diff --git a/raw/aaer/2019/AAER-4013.txt b/raw/aaer/2019/AAER-4013.txt new file mode 100644 index 0000000000000000000000000000000000000000..2288f9d23af82746dd37cbb5761d7c3e7a95fb0c --- /dev/null +++ b/raw/aaer/2019/AAER-4013.txt @@ -0,0 +1,711 @@ + +UNITED STATES OF AMERICA +Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84980 / January 9, 2019 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5100 / January 9, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4013 / January 9, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-18966 + +In the Matter of + +Katz, Sapper & Miller, LLP, +and Scott C. Price, CPA, + +Respondents. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 203(k) OF THE INVESTMENT +ADVISERS ACT OF 1940, SECTION 4C OF +THE SECURITIES EXCHANGE ACT OF +1934, AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Katz, Sapper +& Miller, LLP (“KSM”), and Scott C. Price, CPA (“Price”) (collectively “Respondents”) pursuant +to Section 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”), Section 4C1 of the + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + + 2 +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.2 + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over Respondents and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondents +consent to the entry of this Order Instituting Public Administrative and Cease-And-Desist +Proceedings Pursuant to Section 203(k) of the Investment Advisers Act of 1940, Section 4C of the +Securities Exchange Act of 1934, and Rule 102(e) of the Commission’s Rules of Practice, Making +Findings, and Imposing Remedial Sanctions and a Cease-And-Desist Order (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +Summary + + This matter involves improper professional conduct by Respondents in completing audits +pursuant to Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder (the “Custody Rule”). +In January 2013, Mohlman Asset Management Fund, LLC (“MAMF”), a former SEC-registered +investment adviser, engaged KSM to audit the financial statements of two pooled investment +vehicles MAMF advised, Mohlman Asset Management Fund 2010, LLC (“Fund I”) and Mohlman +Asset Management Fund II, LLC (“Fund II”) (collectively, “the Funds”). The first engagement in +2013 covered Fund I from its inception in 2010 and Fund II from its inception in 2011 to +December 31, 2012, which is the Funds’ fiscal year -end.4 MAMF engaged KSM to audit the +Funds in 2014, 2015, and 2016, covering the Funds’ fiscal years ending on December 31, 2013, +2014, and 2015. The first engagement in 2013 and the second in 2014 also included KSM drafting +the Funds’ 2012 and 2013 year -end financial statements in accordance with generally accepted + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +4 The Funds’ fiscal year corresponds with the calendar year, January 1 to December 31. + 3 +accounting principles (“GAAP”) in the United States. The audits were supposed to be conducted +in accordance with generally accepted auditing standards (“GAAS”) in the United States +established by the AICPA Auditing Standards Board. MAMF engaged KSM to conduct the audits +in an effort to enable MAMF to comply with an exception to the Custody Rule because MAMF +had custody of client assets invested in the Funds. Audits performed pursuant to the Custody Rule +exception require SEC independence. + + Unbeknownst to MAMF, KSM and Price, the audit partner on all of the engagements, +failed to meet the requirements of the Custody Rule in conducting their audits of the Funds. KSM +was not independent because it prepared the Funds’ 2012 and 2013 year-end financial statements +and then audited them. As a result, Respondents KSM and Price caused MAMF’s 2012 and 2013 +violations of the Custody Rule. + + KSM and Price also engaged in improper professional conduct within the meaning of +Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by +failing to: (a) have relevant knowledge, training and experience; (b) issue a modified opinion with +respect to Fund II’s 2013 and 2014 year-end financial statements, even though they should have +been aware of a related party transaction and a loan that had not been properly disclosed in the +financial statements; and (c) exercise due professional care. In addition, KSM failed to establish +sufficient quality control standards. + +Respondents + +1. Katz Sapper & Miller, LLP is an Indiana limited liability partnership +headquartered in Indianapolis, Indiana. KSM offers audit, accounting, tax and consulting services +for a wide range of industries, and is registered with the Public Company Accounting Oversight +Board. As of June 28, 2018, KSM had 264 accountants and approximately 169 additional firm +personnel located in three offices in two states. + +2. Scott Price, CPA, age 46, is a resident of Carmel, Indiana. He has been