief Accountant) to resume appearing or practicing before the Commission as:
830
+
831
+ 1. a preparer or reviewer, or a person responsible for the preparation or review,
832
+ of any public company’s financial statements that are filed with the
833
+ Commission (other than as a member of an audit committee, as that term is
834
+ defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such
835
+ an application must satisfy the Commission that Magnuson’s work in his
836
+ practice before the Commission as an accountant will be reviewed either by
837
+ the independent audit committee of the public company for which he works
838
+ or in some other acceptable manner, as long as he practices before the
839
+ Commission in this capacity; and/or
840
+
841
+ 2. a preparer or reviewer, or a person responsible for the preparation or review,
842
+ of any public company’s financial statements that are filed with the
843
+ Commission as a member of an audit committee, as that term is defined in
844
+ Section 3(a)(58) of the Securities Exchange Act of 1934. Such an
845
+ application will be considered on a facts and circumstances basis with
846
+ respect to such membership, and the applicant’s burden of demonstrating
847
+ good cause for reinstatement will be particularly high given the role of the
848
+ audit committee in financial and accounting matters; and/or
849
+
850
+ 3. an independent accountant.
851
+
852
+ Such an application must satisfy the Commission that:
853
+
854
+ (a) Magnuson, or the public accounting firm with which he is
855
+ associated, is registered with the Public Company Accounting
856
+ Oversight Board (“Board”) in accordance with the Sarbanes-Oxley
857
+ Act of 2002, and such registration continues to be effective;
858
+
859
+ (b) Magnuson, or the registered public accounting firm with which he
860
+ is associated, has been inspected by the Board and that inspection
861
+ did not identify any criticisms of or potential defects in the
862
+ respondent’s or the firm’s quality control system that would
863
+ indicate that Magnuson will not receive appropriate supervision;
864
+
865
+ 19
866
+ (c) Magnuson has resolved all disciplinary issues with the Board, and
867
+ has complied with all terms and conditions of any sanctions
868
+ imposed by the Board (other than reinstatement by the
869
+ Commission); and
870
+
871
+ (d) Magnuson acknowledges his responsibility, as long as he appears
872
+ or practices before the Commission as an independent accountant,
873
+ to comply with all requirements of the Commission and the Board,
874
+ including, but not limited to, all requirements relating to
875
+ registration, inspections, concurring partner reviews and quality
876
+ control standards.
877
+
878
+ I. The Commission will consider an application by Magnuson to resume appearing or
879
+ practicing before the Commission provided that his state CPA license is current and
880
+ he has resolved all other disciplinary issues with the applicable state boards of
881
+ accountancy. However, if state licensure is dependent on reinstatement by the
882
+ Commission, the Commission will consider an application on its other merits. The
883
+ Commission’s review may include consideration of, in addition to the matters
884
+ referenced above, any other matters relating to Magnuson’s character, integrity,
885
+ professional conduct, or qualifications to appear or practice before the Commission as
886
+ an accountant. Whether an application demonstrates good cause will be considered
887
+ on a facts and circumstances basis with due regard for protecting the integrity of the
888
+ Commission’s processes.
889
+
890
+ J. Respondent Magnuson shall, within sixty (60) days of the entry of this Order, pay a
891
+ civil money penalty in the amount of $10,000 to the Securities and Exchange
892
+ Commission for transfer to the general fund of the United States Treasury, subject to
893
+ Exchange Act Section 21F(g)(3). If timely payment is not made, additional interest
894
+ shall accrue pursuant to 31 U.S.C. §3717.
895
+
896
+ Money Payments
897
+
898
+ K. Payment must be made in one of the following ways:
899
+
900
+ (1) Respondents may transmit payment electronically to the Commission,
901
+ which will provide detailed ACH transfer/Fedwire instructions upon
902
+ request;
903
+
904
+ (2) Respondents may make direct payment from a bank account via Pay.gov
905
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
906
+
907
+ (3) Respondents may pay by certified check, bank cashier’s check, or United
908
+ States postal money order, made payable to the Securities and Exchange
909
+ Commission and hand-delivered or mailed to:
910
+
911
+
912
+
913
+ 20
914
+ Enterprise Services Center
915
+ Accounts Receivable Branch
916
+ HQ Bldg., Room 181, AMZ-341
917
+ 6500 South MacArthur Boulevard
918
+ Oklahoma City, OK 73169
919
+
920
+ Payments by check or money order must be accompanied by a cover letter identifying
921
+ Filkoski and Magnuson as Respondents in these proceedings, and the file number of these
922
+ proceedings; a copy of the cover letter and check or money order must be sent to Charles E. Cain,
923
+ Chief, FCPA Unit, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE,
924
+ Washington, DC 20549.
925
+
926
+ Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated
927
+ as penalties paid to the government for all purposes, including all tax purposes. To preserve the
928
+ deterrent effect of the civil penalty, Respondents agree that in any Related Investor Action, they
929
+ shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award
930
+ of compensatory damages by the amount of any part of Respondents’ payment of a civil penalty in
931
+ this action ("Penalty Offset"). If the court in any Related Investor Action grants such a Penalty
932
+ Offset, Respondents agree that they shall, within 30 days after entry of a final order granting the
933
+ Penalty Offset, notify the Commission's counsel in this action and pay the amount of the Penalty
934
+ Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an
935
+ additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed
936
+ in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a private
937
+ damages action brought against Respondent by or on behalf of one or more investors based on
938
+ substantially the same facts as alleged in the Order instituted by the Commission in this
939
+ proceeding.
940
+
941
+ V
942
+
943
+ It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section
944
+ 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by
945
+ Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other
946
+ amounts due by Respondent under this Order or any other judgment, order, consent order, decree
947
+ or settlement agreement entered in connection with this proceeding, is a debt for the violation by
948
+ Respondent of the federal securities laws or any regulation or order issued under such laws, as set
949
+ forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19).
950
+
951
+ By the Commission.
952
+
953
+
954
+ Vanessa A. Countryman
955
+ Secretary
raw/aaer/2019/AAER-4067.txt ADDED
@@ -0,0 +1,98 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES EXCHANGE ACT OF 1934
6
+ Release No. 86771 / August 27, 2019
7
+
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4067 / August 27, 2019
10
+
11
+ ADMINISTRATIVE PROCEEDING
12
+ File No. 3-19380
13
+
14
+ In the Matter of
15
+
16
+ ALAN G. HEIDE, CPA,
17
+ Respondent.
18
+
19
+
20
+
21
+ ORDER INSTITUTING PUBLIC
22
+ ADMINISTRATIVE PROCEEDINGS
23
+ PURSUANT TO RULE 102(e) OF THE
24
+ COMMISSION’S RULES OF PRACTICE,
25
+ MAKING FINDINGS, AND IMPOSING
26
+ REMEDIAL SANCTIONS
27
+
28
+
29
+ I.
30
+
31
+ The Securities and Exchange Commission (“Commission”) deems it appropriate and in the
32
+ public interest that public administrative proceedings be, and hereby are, instituted against Alan G.
33
+ Heide (“Respondent” or “Heide”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of
34
+ Practice.1
35
+
36
+ II.
37
+
38
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
39
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
40
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
41
+
42
+ 1 Rule 102(e)(3)(i) provides, in relevant part, that:
43
+
44
+ The Commission, with due regard to the public interest and without preliminary hearing,
45
+ may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has
46
+ been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his
47
+ or her misconduct in an action brought by the Commission, from violating or aiding and abetting
48
+ the violation of any provision of the Federal securities laws or of the rules and regulations
49
+ thereunder.
50
+ 2
51
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
52
+ herein, except as to the Commission’s jurisdiction over him and the subject matter of these
53
+ proceedings, and the findings contained in Paragraph III.3 below, which are admitted, Respondent
54
+ consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule
55
+ 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
56
+ Sanctions (“Order”), as set forth below.
57
+
58
+ III.
59
+
60
+ On the basis of this Order and Respondent’s Offer, the Commission finds that:
61
+
62
+ 1. Heide, age 61, is and has been a certified public accountant licensed to
63
+ practice in the State of Florida. He served as Chief Financial Officer, Controller, and/or Executive
64
+ Vice President of 1 Global Capital, LLC (“1 Global”) from 2013 until 2017.
65
+
66
+ 2. 1 Global was, at all relevant times, a limited liability company formed in
67
+ Florida with its principal place of business in Hallandale Beach, Florida. 1 Global was a financial
68
+ company engaged in the business of advancing money to businesses. 1 Global was not registered
69
+ with the Commission in any capacity and had no publicly traded stock.
70
+
71
+ 3. On August 19, 2019, a judgment was entered against Heide, permanently
72
+ enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and
73
+ Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933, in the civil action entitled
74
+ Securities and Exchange Commission v. Alan G. Heide, Civil Action Number 19-cv-62047, in the
75
+ United States District Court for the Southern District of Florida.
76
+
77
+ 4. The Commission’s complaint alleged, among other things, that Heide, at
78
+ the direction of the former Chairman and Chief Executive Officer of 1 Global, engaged in a
79
+ fraudulent scheme that resulted in 1 Global disseminating materially false and misleading
80
+ information to investors: (1) overstating the value of investors’ accounts and their rates of return
81
+ on investors’ monthly account statements; and (2) misrepresenting the role of an auditor in 1
82
+ Global’s marketing materials and investor account statements.
83
+ 3
84
+
85
+ IV.
86
+
87
+ In view of the foregoing, the Commission deems it appropriate and in the public interest to
88
+ impose the sanction agreed to in Respondent Heide’s Offer.
89
+
90
+ Accordingly, it is hereby ORDERED, effective immediately, that:
91
+
92
+ Heide is suspended from appearing or practicing before the Commission as an accountant.
93
+
94
+ By the Commission.