a Partner +at KSM since January 1, 2012, and has led KSM’s Financial Services Practice Group since 2017. +He is a certified public accountant licensed in the State of Indiana. Price served as the engagement +partner for all of the audit and financial statement preparation work KSM performed for the Funds. + +Other Relevant Entities + +3. Mohlman Asset Management Fund, LLC is an Indiana limited liability company, +with its principal place of business in Fort Wayne, Indiana. MAMF became a SEC-reporting +investment adviser in March 2010. In September 2017, MAMF filed a Form ADV-W to withdraw +its registration, and its registration was terminated, effective September 19, 2017. Although MAMF +was a SEC-registered investment adviser, the same Indiana limited liability company operated as a +pooled investment vehicle, i.e., Fund I. MAMF was the adviser to the Funds during the relevant + 4 +time period.5 Louis G. Mohlman, Jr. (“L. Mohlman”) owned and controlled MAMF until its +registration terminated. + +4. MAM, LLC is an Indiana limited liability company, with its principal place of +business in Fort Wayne, Indiana. MAM, LLC became a SEC-reporting investment adviser in +September 2009. On or about February 28, 2018, MAM, LLC filed a Form ADV-W to withdraw +its registration, and its registration was terminated, effective March 3, 2018. L. Mohlman, who +served as MAM, LLC’s President and Chief Compliance Officer (“CCO”) from approximately +September 2009 until December 2017, owned and controlled MAM, LLC. + +5. Mohlman Asset Management Fund 2010, LLC is an Indiana limited liability +company that was formed in or around January 2010 and began operating as a private fund in +February 2010. It meets the definition of a pooled investment vehicle under Rule 206(4)-8(b) of the +Advisers Act. At all relevant times, MAMF managed Fund I. + +6. Mohlman Asset Management Fund II, LLC is an Indiana limited liability +company that was formed in or around November 2011 and operates as a private fund. It meets the +definition of a pooled investment vehicle under Rule 206(4)-8(b) of the Advisers Act. At all +relevant times, MAMF managed Fund II. + +7. Annya Capital Management, Inc. is an Indiana corporation that was formed in +December 2012. It is a shell company L. Mohlman created and used to facilitate various +transactions with MAM, LLC’s and MAMF’s current and potential advisory clients. At all relevant +times, Mohlman controlled Annya as its Principal. Annya is not registered with the SEC. + +Facts + +8. Between at least February 2010 and December 31, 2015, MAMF had custody of +client assets invested in the Funds and was required to comply with the Custody Rule. + +9. The Custody Rule requires, among other things, that registered investment advisers +with custody of client assets maintain those funds and securities with a qualified custodian, who +must provide account statements to the investors at least quarterly, and requires client assets to be +verified through an annual surprise examination by an independent public accountant. + +10. An adviser may satisfy the Custody Rule requirements if, in connection with a +limited partnership, it completes and distributes annual audited financial statements prepared in +accordance with GAAP to each limited partner within 120 days of the end of the partnership’s +fiscal year (the “Audit Exception”). See Rule 206(4)-2(b)(4) under the Advisers Act. The + +5 In October 2011, Mohlman amended the registration paperwork for this entity with the State of +Indiana and changed the name to Mohlman Asset Management Fund, LLC. Notwithstanding +this name change with the State of Indiana, Fund I’s Private Offering Memorandum, +Subscription Agreements, and Operating Agreement identify the fund’s name as Mohlman Asset +Management Fund 2010, LLC. + 5 +financial statements must be audited by an independent public accountant that is registered with, +and subject to regular inspection as of the commencement of the professional engagement period, +and as of each calendar year-end, by the PCAOB. See Rule 206(4)-2(b)(4)(i and ii) under the +Advisers Act. To be considered independent, a public accountant must meet the standards of +independence described in Rule 2-01(b) and (c) of Regulation S-X. See Rule 206(4)-2(d)(3) under +the Advisers Act. + +MAMF Engaged KSM to +Audit the Funds’ 2012 through 2015 Year-End Financial Statements + +11. MAMF engaged KSM to perform audits of the Funds’ year-end financial +statements since inception through 2015. The audit engagement letters stated that the audits were +to be performed in accordance with AICPA standards. KSM knew that the Funds’ audits were +being performed so that MAMF could comply with the Custody Rule. + +12. Price was the KSM engagement partner on all of the MAMF engagements, and was +thus ultimately responsible for the Funds’ audit engagements and their performance, and for +recommending that KSM issue its audit reports. + +KSM was not Independent because It Prepared +and Audited the Funds’ 2012 and 2013 Year-End Financial Statements + +13. KSM was not independent because it prepared the Funds’ 2012 and 2013 financial +statements and notes to the financial statements, which it then audited. + +14. Each year, MAMF provided the Funds’ bank statements to KSM. To draft the +Funds’ 2012 and 2013 year-end financial statements, KSM used the bank statements and other +records MAMF provided to create a trial balance and then the financial statements, including the +notes to the financial statements. KSM subsequently performed audit procedures, whereby KSM +audited its own work. + +15. After the engagement team prepared the financial statements and notes, it provided +L. Mohlman with drafts, so that he could approve them. + +16. Under Rule 2-01(c)(4)(i) of Regulation S-X, an accountant is not independent if the +accountant provides certain bookkeeping or other services, related to the accounting records or +financial statements unless it is reasonable to conclude that the results of those services will not be +subject to audit procedures during an audit of the audit client’s financial statements. + +17. The financial statements and accompanying notes that KSM prepared were subject +to the audit procedures that KSM performed during its audits of the Funds. The KSM engagement +team did not apply the SEC independence standards to the work it performed for the Funds’ 2012 +and 2013 year-end financial statements. + + + 6 + +KSM did not Conduct the Audits of the Funds’ +2012 through 2015 Year-End Financial Statements in Accordance with +Certain Applicable Professional Standards + +18. KSM’s engagement letters for the audits of the Funds’ 2012 through 2015 year-end +financial statements state that the audits would be performed in accordance with AICPA standards. +However, in connection with the audits of the Funds, KSM and Price failed to adhere to certain +professional auditing standards, and KSM failed to adhere to certain professional quality control +standards as described in paragraphs 19 through 47 below. + +Failure to Have Relevant Knowledge, Training, and Experience – Respondents KSM and Price + +19. KSM and Price did not sufficiently evaluate the engagement team’s relevant +knowledge of, and training and experience in, the Custody Rule and the applicable SEC +independence standards, in accordance with AICPA Quality Control Standard 10, A Firm’s System +of Quality Control (“QC”), at .12, .31, .33, and .34. + +20. The KSM engagement team conducted the audits of the Funds’ 2012 and 2013 +year-end financial statements with limited experience in conducting financial statement audits of +funds required to comply with the Custody Rule. The engagement team members did not receive +any training on the knowledge and competency required in conducting financial statement audits of +funds required to comply with the Custody Rule. + +21. The KSM engagement team also conducted the audits of the Funds’ 2012 and 2013 +year-end financial statements without proper training in the SEC independence standards. The +engagement team had no training concerning SEC independence standards prior to, or in +conjunction with, any of the Funds’ audits. KSM’s workpapers for the Funds’ audits do not +document that any member of the engagement team reviewed the SEC independence standards for +the audits of the Funds’ 2012 and 2013 year-end financial statements. + +22. Price did not receive any formal training on the SEC independence standards until +approximately the fall of 2014. He first became aware that the SEC independence standards +applied to the Funds’ audits in the fall of 2014. + +23. AICPA Quality Control Standards require an auditing firm to establish policies and +procedures that provide the firm with reasonable assurance that the firm and its personnel comply +with professional standards and applicable legal and regulatory requirements. See QC 10.12, .31, +.33, and .34. These standards also require the firm to establish policies specifically designed to +address the competencies of audit partners, including a requirement that they have the appropriate +competence, capabilities, and authority to perform the role. See QC 10.33. Firm policies and +procedures should also provide reasonable assurance that the policies and procedures concerning +the system of quality control “are relevant, adequate, and operating effectively.” QC 10.52; see +also AU-C 220, Quality Control for Engagement Conducted in Accordance with Generally +Accepted Auditing Standards, at .24. + 7 + +Audit Procedures for Related Party Transactions – Respondents KSM and Price + +24. GAAS concerning related party transactions states that an auditor’s