95
+
96
+
97
+ Vanessa A. Countryman
98
+ Secretary
raw/aaer/2019/AAER-4068.txt ADDED
@@ -0,0 +1,76 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+
3
+ UNITED STATES OF AMERICA
4
+ Before the
5
+ SECURITIES AND EXCHANGE COMMISSION
6
+
7
+
8
+ SECURITIES EXCHANGE ACT OF 1934
9
+ Release No. 86804 / August 29, 2019
10
+
11
+ ACCOUNTING AND AUDITING ENFORCEMENT
12
+ Release No. 4068 / August 29, 2019
13
+
14
+ ADMINISTRATIVE PROCEEDING
15
+ File No. 3-19391
16
+ ______________________________
17
+ :
18
+ In the Matter of :
19
+ : ORDER OF FORTHWITH SUSPENSION
20
+ PURSUANT TO RULE 102(e)(2) OF THE
21
+ ROBIN SMYTH, : COMMISSION’S RULES OF PRACTICE
22
+ :
23
+ Respondent. :
24
+ ______________________________:
25
+
26
+
27
+ I.
28
+
29
+ The Securities and Exchange Commission deems it appropriate to issue an order of
30
+ forthwith suspension of Robin Smyth pursuant to Rule 102(e)(2) of the Commission’s Rules of
31
+ Practice, 17 C.F.R. § 201.102(e)(2).1
32
+
33
+ II.
34
+
35
+ The Commission finds that:
36
+
37
+ 1. Smyth was the chief financial officer of KIT Digital, Inc., a public company, from
38
+ 2003 (beginning at KIT Digital’s predecessor, ROO Group) until mid-2012, with the exception
39
+ of a brief period from April to September 2009. In addition, during the relevant period, Smyth
40
+ also served as KIT Digital’s principal accounting officer (with the exception of the same brief
41
+ period).
42
+
43
+ 2. On April 18, 2019 a criminal judgment of conviction was entered against Smyth
44
+ in United States v. Smyth, et al, No. 15-CR-536 (PGG), in the United States District Court for the
45
+ Southern District of New York, finding him guilty of one count of conspiracy to commit
46
+
47
+ 1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a
48
+ misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the
49
+ Commission.”
50
+
51
+
52
+
53
+ securities fraud, one count of securities fraud, and three counts of making false statements in
54
+ annual and quarterly reports filed with the Securities and Exchange Commission.
55
+
56
+ 3. As a result of this criminal judgment, Smyth was sentenced to time served and
57
+ ordered to pay a penalty of $100,000, with the determination of any restitution amount to be
58
+ made at a later date.
59
+
60
+ III.
61
+
62
+ In view of the foregoing, the Commission finds that Smyth has been convicted of a
63
+ felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice.
64
+
65
+ Accordingly, it is ORDERED, that Smyth is forthwith suspended from appearing or
66
+ practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of
67
+ Practice.
68
+
69
+
70
+ By the Commission.
71
+
72
+
73
+
74
+ Vanessa A. Countryman
75
+ Secretary
76
+
raw/aaer/2019/AAER-4070.txt ADDED
@@ -0,0 +1,516 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES ACT OF 1933
6
+ Release No. 10680 / September 5, 2019
7
+
8
+ SECURITIES EXCHANGE ACT OF 1934
9
+ Release No. 86889 / September 5, 2019
10
+
11
+ ACCOUNTING AND AUDITING ENFORCEMENT
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+ Release No. 4070 / September 5, 2019
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+
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+ ADMINISTRATIVE PROCEEDING
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+ File No. 3-19422
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+
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+
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+ In the Matter of
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+
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+ Daniel Khesin
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+
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+ Respondent.
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+
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+
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+
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+
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+ ORDER INSTITUTING PUBLIC
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+ ADMINISTRATIVE AND CEASE-AND-
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+ DESIST PROCEEDINGS PURSUANT TO
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+ SECTION 8A OF THE SECURITIES ACT
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+ OF 1933, SECTIONS 4C AND 21C OF THE
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+ SECURITIES EXCHANGE ACT OF 1934,
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+ AND RULE 102(e) OF THE
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+ COMMISSION’S RULES OF PRACTICE,
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+ MAKING FINDINGS, AND IMPOSING
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+ REMEDIAL SANCTIONS AND A CEASE-
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+ AND-DESIST ORDER
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+
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+ I.
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+
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+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
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+ administrative and cease-and-desist proceedings be, and hereby are, instituted against Daniel
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+ Khesin (“Khesin” or “Respondent”) pursuant to Section 8A of the Securities Act of 1933
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+ 2
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+ (“Securities Act”), Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange
46
+ Act”), and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. 2
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+
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+ II.
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+
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+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
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+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
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+ purpose of these proceedings and any other proceedings brought by or on behalf of the
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+ Commission, or to which the Commission is a party, and without admitting or denying the findings
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+ herein, except as to the Commission’s jurisdiction over him and the subject matter of these
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+ proceedings, which are admitted, and except as provided herein in Section V, Respondent consents
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+ to the entry of this Order Instituting Cease-And-Desist Proceedings Pursuant to Section 8A of the
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+ Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule
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+ 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
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+ Sanctions and a Cease-And-Desist Order (“Order”), as set forth below.
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+
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+ III.
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+
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+ On the basis of this Order and Respondent’s Offer, the Commission finds3 that:
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+
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+
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+ 1 Section 4C provides, in relevant part, that:
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+
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+ The Commission may censure any person, or deny, temporarily or permanently,
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+ to any person the privilege of appearing or practicing before the Commission in
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+ any way, if that person is found . . . (1) not to possess the requisite qualifications
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+ to represent others; (2) to be lacking in character or integrity, or to have engaged
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+ in unethical or improper professional conduct; or (3) to have willfully violated, or
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+ willfully aided and abetted the violation of, any provision of the securities laws or
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+ the rules and regulations issued thereunder.
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+
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+ 2 Rule 102(e)(1)(iii) provides, in pertinent part, that:
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+
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+ The Commission may . . . deny, temporarily or permanently, the privilege of
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+ appearing or practicing before it . . . to any person who is found…to have
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+ willfully violated, or willfully aided and abetted the violation of any provision of
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+ the Federal securities laws or the rules and regulations thereunder.
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+
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+ 3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not
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+ binding on any other person or entity in this or any other proceeding.
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+
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+
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+ 3
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+ Summary
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+
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+ This matter involves multiple violations of the federal securities laws by certain former
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+ members of DS Healthcare Group, Inc.’s (“DS Healthcare” or the “Company”) senior
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+ management, including Daniel Khesin, who was also DS Healthcare’s chairman of the board and
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+ largest shareholder. During the first three quarters of 2015, Khesin, among others, acted to
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+ overstate DS Healthcare’s revenues. This consisted of recognizing fictitious revenue;
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+ intentionally or severely recklessly overbilling a customer and crediting the customer in a later
96
+ quarter; and authorizing sales practices, such as shipping products at the end of quarters with no
97
+ reasonable expectation of payment at the time of shipment and when the customer was on an
98
+ accounts receivable hold, improper bill and hold sales, improper consignment sales, and issuing
99
+ DS Healthcare stock and discounts as incentives to place orders without disclosing the incentives
100
+ to the Company’s finance department so that they could be recorded in the Company’s books
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+ and records. As a result, DS Healthcare’s reported financial statements in its Forms 10-Q for the
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+ first three quarters of 2015, in its August 4, 2014 and June 2, 2015 Form S-3 Registration
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+ Statements, and in its May 1, 2015 S-8 Registration Statement were materially false and
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+ misleading. The Forms 10-Q for each of these periods contained false officer and Sarbanes-
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+ Oxley certifications signed by Khesin.
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+
107
+ Khesin also made selective disclosures to certain persons associated with a broker or
108
+ dealer and to DS Healthcare shareholders relating to earnings, sales and revenue forecasts, and
109
+ information on pending and future acquisitions without the Company simultaneously disclosing
110
+ the same information to the public. When some of the above conduct was discovered in early
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+ 2016, DS Healthcare’s board of directors terminated Khesin’s employment and removed him
112
+ from the board. In reaction to those efforts, Khesin improperly solicited shareholders for voting
113
+ proxies or consents, and used those consents to regain control of the Company, firing senior
114
+ management and appointing new directors. Khesin also failed to file forms disclosing beneficial
115
+ ownership of and transactions in DS Healthcare securities held by a trust benefiting his son
116
+ where he served as the trustee.
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+
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+ Respondent
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+ 1. Khesin is 39 and resides in Boca Raton, Florida. From at least 2009 to January
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+ 2016, Khesin served as DS Healthcare’s president, chief financial officer, and chairman of the
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+ board, after which he continued to serve as DS Healthcare’s president and chairman of the board
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+ until June 2017. Khesin also served as the Company’s chief executive officer from at least 2009
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+ through the third quarter of 2015. Khesin oversaw DS Healthcare’s hiring of a new chief
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+ executive officer and new chief financial officer in October 2015 and January 2016, respectively,
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+ both of whom held those positions until April 2016. Khesin again served as the Company’s
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+ chief financial officer from April 2016 to September 2016, and chief executive officer from
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+ April 2016 to June 2017. Khesin resigned his positions as president, chief executive officer, and
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+ chairman of the board on June 2, 2017.
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+
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+ 4
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+ Other Relevant Entities
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+ 2. DS Healthcare is a Florida corporation organized in January 2007 and
133
+ headquartered in Pompano Beach, Florida. The Company focuses on hair and personal care
134
+ products. DS Healthcare’s fiscal reporting is based on the calendar year. DS Healthcare
135
+ disclosed in its 2013 and 2014 annual reports that it had material weaknesses in its internal
136
+ control over financial reporting and warned that without developing or maintaining an effective
137
+ system of internal controls, it may not be able to accurately report its financial results or prevent
138
+ fraud. DS Healthcare’s common stock (“DSKX”) previously was registered pursuant to Section
139
+ 12(b) of the Exchange Act and traded on the NASDAQ until December 23, 2016, when
140
+ NASDAQ delisted the Company. DS Healthcare filed a Form S-3 Registration Statement on
141
+ June 2, 2015 that went effective June 11, 2015 for the resale of securities previously issued to a
142
+ consultant. DS Healthcare also filed a Form S-3 Registration Statement that went effective
143
+ August 4, 2014 and a Form S-8 Registration Statement that went effective May 1, 2015. The
144
+ above Forms S-3 and S-8 Registration Statements incorporated by reference the Forms 10-Q at
145
+ issue. DS Healthcare terminated the registration of its securities with the Commission in 2018.
146
+
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+ Background
148
+
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+ 3. DS Healthcare develops proprietary technologies and products for hair and
150
+ personal care needs. The Company operates through a network of retailers across North
151
+ America and international distributors. Throughout 2015, DS Healthcare experienced intensified
152
+ pressure to increase sales due to the declining price of its stock and the pursuit of possible
153
+ acquisitions, which were reliant, in part, on the value of its stock. This pressure led Khesin to
154
+ improperly recognize revenue from sales that violated the Company’s revenue recognition
155
+ policies and departed from the accounting principles generally accepted in the United States
156
+ (“GAAP”).
157
+
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+ 4. During the relevant period, Khesin engaged in misconduct to increase DS
159
+ Healthcare’s reported revenues. This included: recognizing fictitious revenue; intentionally or
160
+ severely recklessly overbilling a customer and crediting the customer in a later quarter; and
161
+ authorizing sales practices, such as shipping products at the end of quarters with no reasonable
162
+ expectation of payment at the time of shipment and when the customer was on an accounts
163
+ receivable hold, improper bill and hold sales, improper consignment sales, and issuing DS
164
+ Healthcare stock and discounts as incentives to place orders without disclosing the incentives to
165
+ the Company’s finance department so that they could be recorded in the Company’s books and
166
+ records. DS Healthcare recognized the revenue associated with the above sales practices at the
167
+ time the products were shipped to the Company’s freight forwarder in violation of DS
168
+ Healthcare’s revenue recognition policies, which also departed from the requirements of GAAP.
169
+ Khesin signed officer and Sarbanes-Oxley certifications attesting to the accuracy and
170
+ completeness of the Company’s financial statements, which improperly included revenue
171
+ attributable to the above transactions and sales practices.
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+
173
+ 5
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+ DS Healthcare Recognized Fictitious Revenue
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+
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+ 5. In 2015, Khesin and another DS Healthcare officer directed DS Healthcare’s
177
+ Mexico subsidiary (“DS Mexico”) to recognize revenue for products that neither DS Mexico nor
178
+ DS Healthcare sold. Specifically, in the second quarter of 2015, Khesin directed DS Mexico to
179
+ record $96,000 of revenue for sales of micro-needling devices that were sold and distributed by a
180
+ separate company partially owned by DS Mexico’s president. Khesin gave this direction
181
+ because DS Healthcare needed the additional revenue to assist with a possible acquisition and to
182
+ help increase the price per share of the Company’s stock. Thereafter, with two weeks left in the
183
+ third quarter of 2015 and the Company behind in its revenue goal by more than $700,000,
184
+ Khesin directed DS Mexico to record $201,000 of revenue for the sale of additional micro-
185
+ needling devices.
186
+
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+ 6. DS Healthcare’s recognition of revenue relating to the micro-needling products
188
+ constituted a departure from GAAP, as revenue recognition standards include, among other
189
+ criteria, that revenue may only be recognized if there is persuasive evidence of a sales
190
+ arrangement between DS Mexico or DS Healthcare and the ultimate purchaser of the products.
191
+ Here, not only was there no persuasive evidence of a sales arrangement at the time of the
192
+ transactions, but neither DS Healthcare nor DS Mexico owned or had possession of the micro-
193
+ needling product inventory; had an agreement to sell or distribute the micro-needling products;
194
+ or bore the risk of loss for the products; all of which would be required to recognize the revenue
195
+ under GAAP.
196
+
197
+ DS Healthcare Intentionally or Severely Recklessly
198
+ Overbilled a Consignment Sale to a Customer in China
199
+
200
+ 7. At the end of the third quarter of 2015, DS Healthcare intentionally or severely
201
+ recklessly overbilled a customer in China in order to generate higher revenues for that quarter.
202
+ Specifically, in the last week of the third quarter of 2015, DS Healthcare entered three orders
203
+ totaling $201,708 for a new customer in China. DS Healthcare entered the orders at a high price,
204
+ rather than the correct total price of $44,796. And, the products ordered were to be paid for as
205
+ they were sold, i.e., on a consignment basis, based on an agreement the customer had with DS
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+ Healthcare’s senior management. Khesin and another DS Healthcare officer approved the
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+ pricing and terms. Khesin knew or was severely reckless in not knowing that consignment sales
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+ were not permitted under DS Healthcare’s revenue recognition policies. Having received emails
209
+ on that subject by the Company’s finance department as early as 2011, Khesin knew DS
210
+ Healthcare could not recognize the associated revenue at the time the products were shipped
211
+ because the customer was not obligated to pay until the products were sold. Despite that
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+ understanding, DS Healthcare recognized the revenue in the third quarter of 2015. And, Khesin
213
+ certified the Company’s financial statements, which included the entire, overbilled consignment
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+ sale. In a later quarter, Khesin authorized the pricing to be changed to a lower amount and
215
+ issued a credit for the amount of the overcharge, i.e., $156,912. DS Healthcare departed from
216
+ GAAP by intentionally or severely recklessly overbilling the customer and issuing a credit for
217
+ the overcharged amount in a subsequent quarter, and by recognizing the revenue from the sale at
218
+ the time of shipment of the products rather than at the time the customer sold the products.
219
+ 6
220
+
221
+ DS Healthcare Improperly Deployed Other Sales Practices to Increase Revenue
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+
223
+ 8. During the first three quarters of 2015, Khesin authorized or permitted: the
224
+ shipment of products at the end of quarters with no reasonable expectation of payment at the
225
+ time of shipment as required by GAAP and when the customer was on an accounts receivable
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+ hold; improper bill and hold sales that did not pass the risk of ownership to the customer at the
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+ time of shipment and which did not have a fixed delivery schedule as required by GAAP; and
228
+ improper consignment sales that recognized revenue at the time of shipment even though
229
+ collectability was not assured as the customer was not obligated to pay for the products until they
230
+ were ultimately sold as required by GAAP. Khesin also authorized the issuance of DS
231
+ Healthcare stock and discounts as incentives to specific customers in an effort to meet DS
232
+ Healthcare’s revenue projections and goals without accounting for those issuances and discounts
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+ in the Company’s books and records. All but one of these customers were under a credit and/or
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+ an accounts receivable hold, requiring advance payment to ensure collectability. DS Healthcare
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+ recognized more than $600,000 in revenue from these transactions at the time of shipment even
236
+ though doing so was a departure from GAAP and contrary to the Company’s revenue recognition
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+ policies.
238
+
239
+ 9. Khesin knew or was severely reckless in not knowing the above sales practices as
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+ implemented did not comply with the Company’s revenue recognition policies, having received
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+ emails and guidance from the finance department as far back as 2011 and 2012. As a result of
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+ the improper recognition of the above revenue, DS Healthcare materially overstated its net
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+ revenue, gross profit, and accounts receivable in the first three quarters of 2015. DS Healthcare
244
+ also materially overstated its operating income and understated its net loss in the second quarter
245
+ of 2015, and understated its operating and net losses in the first and third quarters of 2015. DS
246
+ Healthcare also materially misrepresented the same metrics when it incorporated by reference its
247
+ first through third quarter 2015 financial statements in its August 14, 2014 and June 2, 2015
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+ Form S-3 Registration Statements, and in its May 1, 2015 Form S-8 Registration Statement.
249
+
250
+ 10. On March 23, 2016, following the initiation of an independent investigation by a
251
+ law firm hired by the Company’s audit committee, DS Healthcare reported in a Form 8-K,
252
+ among other things, that its financial statements for the second and third quarters of 2015 should
253
+ no longer be relied upon. DS Healthcare’s stock fell approximately 35% on the news to close at
254
+ $.86 per share on March 24, 2016. DS Healthcare subsequently restated, among others, its
255
+ financial statements for the first three quarters of 2015, materially decreasing its quarterly net
256
+ revenues. This had the result of increasing its losses for these periods by 921%, 979%, and 43%
257
+ to $869,546, $103,102, and $819,436, respectively. As DS Healthcare’s president, chief
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+ executive officer, chief financial officer, and chairman of the board, Khesin was one of the
259
+ individuals responsible for preparing, reviewing and commenting on the Company’s public
260
+ filings. Khesin also was responsible for signing officer and Sarbanes-Oxley certifications
261
+ relating to, among others, the accuracy of the financial statements and results of operations and
262
+ the lack of knowledge of fraud involving management or other employees with a significant role
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+ in the Company. Based on his knowledge and role in the above transactions, Khesin knew or
264
+ was severely reckless in not knowing DS Healthcare’s reported financial statements were
265
+ 7
266
+ materially inaccurate and not in compliance with GAAP, and that his certifications were false at
267
+ the time he signed them. Likewise, Khesin caused the falsification of DS Healthcare’s books
268
+ and records, and failed to devise and maintain a sufficient system of internal accounting controls.
269
+
270
+ False Representations to DS Healthcare’s Auditor
271
+
272
+ 11. For each of the quarters that were restated, Khesin represented to the Company’s
273
+ auditor, among other things, that DS Healthcare’s financial statements were prepared and fairly
274
+ presented in conformity with GAAP; all financial records and related data were made available
275
+ to the auditor; and the Company had not received any communications, nor had knowledge of
276
+ any fraud, allegations of fraud, or suspected fraud. Based on his knowledge and role in the
277
+ above transactions, Khesin knew or was severely reckless in not knowing those representations
278
+ were false at the time he made them.
279
+
280
+ Selective Disclosure of Material, Non-Public Information
281
+
282
+ 12. On multiple occasions during Khesin’s tenure, he selectively disclosed material,
283
+ non-public information relating to earnings, revenue and sales forecasts, and pending and future
284
+ acquisition plans to certain persons associated with a broker or dealer and to DS Healthcare
285
+ shareholders. For example, Khesin regularly communicated with certain investors in 2016 via
286
+ telephone and face-to-face meetings, providing forward-looking statements, and information
287
+ about pending and future acquisitions before they had taken place and before they were disclosed
288
+ to the public. During 2015 and 2016 Khesin also communicated Company earnings, revenue and
289
+ sales forecasts, and acquisition efforts to certain investors without contemporaneously having the
290
+ Company provide the same information to the public. Khesin did not obtain express agreements
291
+ from the above individuals to maintain the confidentiality of the information conveyed. Khesin
292
+ knew or was severely reckless in not knowing such communications were improper based on the
293
+ Company’s policies on disclosing material, non-public information to the public. DS Healthcare
294
+ did not simultaneously disclose the information to the broader market.