objective, +among other things, is to “obtain sufficient appropriate audit evidence about whether related party +relationships and transactions have been appropriately identified, accounted for, and disclosed in +the financial statements.” AU-C 550, Related Parties, at .09. To form an opinion on the financial +statements, the auditor should evaluate whether “the identified related party relationships and +transactions have been appropriately accounted for and disclosed” and “the effects of the related +party relationships and transactions prevent the financial statements from achieving fair +presentation.” AU-C 550, at .26. Disclosures of related party transactions must include (1) the +nature of the relationships involved; (2) a description of the transactions and other such +information deemed necessary to an understanding of the effects of the transactions on the +financial statements; and (3) the terms and manner of settlement. Accounting Standard +Codification Topic 850-10-50-1. + +25. In February 2014, in preparation for the financial statement and audit work KSM +would be performing for the Funds’ 2013 fiscal year, the KSM engagement team requested +documents from L. Mohlman concerning the Funds’ investments, including but not limited to, any +of the offering or like documents for investments made in 2013, as well as evidence of the +investments. In response to that request, L. Mohlman provided the KSM engagement team with +documents concerning Annya and a transaction that Fund II had engaged in with Person A to +obtain shares of Annya. The documents included Annya’s private offering memorandum +(“POM”), a Subscription Agreement between Person A and Annya, and a Share Purchase +Agreement between Person A and Fund II. + +26. Annya’s POM identified MAMF as its manager, and L. Mohlman as its principal. +Price and at least one other KSM engagement team member were aware that Annya and MAMF +were controlled by L. Mohlman. When KSM prepared Footnote One of Fund II’s 2013 year-end +financial statements, it noted that the principal of Fund II was also the manager of Annya. KSM +and Price therefore knew Annya was a related party. + +27. The Subscription Agreement between Person A and Annya and the Share Purchase +Agreement between Person A and Fund II pertained to a transaction whereby MAMF caused Fund +II to purchase 100 shares of Annya from Person A in exchange for Person A becoming an advisory +client of MAM, LLC (the “Person A Transaction”). MAMF, MAM, LLC, and Annya were all +controlled by L. Mohlman at this time, and KSM and Price were aware of this. + +28. According to the Subscription Agreement, Person A purchased 100 shares of +Annya for $1,000. The Share Purchase Agreement shows that Fund II purchased 100 shares of +Annya from Person A for $51,000, and in exchange, Person A had to maintain a portfolio value of +at least $4,000,000 with MAM, LLC, or its affiliates, for a three-year period. Person A did become +a client of MAM, LLC as a result of the Share Purchase Agreement and remained as such until +2015. + + 8 +29. Based on their review of the Subscription Agreement and Share Purchase +Agreements, and discussions with L. Mohlman, the KSM engagement team, including Price, +should have been aware that Fund II purchased Annya shares and MAM, LLC obtained Person A +as a client as a result of the transaction. + +30. Fund II’s 2013 and 2014 year-end financial statements, however, did not +adequately disclose the Person A Transaction as a related party transaction. Fund II’s 2013 and +2014 year-end financial statements included the Person A Transaction on the Schedule of +Investments as an investment in an early stage company and identified the company as Annya. +Footnote One of Fund II’s 2013 and 2014 year-end financial statements merely described the +Person A Transaction as an investment in the common stock of Annya, and noted that the principal +of Fund II was also the manager of Annya. The footnotes did not further describe the nature of the +relationships involved, or the Person A Transaction and its terms, specifically, the portfolio +management rights portion of the transaction. + +31. Despite being aware of the related party and the related party transaction, KSM +issued an audit report containing an unmodified opinion with respect to Fund II’s 2013 and 2014 +year-end financial statements, even though the related party transaction had not been properly +disclosed. Price approved KSM’s 2013 and 2014 reports before they were issued. + +Failure to Exercise Due Professional Care – Respondents KSM and Price + +32. KSM and Price, for the audits of the Funds’ 2012 through 2015 year-end financial +statements, failed to exercise due professional care in planning and performing the Funds’ audits, +in accordance with AU-C 200, Objectives of the Independent Auditor and the Conduct of an Audit +in Accordance With Generally Accepted Auditing Standards. + +33. KSM and Price were not independent pursuant to SEC independence standards +when they performed the audits of the Funds’ 2012 and 2013 year-end financial statements, and +failed to have relevant knowledge, training and experience, or properly evaluate the disclosures of +a related party transaction and loan. + +34. The loan concerned a 2013 transaction whereby Fund II loaned money to an +individual, Person B, and his wife, Person C. Fund II’s 2013, 2014, and 2015 year-end financial +statements identified the transaction on the Condensed Schedule of Investments as an investment +with an early stage company in the form of a promissory note with Company A, as opposed to an +unsecured loan and promissory note with Persons B and C. While the footnotes to the financial +statements provided details concerning the terms and amount of the note, they also erroneously +identified the promissory note as being with Company A, as opposed to Persons B and C. + +35. Price did not adequately consider the appropriate independence standards for the +audits of the Funds’ 2012 and 2013 year-end financial statements. Rather than apply the SEC +independence standards, the engagement team applied the AICPA independence standards. There +is no documentation in the workpapers that Price reviewed the SEC independence standards in +connection with the audits of the Funds’ 2012 and 2013 year-end financial statements. + 9 + +36. AU-C 200 requires auditors to exercise due professional care in the planning and +performance of the audit and the preparation of the report. See AU-C 200 at .16, .A16, and .A19. +The engagement partner should be satisfied that the engagement team has the appropriate +competence and capabilities to perform the audit in the engagement in accordance with +professional standards and applicable legal and regulatory requirements. See AU-C 220 at .16. +The engagement partner should take responsibility for the direction, supervision, and performance +of the audit engagement in compliance with professional standards, applicable legal and regulatory +requirements, and the firm’s policies and procedures; and the auditor’s report being appropriate +under the circumstances. Id. at .17(a) and (b). + +Failure to Adhere to the Quality Control Standards – Respondent KSM + +37. Although the relevant engagement letters stated that the Funds’ audits would be +performed in accordance with AICPA standards, KSM failed to establish sufficient quality control +standards in accordance with AICPA Quality Control standard 10 or AU 220 at .13. + +38. KSM failed to establish adequate policies with respect to its compliance with SEC +independence standards for engagements performed to satisfy the Custody Rule. See QC 10 at .22 +and .27. The engagement team did not have the adequate training or experience in SEC +independence standards. Price did not have the relevant knowledge, training and experience +required. + +39. KSM’s failure to establish adequate quality control policies was reflected in KSM’s +failure to maintain independence in performing the Funds’ audits described above. + +40. AICPA Quality Control standard 10 requires that a system of quality control be +established and maintained. See QC 10 at .17. One of the elements of a system of quality control +is personnel management. See QC 10 at .17, .31. The objective of the firm is to establish and +maintain a system of quality control to provide it with reasonable assurance that the firm and its +personnel comply with the professional standards. See QC 10 at .12. + +Respondents’ Misconduct Under Section 4C of the Exchange Act and Rule 102(e) + +41. Rule 102(e)(1) of the Commission’s Rules of Practice and Section 4C of the +Exchange Act allow the Commission to censure a person, or deny the person, either permanently +or temporarily, from appearing or practicing before the Commission if the Commission finds the +person to be lacking in character or integrity or to have engaged in unethical or improper +professional conduct. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. + +KSM and Price’s Improper Professional Conduct + +42. KSM and Price engaged in improper professional conduct within the meaning of +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice by negligently engaging in highly + 10 +unreasonable conduct that resulted in a violation of applicable professional standards in +circumstances for which heightened scrutiny is warranted, or by negligently engaging in repeated +instances of unreasonable conduct, each resulting in a violation of the applicable professional +standards. + +43. KSM and Price failed to comply with the SEC independence standards for the +audits of the Funds’ 2012 and 2013 year-end financial statements, for which heightened scrutiny +was warranted. The KSM engagement team unreasonably concluded that AICPA independence +standards applied, as opposed to SEC independence standards. + +44. KSM and Price also failed to have relevant knowledge, training and experience +prior to conducting the audits of the Funds’ 2012 and 2013 year-end financial statements. KSM +failed to establish sufficient quality control standards to determine whether independence conflicts +had been appropriately reviewed and addressed. + +45. In addition, KSM and Price failed to exercise due professional care in connection +with the Funds’ audits because: (1) for the audits of the Funds’ 2012 and 2013 year-end financial +statements, they violated the SEC independence standards; and (2) for the audits of Fund II’s 2013, +2014, and 2015 year-end financial statements, they violated AICPA audit standards. + +46. KSM and Price issued an audit report containing an unmodified opinion regarding +Fund II’s 2013 and 2014 year-end financial statements, even though they should have been aware +of a related party transaction that had not been properly disclosed. + +47. KSM and Price also issued an audit report containing an unmodified opinion +regarding Fund II’s 2013 through 2015 year-end financial statements, even though they should +have been aware that Fund II’s 2013 through 2015 year-end financial statements failed to properly +disclose an unsecured loan to Person B and his wife, Person C. + +KSM and Price +Caused MAMF’s 2012 and 2013 Custody Rule Violations + +48. KSM and Price caused MAMF’s 2012 and 2013 violations of Section 206(4) of the +Advisers Act and Rule 206(4)-2 thereunder. + +49. KSM knew that MAMF needed the Funds’ financial statements audited to comply +with the Custody Rule. Price, as the engagement partner for all audits, was ultimately responsible +that the Funds’ audits complied with applicable AICPA standards and the Custody Rule’s +requirements, including that KSM was an independent accountant. + +50. As a result, Price approved KSM’s issuance of the Funds’ 2012 and 2013 audit +reports despite the fact that KSM’s independence was impaired. + + + + 11 +Findings + +51. As a result of the conduct described above, the Commission finds that KSM and +Price engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act +and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +52. As a result of the conduct described above, the Commission finds that KSM and +Price caused MAMF’s 2012 and 2013 violations of Section 206(4) of the Advisers Act and Rule +206(4)-2 promulgated thereunder. + +KSM’s and Price’s Remedial Efforts +In determining to accept the Offers, the Commission considered remedial acts undertaken +by Respondents and cooperation afforded the Commission staff. KSM already has taken steps to +improve its policies, procedures, and training, including hiring an Audit Director to provide +oversight and training for KSM’s Custody Rule audits; revising its quality control policies and +procedures – including client acceptance – and requiring SEC-specific training, twice yearly for +all Financial Services Group members. Price played a significant role in KSM’s remediation +efforts, including, but not limited to, standardizing workpapers and procedures for fund audits +and engagements performed under the Custody Rule and drafting new policies and procedures. +Price is also the person who discovered the SEC independence standards applied to the Funds’ +audits and caused the engagement team to apply those standards to the audits performed for the +Funds in 2015 and 2016. +Undertakings + + Respondent KSM has undertaken to: + +53. Within 60 days after entry of this Order, KSM shall retain, at KSM’s expense, an +independent consultant not unacceptable to the Commission’s staff (the “Independent Consultant”) +for a period of one year and certify, in the manner described in paragraph 61 below, that it is in +compliance with the Independent Consultant’s recommendations. KSM shall require the +Independent Consultant to: + +a. conduct a comprehensive review of KSM’s policies, procedures, controls, and +training on auditor independence standards for Custody Rule audits, broker- +dealer audits, public company audits, or any other assurance service arising +from a Commission rule (collectively the “Policies & Practices”); + +b. make recommendations for changes or improvements to the Policies & +Practices and a procedure for implementing the recommended changes or +improvements; and + +c. conduct a review to assess whether KSM is complying with its revised Policies +& Practices and whether the revised Policies & Practices are effective in + 12 +achieving their stated purposes, and make additional recommendations for +changes or improvements to the Policies & Practices, if needed. + +54. KSM undertakes that, no later than ten days following the