295
+
296
+ Khesin Failed to Report DSKX Stock Transactions as Trustee of His Son’s Trust
297
+
298
+ 13. On December 29, 2014, Khesin created a trust and named himself the sole trustee
299
+ and his young son the beneficiary. From March 2015 to at least February 2016, Khesin, on
300
+ behalf of the trust, executed 29 transactions in DS Healthcare stock. Pursuant to the trust and the
301
+ brokerage records, Khesin was the only person authorized to place trades on behalf of the trust.
302
+ Despite being obligated to do so, Khesin did not file Forms 4 or 5 disclosing these transactions.
303
+
304
+ Khesin’s Fight for Control of the Company
305
+ 14. In March 2016 and based on some of the conduct described above, DS
306
+ Healthcare’s board of directors terminated Khesin’s employment and removed him from the
307
+ board of directors for cause. Khesin countered by taking steps to secure control of the Company.
308
+ Specifically, Khesin sent voting agreements to more than ten persons on March 28, 2016, in
309
+ order to get enough voting rights to give him majority control of the Company. The voting
310
+ agreements purported to transfer to Khesin all voting rights to the underlying shares for a six-
311
+ 8
312
+ month period. Khesin did not send a proxy statement or the information required to be in a
313
+ proxy statement to the shareholders or file anything with the Commission prior to his solicitation
314
+ of the voting agreements. By March 29, 2016, Khesin had received enough voting agreements to
315
+ have voting power over 56% of DS Healthcare’s common stock.
316
+
317
+ 15. On March 31, 2016, Khesin filed the agreements with the Commission as exhibits
318
+ to a Schedule 13D and announced that he had acquired voting power to change the board and
319
+ management structure of the Company. Khesin filed a definitive proxy statement on Schedule
320
+ 14A on April 4, 2016, in which he admitted he telephonically solicited proxy consents and sent
321
+ the voting agreements to the shareholders he contacted on March 28, 2016, and that he sent the
322
+ proxy statement to the shareholders on April 2, 2016. Khesin’s oral solicitations were materially
323
+ misleading and contained material omissions because he misrepresented why he had been fired
324
+ and did not explain, among other things, that the Company had initiated an independent
325
+ investigation relating to the transactions Khesin had been involved in.
326
+
327
+ 16. The proxy statement, delivered to the shareholders after Khesin obtained voting
328
+ control of their stock, identified the purpose of the proxy solicitation was to accomplish the
329
+ “transfer of voting authority through proxy . . . for the purpose of replacement of the three
330
+ current Board of Directors . . . and to bring about management changes. . . .” Khesin filed a
331
+ Form 8-K on April 6, 2016, announcing that on March 31, 2016 DS Healthcare shareholders
332
+ removed the three independent directors from DS Healthcare’s board of directors. On April 22,
333
+ 2016, Khesin filed a Schedule 14f-1 reporting the change in control and the future appointment
334
+ of new directors to DS Healthcare’s board of directors stemming from Khesin’s use of the voting
335
+ agreements. Khesin’s solicitation and use of the voting agreements was improper because he
336
+ obtained the voting agreements without providing the shareholders with a proxy statement
337
+ complying with the requirements of Schedule 14A.
338
+
339
+ Violations
340
+
341
+ 17. Securities Act Sections 17(a)(1) and 17(a)(3) and Exchange Act Section 10(b) and
342
+ Rule 10b-5 thereunder prohibit fraudulent conduct in the offer or sale of securities and in
343
+ connection with the purchase or sale of securities, respectively.
344
+
345
+ 18. Exchange Act Section 13(a) and Rule 13a-13 thereunder require that every issuer
346
+ of a security registered pursuant to Exchange Act Section 12 file with the Commission, among
347
+ other things, quarterly and other reports as the Commission may require. Rule 13a-14 under the
348
+ Exchange Act requires all periodic reports to include certifications personally signed by the
349
+ issuer’s principal executive officer and financial officers in the form specified in the applicable
350
+ requirements.
351
+
352
+ 19. Rule 12b-20 under the Exchange Act requires that, in addition to the information
353
+ expressly required to be included in a statement or report filed with the Commission, there shall
354
+ be added such further material information, if any, as may be necessary to make the required
355
+ statements, in light of the circumstances under which they are made not misleading.
356
+
357
+ 9
358
+ 20. Exchange Act Section 13(b)(2)(A) requires reporting companies to make and
359
+ keep books, records and accounts which, in reasonable detail, accurately and fairly reflect their
360
+ transactions and dispositions of their assets.
361
+
362
+ 21. Exchange Act Section 13(b)(2)(B) requires all reporting companies to devise and
363
+ maintain a system of internal accounting controls sufficient to provide reasonable assurances that
364
+ transactions are recorded as necessary to permit preparation of financial statements in accordance
365
+ with GAAP.
366
+
367
+ 22. Exchange Act Section 13(b)(5) prohibits any person from knowingly
368
+ circumventing or knowingly failing to implement a system of internal accounting controls or
369
+ knowingly falsifying any book, record, or account described in Section 13(b)(2).
370
+
371
+ 23. Rule 13b2-1 under the Exchange Act prohibits any person from directly or
372
+ indirectly, falsifying or causing to be falsified, any book, record, or account subject to Exchange
373
+ Act Section 13(b)(2)(A). Rule 13b2-2 under the Exchange Act prohibits any officer or director
374
+ from directly or indirectly making or causing to be made a materially false or misleading
375
+ statement to an accountant in connection with any audit, review, or examination of the financial
376
+ statements of an issuer.
377
+
378
+ 24. Regulation FD requires, among other things, that whenever an issuer, or anyone
379
+ acting on its behalf, intentionally makes a selective disclosure of material, non-public
380
+ information about the issuer to certain specified persons, including analysts and investors, the
381
+ issuer is required to make a simultaneous public disclosure of that information.
382
+
383
+ 25. Exchange Act Section 14(a) and Rule 14a-3 thereunder prohibits any person from
384
+ soliciting a proxy without furnishing information specified by Schedule 14A, including financial
385
+ statements meeting the requirements of Regulation S-X, management’s discussion and analysis
386
+ of financial condition and results of operations, among other things. Rule 14a-9 under the
387
+ Exchange Act prohibits the use of proxy statements that are materially false or misleading.
388
+
389
+ 26. Exchange Act Section 16(a) and Rules 16a-2 and 16a-3 thereunder require direct
390
+ or indirect beneficial owners of more than ten percent of a class of securities registered under
391
+ Section 12 of the Exchange Act, and directors and officers to file reports of ownership and
392
+ changes of beneficial ownership with the Commission. Exchange Act Rule 16a-8 requires that if
393
+ a trustee subject to Section 16 has a pecuniary interest in any holding or transaction in the
394
+ issuer’s securities held by the trust, such holding or transaction is attributable to the trustee and
395
+ shall be reported by the trustee in the trustee’s individual capacity.
396
+
397
+ Findings
398
+
399
+ 27. Based on the foregoing, the Commission finds that Khesin: (i) willfully violated
400
+ Securities Act Sections 17(a)(1) and 17(a)(3), Exchange Act Sections 10(b), 13(b)(5), 14(a), and
401
+ 16(a) and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, 14a-9, 16a-3, and 16a-8 thereunder; and
402
+ 10
403
+ (ii) willfully aided and abetted and caused DS Healthcare’s violations of Exchange Act Sections
404
+ 13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20, 13a-13 thereunder, and Regulation FD.
405
+
406
+ 28. Based on the foregoing, the Commission finds that by willfully violating
407
+ Securities Act Sections 17(a)(1) and 17(a)(3), Exchange Act Sections 10(b), 13(b)(5), 14(a), and
408
+ 16(a) and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, 14a-9, 16a-3, and 16a-8 thereunder, and
409
+ willfully aiding and abetting DS Healthcare’s violations of Exchange Act Sections 13(a),
410
+ 13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20, 13a-13 thereunder, and Regulation FD, Khesin
411
+ engaged in conduct subject to Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of
412
+ the Commission’s Rules of Practice.
413
+
414
+ IV.
415
+
416
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
417
+ agreed to in Respondent Khesin’s Offer.
418
+
419
+ Accordingly, it is hereby ORDERED that:
420
+
421
+ A. Khesin shall cease and desist from committing or causing any violations and any
422
+ future violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections
423
+ 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a), and 16(a) of the Exchange
424
+ Act and Rules 10b-5, 12b-20, 13a-13, 13a-14, 13b2-1, 13b2-2, 14a-3, 14a-9, 16a-3,
425
+ and 16a-8 thereunder, and Regulation FD.
426
+
427
+ B. Khesin be, and hereby is, prohibited for eight (8) years from the date of the Order
428
+ from acting as an officer or director of any issuer that has a class of securities
429
+ registered pursuant to Section 12 of the Exchange Act or that is required to file
430
+ reports pursuant to Section 15(d) of the Exchange Act.
431
+
432
+ C. Khesin is denied the privilege of appearing or practicing before the Commission
433
+ as an accountant.
434
+
435
+ D. After eight (8) years from the date of this Order, Khesin may request that the
436
+ Commission consider his reinstatement by submitting an application (attention:
437
+ Office of the Chief Accountant) to resume appearing and practicing before the
438
+ Commission as an accountant.
439
+
440
+ E. Khesin shall within twenty-one (21) days of the entry of the Order, pay a civil
441
+ money penalty in the amount of $130,000 to the Securities and Exchange
442
+ Commission for transfer to the general fund of the United States Treasury, subject
443
+ to Exchange Act Section 21F(g)(3). Payment shall be made in four installments of
444
+ $32,500 each as follows: the first installment of $32,500 due within 21 days of
445
+ the date of the entry the Order; the second installment of $32,500 due within 120
446
+ days of the entry of the Order; the third installment of $32,500 due within 240
447
+ days of the entry of the Order; and the fourth and final installment of $32,500 due
448
+ 11
449
+ within 360 days of the entry of the Order. Payments shall be applied first to post
450
+ order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making the
451
+ final payment set forth herein, Khesin shall contact the staff of the Commission
452
+ for the amount due. If Khesin fails to make any payment by the date agreed
453
+ and/or in the amount agreed according to the schedule set forth above, all
454
+ outstanding payments under this Order, including post-order interest, minus any
455
+ payments made, shall become due and payable immediately at the discretion of
456
+ the staff of the Commission without further application to the Commission.
457
+
458
+ F. Payment must be made in one of the following ways:
459
+
460
+ (1) Khesin may transmit payment electronically to the Commission, which
461
+ will provide detailed ACH transfer/Fedwire instructions upon request;
462
+
463
+ (2) Khesin may make direct payment from a bank account via Pay.gov
464
+ through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
465
+
466
+ (3) Khesin may pay by certified check, bank cashier’s check, or United States
467
+ postal money order, made payable to the Securities and Exchange
468
+ Commission and hand-delivered or mailed to:
469
+
470
+ Enterprise Services Center
471
+ Accounts Receivable Branch
472
+ HQ Bldg., Room 181, AMZ-341
473
+ 6500 South MacArthur Boulevard
474
+ Oklahoma City, OK 73169
475
+
476
+ Payments by check or money order must be accompanied by a cover letter
477
+ identifying Daniel Khesin as a Respondent in these proceedings, and the file
478
+ number of these proceedings; a copy of the cover letter and check or money order
479
+ must be sent to Eric R. Busto, Assistant Regional Director, Securities and
480
+ Exchange Commission, 801 Brickell Avenue, Suite 1800, Miami, FL 33131.
481
+
482
+ G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall
483
+ be treated as penalties paid to the government for all purposes, including all tax
484
+ purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees
485
+ that in any Related Investor Action, he shall not argue that he is entitled to, nor
486
+ shall he benefit by, offset or reduction of any award of compensatory damages by
487
+ the amount of any part of Respondent’s payment of a civil penalty in this action
488
+ (“Penalty Offset”). If the court in any Related Investor Action grants such a
489
+ Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a
490
+ final order granting the Penalty Offset, notify the Commission’s counsel in this
491
+ action and pay the amount of the Penalty Offset to the Securities and Exchange
492
+ Commission. Such a payment shall not be deemed an additional civil penalty and
493
+ shall not be deemed to change the amount of the civil penalty imposed in this
494
+ 12
495
+ proceeding. For purposes of this paragraph, a “Related Investor Action” means a
496
+ private damages action brought against Respondent by or on behalf of one or
497
+ more investors based on substantially the same facts as alleged in the Order
498
+ instituted by the Commission in this proceeding.
499
+
500
+ V.
501
+ It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section
502
+ 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by
503
+ Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other
504
+ amounts due by Respondent under this Order or any other judgment, order, consent order, decree
505
+ or settlement agreement entered in connection with this proceeding, is a debt for the violation by
506
+ Respondent of the federal securities laws or any regulation or order issued under such laws, as set
507
+ forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19).
508
+
509
+ By the Commission.
510
+
511
+
512
+
513
+ Vanessa A. Countryman
514
+ Secretary
515
+
516
+
raw/aaer/2019/AAER-4071.txt ADDED
@@ -0,0 +1,437 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+ UNITED STATES OF AMERICA
2
+ Before the
3
+ SECURITIES AND EXCHANGE COMMISSION
4
+
5
+ SECURITIES ACT OF 1933
6
+ Release No. 10681 / September 6, 2019
7
+
8
+ SECURITIES EXCHANGE ACT OF 1934
9
+ Release No. 86900 / September 6, 2019
10
+
11
+ ACCOUNTING AND AUDITING ENFORCEMENT
12
+ Release No. 4071 / September 6, 2019
13
+
14
+ ADMINISTRATIVE PROCEEDING
15
+ File No. 3-19426
16
+
17
+
18
+ In the Matter of
19
+
20
+ Abner Silva
21
+
22
+ Respondent.
23
+
24
+
25
+
26
+
27
+ ORDER INSTITUTING PUBLIC
28
+ ADMINISTRATIVE AND CEASE-AND-
29
+ DESIST PROCEEDINGS PURSUANT TO
30
+ SECTION 8A OF THE SECURITIES ACT
31
+ OF 1933, SECTIONS 4C AND 21C OF THE
32
+ SECURITIES EXCHANGE ACT OF 1934,
33
+ AND RULE 102(e) OF THE
34
+ COMMISSION’S RULES OF PRACTICE,
35
+ MAKING FINDINGS, AND IMPOSING
36
+ REMEDIAL SANCTIONS AND A CEASE-
37
+ AND-DESIST ORDER
38
+
39
+ I.
40
+
41
+ The Securities and Exchange Commission (“Commission”) deems it appropriate that public
42
+ administrative and cease-and-desist proceedings be, and hereby are, instituted against Abner Silva
43
+ (“Silva” or “Respondent”) pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”),
44
+ Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule
45
+ 102(e)(1)(iii) of the Commission’s Rules of Practice.2
46
+
47
+ 1 Section 4C provides, in relevant part, that:
48
+
49
+ The Commission may censure any person, or deny, temporarily or permanently,
50
+ to any person the privilege of appearing or practicing before the Commission in
51
+ any way, if that person is found . . . (1) not to possess the requisite qualifications
52
+ to represent others; (2) to be lacking in character or integrity, or to have engaged
53
+ in unethical or improper professional conduct; or (3) to have willfully violated, or
54
+ willfully aided and abetted the violation of, any provision of the securities laws or
55
+ the rules and regulations issued thereunder.
56
+
57
+ 2
58
+
59
+ II.
60
+
61
+ In anticipation of the institution of these proceedings, Respondent has submitted an Offer
62
+ of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the
63
+ purpose of these proceedings and any other proceedings brought by or on behalf of the
64
+ Commission, or to which the Commission is a party, and without admitting or denying the findings
65
+ herein, except as to the Commission’s jurisdiction over him and the subject matter of these
66
+ proceedings, which are admitted, and except as provided herein in Section V, Respondent consents
67
+ to the entry of this Order Instituting Cease-And-Desist Proceedings Pursuant to Section 8A of the
68
+ Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule
69
+ 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial
70
+ Sanctions and a Cease-And-Desist Order (“Order”), as set forth below.
71
+
72
+ III.
73
+
74
+ On the basis of this Order and Respondent’s Offer, the Commission finds3 that:
75
+
76
+ Summary
77
+
78
+ This matter involves multiple violations of the federal securities laws by certain former
79
+ members of DS Healthcare Group, Inc.’s (“DS Healthcare” or the “Company”) senior
80
+ management, including Abner Silva. During the first three quarters of 2015, Silva, among
81
+ others, acted to overstate DS Healthcare’s revenues. This consisted of recognizing fictitious
82
+ revenue; intentionally or severely recklessly overbilling a customer and crediting the customer in
83
+ a later quarter; and shipping products that were sold pursuant to sales practices that violated the
84
+ Company’s revenue recognition policies, such as shipping products at the end of quarters with no
85
+ reasonable expectation of payment at the time of shipment and when the customer was on an
86
+ accounts receivable hold, improper bill and hold sales, and improper consignment sales. As a
87
+ result, DS Healthcare’s reported financial statements in its Forms 10-Q for the first three quarters
88
+ of 2015, in its August 4, 2014 and June 2, 2015 Form S-3 Registration Statements, and in its
89
+ May 1, 2015 S-8 Registration Statement were materially false and misleading.
90
+
91
+
92
+ 2 Rule 102(e)(1)(iii) provides, in pertinent part, that:
93
+
94
+ The Commission may . . . deny, temporarily or permanently, the privilege of
95
+ appearing or practicing before it . . . to any person who is found…to have
96
+ willfully violated, or willfully aided and abetted the violation of any provision of
97
+ the Federal securities laws or the rules and regulations thereunder.
98
+
99
+ 3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not
100
+ binding on any other person or entity in this or any other proceeding.
101
+
102
+
103
+ 3
104
+ Silva also made selective disclosures to certain persons associated with a broker or dealer
105
+ and to DS Healthcare shareholders relating to earnings information and pending acquisitions
106
+ without the Company simultaneously disclosing the same information to the public. When some
107
+ of the above conduct was discovered in early 2016, recently hired senior management terminated
108
+ Silva’s employment.
109
+
110
+ Respondent
111
+
112
+ 1. Silva is 38 and resides in Miami, Florida. From at least March 2015 to January
113
+ 2016, Silva served as DS Healthcare’s chief operating officer. He previously served as the
114
+ Company’s investor relations contact and chief information officer while employed as a
115
+ consultant from 2009 to early 2015. Silva was a registered representative from 2001 to 2011 at
116
+ various times with FSC Securities Corp., Perrott, Mather & Gilday, Inc., Gray Stone Financial,
117
+ Inc., and Mediterranean Securities Group, LLC and held Series 7 and 24 licenses.
118
+
119
+ Other Relevant Entities
120
+ 2. DS Healthcare is a Florida corporation organized in January 2007 and
121
+ headquartered in Pompano Beach, Florida. The Company focuses on hair and personal care
122
+ products. DS Healthcare’s fiscal reporting is based on the calendar year. DS Healthcare
123
+ disclosed in its 2013 and 2014 annual reports that it had material weaknesses in its internal
124
+ control over financial reporting and warned that without developing or maintaining an effective
125
+ system of internal controls, it may not be able to accurately report its financial results or prevent
126
+ fraud. DS Healthcare’s common stock (“DSKX”) previously was registered pursuant to Section
127
+ 12(b) of the Exchange Act and traded on the NASDAQ until December 23, 2016, when
128
+ NASDAQ delisted DS Healthcare. DS Healthcare filed a Form S-3 Registration Statement on
129
+ June 2, 2015 that went effective June 11, 2015 for the resale of securities previously issued to a
130
+ consultant. DS Healthcare also filed a Form S-3 Registration Statement that went effective
131
+ August 4, 2014 and a Form S-8 Registration Statement that went effective May 1, 2015. The
132
+ above Forms S-3 and S-8 Registration Statements incorporated by reference the Forms 10-Q at
133
+ issue. DS Healthcare terminated the registration of its securities with the Commission in 2018.
134
+
135
+ Background
136
+
137
+ 3. DS Healthcare develops proprietary technologies and products for hair and
138
+ personal care needs. The Company operates through a network of retailers across North
139
+ America and international distributors. Throughout 2015, DS Healthcare experienced intensified
140
+ pressure to increase sales due to the declining price of its stock and the pursuit of possible
141
+ acquisitions, which were reliant, in part, on the value of its stock. This pressure led Silva to
142
+ improperly recognize revenue from sales that violated the Company’s revenue recognition
143
+ policies and departed from the accounting principles generally accepted in the United States
144
+ (“GAAP”).
145
+
146
+ 4. During the relevant period, Silva engaged in misconduct to increase DS
147
+ Healthcare’s reported revenues. This included: recognizing fictitious revenue; intentionally
148
+ overbilling a customer and crediting the customer in a later quarter; and shipping products that
149
+ 4
150
+ were sold pursuant to sales practices that violated the Company’s revenue recognition policies,
151
+ such as shipping products at the end of quarters with no reasonable expectation of payment at the
152
+ time of shipment and when the customer was on an accounts receivable hold, improper bill and
153
+ hold sales, and improper consignment sales. DS Healthcare recognized the revenue associated
154
+ from the above sales practices at the time the products were shipped to the Company’s freight
155
+ forwarder in violation of DS Healthcare’s revenue recognition policies, which also departed from
156
+ the requirements of GAAP.
157
+
158
+ DS Healthcare Recognized Fictitious Revenue
159
+ 5. In 2015, Silva and another DS Healthcare officer directed DS Healthcare’s
160
+ Mexico subsidiary (“DS Mexico”) to recognize revenue for products that neither DS Mexico nor
161
+ DS Healthcare sold. Specifically, in the second quarter of 2015, Silva directed DS Mexico to
162
+ record $96,000 of revenue for sales of micro-needling devices that were sold and distributed by a
163
+ separate company partially owned by DS Mexico’s president. Silva gave this direction because
164
+ DS Healthcare needed the additional revenue to assist with a possible acquisition and to help
165
+ increase the price per share of the Company’s stock. Thereafter, with two weeks left in the third
166
+ quarter of 2015 and the Company behind in its revenue goal by more than $700,000, Silva
167
+ directed DS Mexico to record $201,000 of revenue for the sale of additional micro-needling
168
+ devices.
169
+
170
+ 6. DS Healthcare’s recognition of revenue relating to the micro-needling products
171
+ constituted a departure from GAAP, as revenue recognition standards include, among other
172
+ criteria, that revenue may only be recognized if there is persuasive evidence of a sales
173
+ arrangement between DS Mexico or DS Healthcare and the ultimate purchaser of the products.
174
+ Here, not only was there no persuasive evidence of a sales arrangement at the time of the
175
+ transactions, but neither DS Healthcare nor DS Mexico owned or had possession of the micro-
176
+ needling product inventory; had an agreement to sell or distribute the micro-needling products;
177
+ or bore the risk of loss for the products; all of which would be required to recognize the revenue
178
+ under GAAP.
179
+
180
+ DS Healthcare Intentionally or Severely Recklessly
181
+ Overbilled a Consignment Sale to a Customer in China
182
+
183
+ 7. At the end of the third quarter of 2015, DS Healthcare intentionally or severely
184
+ recklessly overcharged a customer in China in order to generate higher revenues for that quarter.
185
+ Specifically, in the last week of the third quarter of 2015, DS Healthcare entered three orders
186
+ totaling $201,708 for a new customer in China. DS Healthcare entered the orders at a high price
187
+ rather than the correct total price of $44,796 and did so at Silva’s direction. And, the products
188
+ ordered were to be paid for as they were sold, i.e., on a consignment basis, based on an
189
+ agreement the customer had with DS Healthcare’s senior management, including Silva. Silva
190
+ and another DS Healthcare officer approved the pricing and terms. Silva knew or was severely
191
+ reckless in not knowing that consignment sales were not permitted under DS Healthcare’s
192
+ revenue recognition policies. Having received emails on that subject by the Company’s finance
193
+ department as early as 2011, Silva knew DS Healthcare could not recognize the associated
194
+ revenue at the time the products were shipped because the customer was not obligated to pay
195
+ 5
196
+ until the products were sold. Despite that understanding, Silva shipped the products, allowing
197
+ DS Healthcare to recognize the revenue for these sales in the third quarter of 2015. In a later
198
+ quarter, the Company issued a credit for the amount of the overcharge, i.e., $156,912. DS
199
+ Healthcare departed from GAAP by intentionally or severely recklessly overbilling the customer
200
+ and issuing a credit for the overcharged amount in a subsequent quarter, and by recognizing the
201
+ revenue from the sale at the time of shipment of the products rather than at the time the customer
202
+ sold the products.
203
+
204
+ DS Healthcare Improperly Deployed Other Sales Practices to Increase Revenue
205
+
206
+ 8. During the first three quarters of 2015, Silva authorized: the shipment of products
207
+ at the end of quarters with no reasonable expectation of payment at the time of shipment as
208
+ required by GAAP and when the customer was on an accounts receivable hold; improper bill and
209
+ hold sales that did not pass the risk of ownership to the customer at the time of shipment and
210
+ which did not have a fixed delivery schedule as required by GAAP; and improper consignment
211
+ sales that recognized revenue at the time of shipment even though collectability was not assured
212
+ as the customer was not obligated to pay for the products until the products were ultimately sold
213
+ as required by GAAP. All but one of these customers were under a credit and/or an accounts
214
+ receivable hold, requiring advance payment to ensure collectability. DS Healthcare recognized
215
+ more than $600,000 in revenue from these transactions at the time of shipment even though
216
+ doing so was a departure from GAAP and contrary to the Company’s revenue recognition
217
+ policies.
218
+
219
+ 9. Silva knew or was severely reckless in not knowing the above sales practices as
220
+ implemented did not comply with the Company’s revenue recognition policies, having received
221
+ emails and guidance from the finance department as far back as 2011 and 2012. As a result of
222
+ the improper recognition of the above revenue, DS Healthcare materially overstated its net
223
+ revenue, gross profit, and accounts receivable in the first three quarters of 2015. DS Healthcare
224
+ also materially overstated its operating income and understated its net loss in the second quarter
225
+ of 2015, and understated its operating and net losses in the first and third quarters of 2015. DS
226
+ Healthcare also materially misrepresented the same metrics when it incorporated by reference its
227
+ first through third quarter 2015 financial statements in its August 4, 2014 and June 2, 2015 Form
228
+ S-3 Registration Statements, and in its May 1, 2015 Form S-8 Registration Statement.
229
+
230
+ 10. On March 23, 2016, following the initiation of an independent investigation by a
231
+ law firm hired by the Company’s audit committee, DS Healthcare reported in a Form 8-K,
232
+ among other things, that its financial statements for the second and third quarters of 2015 should
233
+ no longer be relied upon. DS Healthcare’s stock fell approximately 35% on the news to close at
234
+ $.86 per share on March 24, 2016. DS Healthcare subsequently restated, among others, its
235
+ financial statements for the first three quarters of 2015, materially decreasing its quarterly net
236
+ revenues. This had the result of increasing its losses for these periods by 921%, 979%, and 43%
237
+ to $869,546, $103,102, and $819,436, respectively. As DS Healthcare’s chief operating officer
238
+ during the periods in question, Silva was one of the individuals responsible for preparing,
239
+ reviewing and commenting on the Company’s public filings for the first three quarters of 2015.
240
+ Based on his knowledge and role in the above transactions, Silva knew or was severely reckless
241
+ 6
242
+ in not knowing DS Healthcare’s reported financial statements were materially inaccurate and not
243
+ in compliance with GAAP. Likewise, Silva caused the falsification of DS Healthcare’s books
244
+ and records, and failed to devise and maintain a sufficient system of internal accounting controls.
245
+ Silva’s employment with DS Healthcare was terminated in early 2016, following the hiring of
246
+ new executive leadership at the Company who questioned some of the above conduct.
247
+
248
+ False Representations to DS Healthcare’s Auditor
249
+
250
+ 11. Silva signed a management representation letter to DS Healthcare’s auditor in
251
+ relation to the Company’s third quarter 2015 Form 10-Q. Silva specifically represented, among
252
+ other things, that DS Healthcare’s financial statements were prepared and fairly represented in
253
+ conformity with GAAP; all financial records and related data were made available to the auditor;
254
+ and the Company had not received any communications, nor had knowledge of any fraud,
255
+ allegations of fraud, or suspected fraud. Based on his knowledge and role in the above
256
+ transactions, Silva knew or was severely reckless in not knowing those representations were false
257
+ at the time he made them.
258
+
259
+ Selective Disclosure of Material, Non-Public Information
260
+
261
+ 12. On multiple occasions during Silva’s tenure, he selectively disclosed material,
262
+ non-public information relating to DS Healthcare’s earnings, revenue and sales forecasts, and
263
+ pending and future acquisition plans to certain persons associated with a broker or dealer and to
264
+ DS Healthcare shareholders. For example, on December 20, 2015 Silva provided a new and
265
+ significant DS Healthcare shareholder, among other things, the anticipated closing date of a
266
+ pending acquisition and the current and forecast financial projections and models for the
267
+ combined companies. Silva also shared material non-public information about the status of a
268
+ DS Healthcare acquisition with others in January and February of 2016. Silva did not obtain
269
+ express agreements from the individuals to maintain the confidentiality of the information
270
+ conveyed. Silva knew or was severely reckless in not knowing such communications were
271
+ improper based on the Company’s policies on disclosing material, non-public information to the
272
+ public. DS Healthcare did not contemporaneously disclose the same information to the broader
273
+ market.
274
+
275
+ Violations
276
+
277
+ 13. Securities Act Sections 17(a)(1) and 17(a)(3) and Exchange Act Section 10(b) and
278
+ Rule 10b-5 thereunder prohibit fraudulent conduct in the offer or sale of securities and in
279
+ connection with the purchase or sale of securities, respectively.
280
+
281
+ 14. Exchange Act Section 13(a) and Rule 13a-13 thereunder require that every issuer
282
+ of a security registered pursuant to Exchange Act Section 12 file with the Commission, among
283
+ other things, quarterly and other reports as the Commission may require.
284
+
285
+ 15. Rule 12b-20 under the Exchange Act requires that, in addition to the information
286
+ expressly required to be included in a statement or report filed with the Commission, there shall
287
+ 7
288
+ be added such further material information, if any, as may be necessary to make the required
289
+ statements, in light of the circumstances under which they are made not misleading.
290
+
291
+ 16. Exchange Act Section 13(b)(2)(A) requires reporting companies to make and
292
+ keep books, records and accounts which, in reasonable detail, accurately and fairly reflect their
293
+ transactions and dispositions of their assets.
294
+
295
+ 17. Exchange Act Section 13(b)(2)(B) requires all reporting companies to devise and
296
+ maintain a system of internal accounting controls sufficient to provide reasonable assurances that
297
+ transactions are recorded as necessary to permit preparation of financial statements in accordance
298
+ with GAAP.
299
+
300
+ 18. Exchange Act Section 13(b)(5) prohibits any person from knowingly
301
+ circumventing or knowingly failing to implement a system of internal accounting controls or
302
+ knowingly falsifying any book, record, or account described in Section 13(b)(2).
303
+
304
+ 19. Rule 13b2-1 under the Exchange Act prohibits any person from directly or
305
+ indirectly, falsifying or causing to be falsified, any book, record, or account subject to Exchange
306
+ Act Section 13(b)(2)(A). Rule 13b2-2 under the Exchange Act prohibits any officer or director
307
+ from directly or indirectly making or causing to be made a materially false or misleading
308
+ statement to an accountant in connection with any audit, review, or examination of the financial
309
+ statements of an issuer.
310
+
311
+ 20. Regulation FD requires, among other things, that whenever an issuer, or anyone
312
+ acting on its behalf, intentionally makes a selective disclosure of material, non-public
313
+ information about the issuer to certain specified persons, including analysts and investors, the
314
+ issuer is required to make a simultaneous public disclosure of that information.
315
+
316
+ Findings
317
+
318
+ 21. Based on the foregoing, the Commission finds that Silva: (i) willfully violated
319
+ Securities Act Sections 17(a)(1) and 17(a)(3), Exchange Act Sections 10(b) and 13(b)(5) and
320
+ Rules 10b-5, 13b2-1 and 13b2-2 thereunder; (ii) willfully aided and abetted and caused a DS
321
+ Healthcare principal’s violations of Securities Act Sections 17(a)(1) and 17(a)(3) and Exchange
322
+ Act Section 10(b) and Rule 10b-5 thereunder; and (iii) willfully aided and abetted and caused DS
323
+ Healthcare’s violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 12b-
324
+ 20, 13a-13 thereunder, and Regulation FD.
325
+
326
+ 22. Based on the foregoing, the Commission finds that by willfully violating
327
+ Securities Act Sections 17(a)(1) and 17(a)(3), Exchange Act Sections 10(b) and 13(b)(5) and
328
+ Rules 10b-5, 13b2-1 and 13b2-2 thereunder, willfully aiding and abetting a DS Healthcare
329
+ principal’s violations of Securities Act Sections 17(a)(1) and 17(a)(3) and Exchange Act Section
330
+ 10(b) and Rule 10b-5 thereunder, and willfully aiding and abetting DS Healthcare’s violations of
331
+ Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20, 13a-13 thereunder,
332
+ 8
333
+ and Regulation FD, Silva engaged in conduct subject to Section 4C(a)(3) of the Exchange Act
334
+ and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice.
335
+
336
+ IV.
337
+
338
+ In view of the foregoing, the Commission deems it appropriate to impose the sanctions
339
+ agreed to in Respondent Silva’s Offer.
340
+
341
+ Accordingly, it is hereby ORDERED that:
342
+
343
+ A. Silva shall cease and desist from committing or causing any violations and any
344
+ future violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections
345
+ 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules
346
+ 10b-5, 12b-20, 13a-13, 13b2-1, and 13b2-2 thereunder, and Regulation FD.
347
+
348
+ B. Silva be, and hereby is, prohibited for five (5) years from the date of the Order from
349
+ acting as an officer or director of any issuer that has a class of securities registered
350
+ pursuant to Section 12 of the Exchange Act or that is required to file reports
351
+ pursuant to Section 15(d) of the Exchange Act.
352
+
353
+ C. Silva is denied the privilege of appearing or practicing before the Commission as
354
+ an accountant.
355
+
356
+ D. After five (5) years from the date of this Order, Silva may request that the
357
+ Commission consider his reinstatement by submitting an application (attention:
358
+ Office of the Chief Accountant) to resume appearing and practicing before the
359
+ Commission as an accountant.
360
+
361
+ E. Silva shall within twenty-one (21) days of the entry of the Order, pay a civil
362
+ money penalty in the amount of $80,000 to the Securities and Exchange
363
+ Commission for transfer to the general fund of the United States Treasury, subject
364
+ to Exchange Act Section 21F(g)(3). Payment shall be made in four installments of
365
+ $20,000 each as follows: the first installment of $20,000 due within 21 days of
366
+ the date of the entry the Order; the second installment of $20,000 due within 120
367
+ days of the entry of the Order; the third installment of $20,000 due within 240
368
+ days of the entry of the Order; and the fourth and final installment of $20,000 due
369
+ within 360 days of the entry of the Order. Payments shall be applied first to post
370
+ order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making the
371
+ final payment set forth herein, Silva shall contact the staff of the Commission for
372
+ the amount due. If Silva fails to make any payment by the date agreed and/or in
373
+ the amount agreed according to the schedule set forth above, all outstanding
374
+ payments under this Order, including post-order interest, minus any payments
375
+ made, shall become due and payable immediately at the discretion of the staff of
376
+ the Commission without further application to the Commission.
377
+
378
+ 9
379
+ F. Payment must be made in one of the following ways:
380
+
381
+ (1) Silva may transmit payment electronically to the Commission, which will
382
+ provide detailed ACH transfer/Fedwire instructions upon request;
383
+
384
+ (2) Silva may make direct payment from a bank account via Pay.gov through
385
+ the SEC website at http://www.sec.gov/about/offices/ofm.htm; or
386
+
387
+ (3) Silva may pay by certified check, bank cashier’s check, or United States
388
+ postal money order, made payable to the Securities and Exchange
389
+ Commission and hand-delivered or mailed to:
390
+
391
+ Enterprise Services Center
392
+ Accounts Receivable Branch
393
+ HQ Bldg., Room 181, AMZ-341
394
+ 6500 South MacArthur Boulevard
395
+ Oklahoma City, OK 73169
396
+
397
+ Payments by check or money order must be accompanied by a cover letter
398
+ identifying Abner Silva as a Respondent in these proceedings, and the file number
399
+ of these proceedings; a copy of the cover letter and check or money order must be
400
+ sent to Eric R. Busto, Assistant Regional Director, Securities and Exchange
401
+ Commission, 801 Brickell Avenue, Suite 1800, Miami, FL 33131.
402
+
403
+ G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall
404
+ be treated as penalties paid to the government for all purposes, including all tax
405
+ purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees
406
+ that in any Related Investor Action, he shall not argue that he is entitled to, nor
407
+ shall he benefit by, offset or reduction of any award of compensatory damages by
408
+ the amount of any part of Respondent’s payment of a civil penalty in this action
409
+ (“Penalty Offset”). If the court in any Related Investor Action grants such a
410
+ Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a
411
+ final order granting the Penalty Offset, notify the Commission’s counsel in this
412
+ action and pay the amount of the Penalty Offset to the Securities and Exchange
413
+ Commission. Such a payment shall not be deemed an additional civil penalty and
414
+ shall not be deemed to change the amount of the civil penalty imposed in this
415
+ proceeding. For purposes of this paragraph, a “Related Investor Action” means a
416
+ private damages action brought against Respondent by or on behalf of one or
417
+ more investors based on substantially the same facts as alleged in the Order
418
+ instituted by the Commission in this proceeding.
419
+
420
+ V.
421
+ It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section
422
+ 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by
423
+ 10
424
+ Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other
425
+ amounts due by Respondent under this Order or any other judgment, order, consent order, decree
426
+ or settlement agreement entered in connection with this proceeding, is a debt for the violation by
427
+ Respondent of the federal securities laws or any regulation or order issued under such laws, as set
428
+ forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19).
429
+
430
+ By the Commission.
431
+
432
+
433
+
434
+ Vanessa A. Countryman
435
+ Secretary
436
+
437
+
raw/aaer/2019/AAER-4072.txt ADDED
@@ -0,0 +1,127 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+ UNITED STATES OF AMERICA
3
+ Before the
4
+ SECURITIES AND EXCHANGE COMMISSION
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 86903 / September 9, 2019
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4072 / September 9, 2019
10
+ ADMINISTRATIVE PROCEEDING
11
+ File No. 3-17651
12
+
13
+ In the Matter of
14
+ Adrian D. Beamish, CPA
15
+
16
+ :
17
+ :
18
+ :
19
+ :
20
+ :
21
+ :
22
+ ORDER GRANTING APPLICATION FOR
23
+ REINSTATEMENT TO APPEAR AND PRACTICE
24
+ BEFORE THE COMMISSION AS AN ACCOUNTANT
25
+ RESPONSIBLE FOR THE PREPARATION OR
26
+ REVIEW OF FINANCIAL STATEMENTS REQUIRED
27
+ TO BE FILED WITH THE COMMISSION AND AS AN
28
+ INDEPENDENT ACCOUNTANT
29
+
30
+ On September 7, 2017, Adrian D. Beamish, CPA (“Beamish”) was denied the privilege
31
+ of appearing or practicing before the Commission as an accountant as a result of settled public
32
+ administrative proceedings instituted by the Commission against Beamish pursuant to Rule
33
+ 102(e)(1) of the Commission’s Rules of Practice. 1 This order is issued in response to Beamish’s
34
+ application for reinstatement to appear and practice before the Commission as an accountant
35
+ responsible for the preparation or review of financial statements required to be filed with the
36
+ Commission (other than as a member of an audit committee, as that term is defined in Section
37
+ 3(a)(58) of the Securities Exchange Act of 1934 (“Exchange Act”)) and as an independent
38
+ accountant.
39
+
40
+ The Commission’s order found that Beamish engaged in improper professional conduct
41
+ during PricewaterhouseCoopers LLP’s audits of Burrill Life Sciences Capital Fund III, LP’s
42
+ 2009, 2010, 2011, and 2012 year-end financial statements. Beginning in 2009, Beamish became
43
+ aware that the fund’s founder had arranged for the fund to pre-pay millions of dollars in
44
+ purported management fees to the fund’s management company that the founder owned and
45
+ controlled. Beamish failed to inquire whether the management company had the authority to
46
+ take the unusual payments, nor did he scrutinize the rationale for the payments. Despite a
47
+ growing advanced management fee balance, and Beamish’s own audit team’s suggested financial
48
+ disclosure language being rejected by management, the Commission found that Beamish
49
+ improperly signed audit reports with unqualified audit opinions. In addition, the fund’s financial
50
+
51
+ 1 See Accounting and Auditing Enforcement Release No. 3892 dated September 7, 2017. Beamish was permitted,
52
+ pursuant to the order, to apply for reinstatement after one year upon making certain showings.
53
+ statements did not comply with Generally Accepted Accounting Principles. Further, Beamish
54
+ relied upon unreasonable bases as the supposed means for repayment of the advanced
55
+ management fee balance.
56
+
57
+ Beamish has met all of the conditions set forth in the original order and, in his capacity as
58
+ an independent accountant, has stated that he will comply with all requirements of the
59
+ Commission and the Public Company Accounting Oversight Board, including, but not limited to
60
+ all requirements relating to registration, inspections, concurring partner reviews and quality
61
+ control standards. In his capacity as a preparer or reviewer, or as a person responsible for the
62
+ preparation or review, of financial statements of a public company to be filed with the
63
+ Commission, other than as a member of an audit committee, Beamish attests that he will
64
+ undertake to have his work reviewed by the independent audit committee of any company for
65
+ which he works, or in some other manner acceptable to the Commission, while practicing before
66
+ the Commission in this capacity.
67
+
68
+ Beamish is not, at this time, seeking to appear or practice before the Commission as a
69
+ preparer or reviewer, or a person responsible for the preparation or review, of any public
70
+ company’s financial statements that are filed with the Commission as a member of an audit
71
+ committee, as that term is defined in Section 3(a)(58) of the Exchange Act. If he should wish to
72
+ resume appearing and practicing before the Commission in this role, he will be required to
73
+ submit an application to the Commission showing that he has complied and will comply with the
74
+ terms of the original suspension order in this regard. Therefore, Beamish’s suspension from
75
+ practice before the Commission as a preparer or reviewer, or a person responsible for the
76
+ preparation or review, of any public company’s financial statements that are filed with the
77
+ Commission as a member of an audit committee continues in effect until the Commission
78
+ determines that a sufficient showing has been made in this regard in accordance with the terms of
79
+ the original suspension order.
80
+
81
+ Beamish is currently subject to probation under the California State Board of
82
+ Accountancy. Failure to abide by the terms of his probation could result in the suspension of
83
+ Beamish’s CPA license. Beamish has attested that he will notify the Commission if he is found
84
+ to have violated the terms of the probation. He also has attested that he understands that the
85
+ suspension of his CPA license could result in the revocation of the reinstatement of his privilege
86
+ to appear or practice before the Commission as an accountant.
87
+
88
+ Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for
89
+ reinstatement, and provides that the Commission may reinstate the privilege to appear and
90
+ practice before the Commission “for good cause shown.”2 This “good cause” determination is
91
+ necessarily highly fact specific.
92
+
93
+
94
+ 2 Rule 102(e)(5)(i) provides:
95
+
96
+ “An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3)
97
+ of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing;
98
+ however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the
99
+ Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i).
100
+ On the basis of the information supplied, representations made, and undertakings agreed
101
+ to by Beamish, it appears that he has complied with the terms of the September 7, 2017 order
102
+ denying him the privilege of appearing or practicing before the Commission as an accountant,
103
+ that no information has come to the attention of the Commission relating to his character,
104
+ integrity, professional conduct, or qualifications to practice before the Commission that would be
105
+ a basis for adverse action against him pursuant to Rule 102(e) of the Commission’s Rules of
106
+ Practice, and that Beamish, by undertaking to have his work reviewed by the independent audit
107
+ committee of any company for which he works, or in some other manner acceptable to the
108
+ Commission, in his practice before the Commission as a preparer or reviewer of financial
109
+ statements required to be filed with the Commission, and that Beamish, by undertaking to
110
+ comply with all requirements of the Commission and the Public Company Accounting Oversight
111
+ Board, including, but not limited to, all requirements relating to registration, inspections,
112
+ concurring partner reviews and quality control standards, in his practice before the Commission
113
+ as an independent accountant has shown good cause for reinstatement. Therefore, it is
114
+ accordingly,
115
+
116
+ ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that
117
+ Adrian D. Beamish, CPA is hereby reinstated to appear and practice before the Commission as
118
+ an accountant responsible for the preparation or review of financial statements required to be
119
+ filed with the Commission, other than as a member of an audit committee, and as an independent
120
+ accountant.
121
+
122
+ By the Commission.
123
+
124
+
125
+ Vanessa A. Countryman
126
+ Secretary
127
+
raw/aaer/2019/AAER-4073.pdf ADDED
Binary file (88.2 kB). View file
 
raw/aaer/2019/AAER-4073.txt ADDED
@@ -0,0 +1,91 @@
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
1
+
2
+ UNITED STATES OF AMERICA
3
+ Before the
4
+ SECURITIES AND EXCHANGE COMMISSION
5
+
6
+ SECURITIES EXCHANGE ACT OF 1934
7
+ Release No. 86924 / September 11, 2019
8
+ ACCOUNTING AND AUDITING ENFORCEMENT
9
+ Release No. 4073 / September 11, 2019
10
+ ADMINISTRATIVE PROCEEDING
11
+ File No. 3-17214
12
+
13
+ In the Matter of
14
+ Robert D. Hesselgesser,
15
+ CPA
16
+
17
+ :
18
+ :
19
+ :
20
+ :
21
+ :
22
+ :
23
+ ORDER GRANTING APPLICATION FOR
24
+ REINSTATEMENT TO APPEAR AND PRACTICE
25
+ BEFORE THE COMMISSION AS AN ACCOUNTANT
26
+ RESPONSIBLE FOR THE PREPARATION OR
27
+ REVIEW OF FINANCIAL STATEMENTS REQUIRED
28
+ TO BE FILED WITH THE COMMISSION AND AS AN
29
+ INDEPENDENT ACCOUNTANT
30
+
31
+ On April 19, 2016, Robert D. Hesselgesser, CPA (“Hesselgesser”) was denied the
32
+ privilege of appearing or practicing before the Commission as an accountant as a result of settled
33
+ public administrative proceedings instituted by the Commission against Hesselgesser pursuant to
34
+ Rule 102(e)(1) of the Commission’s Rules of Practice.1 This order is issued in response to
35
+ Hesselgesser’s application for reinstatement to appear and practice before the Commission as an
36
+ accountant responsible for the preparation or review of financial statements required to be filed
37
+ with the Commission and as an independent accountant.
38
+
39
+ The Commission’s order found that Hesselgesser engaged in improper professional
40
+ conduct while serving as the engagement partner on PricewaterhouseCoopers LLP’s audit of
41
+ Ener1, Inc.’s (“Ener1”) 2010 financial statements. Hesselgesser violated Public Company
42
+ Accounting Oversight Board Standards relating to Due Professional Care and Skepticism,
43
+ Competent Evidential Matter, Management Representations, Documentation, and Planning and
44
+ Supervision by not performing sufficient procedures to support his audit conclusions that Ener1
45
+ management had appropriately accounted for certain assets and revenue.
46
+
47
+ Hesselgesser has met all of the conditions set forth in the original order and, in his
48
+ capacity as an independent accountant, has stated that he will comply with all requirements of
49
+ the Commission and the Public Company Accounting Oversight Board, including, but not
50
+
51
+ 1 See Accounting and Auditing Enforcement Release No. 3767 dated April 19, 2016. Hesselgesser was permitted,
52
+ pursuant to the order, to apply for reinstatement after two years upon making certain showings.
53
+ limited to all requirements relating to registration, inspections, concurring partner reviews and
54
+ quality control standards. In his capacity as a preparer or reviewer, or as a person responsible for
55
+ the preparation or review, of financial statements of a public company to be filed with the
56
+ Commission, other than as a member of an audit committee, Hesselgesser attests that he will
57
+ undertake to have his work reviewed by the independent audit committee of any company for
58
+ which he works, or in some other manner acceptable to the Commission, while practicing before
59
+ the Commission in this capacity.
60
+ Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for
61
+ reinstatement, and provides that the Commission may reinstate the privilege to appear and
62
+ practice before the Commission “for good cause shown.” This “good cause” determination is
63
+ necessarily highly fact specific.
64
+ On the basis of the information supplied, representations made, and undertakings agreed
65
+ to by Hesselgesser, it appears that he has complied with the terms of the April 19, 2016 order
66
+ denying him the privilege of appearing or practicing before the Commission as an accountant,
67
+ that no information has come to the attention of the Commission relating to his character,
68
+ integrity, professional conduct, or qualifications to practice before the Commission that would be
69
+ a basis for adverse action against him pursuant to Rule 102(e) of the Commission’s Rules of
70
+ Practice, and that Hesselgesser, by undertaking to have his work reviewed by the independent
71
+ audit committee of any company for which he works, or in some other manner acceptable to the
72
+ Commission, in his practice before the Commission as a preparer or reviewer of financial
73
+ statements required to be filed with the Commission, and that Hesselgesser, by undertaking to
74
+ comply with all requirements of the Commission and the Public Company Accounting Oversight
75
+ Board, including, but not limited to, all requirements relating to registration, inspections,
76
+ concurring partner reviews and quality control standards, in his practice before the Commission
77
+ as an independent accountant has shown good cause for reinstatement. Therefore, it is
78
+ accordingly,
79
+ ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that
80
+ Robert D. Hesselgesser, CPA is hereby reinstated to appear and practice before the Commission
81
+ as an accountant responsible for the preparation or review of financial statements required to be
82
+ filed with the Commission and as an independent accountant.
83
+ By the Commission.
84
+
85
+
86
+
87
+ Vanessa A. Countryman
88
+ Secretary
89
+
90
+
91
+