date of the Independent +Consultant’s engagement, it will provide to the Commission staff a copy of an engagement letter +detailing the Independent Consultant’s responsibilities pursuant to paragraph 53 above. KSM shall +not have the authority to terminate the Independent Consultant without prior written approval of +the Commission’s staff. + +55. KSM undertakes that it will arrange for the Independent Consultant to issue its first +report within 90 days after the date of the Independent Consultant’s engagement. Within ten days +after the issuance of the report, KSM shall require the Independent Consultant to submit to Amy S. +Cotter, Assistant Regional Director, Division of Enforcement, Securities and Exchange +Commission, 175 West Jackson Blvd., Suite 1450, Chicago, IL 60604 a copy of the Independent +Consultant’s report. The Independent Consultant’s report shall describe the review performed and +the conclusions reached and shall include any recommendations deemed necessary to make the +Policies & Practices adequate and address the deficiencies set forth in Section III of the Order. + +56. Within 30 days of receipt of the Independent Consultant’s report, KSM undertakes +that it will adopt all recommendations contained in the report and remedy any deficiencies in its +written policies, procedures, and systems; provided, however, that as to any recommendation that +KSM believes is unnecessary or inappropriate, KSM may, within 15 days of receipt of the report, +advise the Independent Consultant in writing of any recommendations that it considers to be +unnecessary or inappropriate and propose in writing an alternative policy or procedure designed to +achieve the same objective or purpose. + +57. With respect to any recommendation with which KSM and the Independent +Consultant do not agree, KSM undertakes that it will attempt in good faith to reach an agreement +with the Independent Consultant within 30 days of receipt of the report. In the event that KSM and +the Independent Consultant are unable to agree on an alternative proposal acceptable to the +Commission’s staff, KSM will abide by the original recommendation of the Independent +Consultant. + +58. Within 30 days after the date of the Independent Consultant’s report, KSM +undertakes that it will submit an affidavit to Amy S. Cotter, Assistant Regional Director, Division +of Enforcement, Securities and Exchange Commission, 175 West Jackson Blvd., Suite 1450, +Chicago, IL 60604 stating that it has implemented any and all recommendations of the Independent +Consultant, or explaining the circumstances under which it has not implemented such +recommendations. + +59. KSM undertakes that it will cooperate fully with the Independent Consultant and +provide the Independent Consultant with access to its files, books, records and personnel as +reasonably requested for the Independent Consultant’s review. + + 13 +60. KSM undertakes that it will require the Independent Consultant to enter into an +agreement that provides that for the period of engagement and for a period of two years from +completion of the engagement, the Independent Consultant shall not enter into any employment, +consultant, attorney-client, auditing or other professional relationship with KSM, or any of its +present or former affiliates, directors, officers, employees, or agents acting in their capacity. The +agreement will also provide that the Independent Consultant will require that any firm with which +he/she is affiliated or of which he/she is a member, and any person engaged to assist the +Independent Consultant in performance of his/her duties under this Order shall not, without prior +written consent of the Chicago Regional Office, enter into any employment, consultant, attorney- +client, auditing or other professional relationship with KSM, or any of its present or former +affiliates, directors, officers, employees, or agents acting in their capacity as such for the period of +the engagement and for a period of two years after the engagement. + +61. KSM undertakes that it will certify, in writing, compliance with the undertaking(s) +set forth above. The certification shall identify the undertaking(s), provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate +compliance. The Commission staff may make reasonable requests for further evidence of +compliance, and Respondents agree to provide such evidence. The certification and supporting +material shall be submitted to Amy S. Cotter, Assistant Regional Director, Division of +Enforcement, Securities and Exchange Commission, 175 West Jackson Blvd., Suite 1450, +Chicago, IL 60604, with a copy to the Office of Chief Counsel of the Enforcement Division, no +later than sixty (60) days from the date of the completion of the undertakings. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, pursuant to Section 203(k) of the Advisers Act, it is hereby ORDERED that: + +A. Respondents KSM and Price cease and desist from committing or causing any +violations and any future violations of Section 206(4) of the Advisers Act and Rule 204-2 +promulgated thereunder. + +B. Respondent KSM shall comply with the undertakings enumerated in Section III., +Paragraphs 53 through 61. + +Price + +C. Respondent Price is censured. + + + + + + 14 +D. Respondent Price shall, within 10 days of the entry of this Order, pay a civil money +penalty of $15,000.00 to the Securities and Exchange Commission for transfer to the general fund +of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not +made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Price as a +Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Amy S. Cotter, Assistant Regional Director, 175 +West Jackson Boulevard, Suite 1450, Chicago, Illinois 60604. + +KSM + +E. Respondent KSM shall, within 10 days of the entry of this Order, pay disgorgement +of $32,473.06 and prejudgment interest of $6,257.11, and pay a civil money penalty of $63,104.31 +to the Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment of disgorgement and +prejudgment interest is not made, additional interest shall accrue pursuant to SEC Rule of Practice +600, and if timely payment of the civil money penalty is not made, additional interest shall accrue +pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + 15 + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying KSM as a +Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Amy S. Cotter, Assistant Regional Director, 175 +West Jackson Boulevard, Suite 1450, Chicago, Illinois 60604. + +Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated as +penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondent s agree that in any Related Investor Action, they +shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award +of compensatory damages by the amount of any part of Respondents’ payment of a civil penalty in +this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondents agree that they shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +in this proceeding. For purposes of this para graph, a “Related Investor Action” means a private +damages action brought against Respondents by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + + + + + + + + + + + + + + 16 +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent Price, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Price under this Order or any other judgment, order, consent +order, decree or settlement agreement entered in connection with this proceeding, is a debt for the +violation by Respondent Price of the federal securities laws or any regulation or order issued under +such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4014.txt b/raw/aaer/2019/AAER-4014.txt new file mode 100644 index 0000000000000000000000000000000000000000..7107dbfc9a387d55bd4cb0029a7a1961030b2c06 --- /dev/null +++ b/raw/aaer/2019/AAER-4014.txt @@ -0,0 +1,477 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84983 / January 14, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4014 / January 14, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-18967 + + + +In the Matter of + +LBB & ASSOCIATES LTD., +LLP and +CARLOS LOPEZ, CPA, + +Respondents. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 AND +RULE 102(e) OF THE COMMISSION’S RULES +OF PRACTICE, AND NOTICE OF HEARING + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against LBB & Associates Ltd., LLP +(“LBB”) and Carlos Lopez, CPA (“Lopez”) (collectively, “Respondents”) pursuant to Section 4C1 of +the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) 2 of the Commission’s +Rules of Practice. + + + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that person is +found . . . (1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in +character or integrity, or to have engaged in unethical or improper professional conduct. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + 2 +II. + + After an investigation, the Division of Enforcement and the Office of the Chief Accountant +allege that: + +A. SUMMARY + +1. For annual audits of years 2012, 2013 and 2014, Respondents engaged in a pattern of +improper professional conduct as auditors. Specifically, Respondents failed to comply with Public +Company Accounting Oversight Board (“PCAOB”) standards in their audit of Behavioral +Recognition Systems, Inc. (now known as Giant Gray, Inc.) (“BRS”) for fiscal year 2012 and in +their engagement quality reviews (“EQR”) of the 2013 and 2014 fiscal year audits. Lopez, LBB’s +managing partner and majority owner, served as LBB’s engagement partner for the 2012 audit and +as its EQR partner for the 2013 and 2014 audits. + +2. During the 2012 audit, Lopez did not comply with PCAOB standards regarding: (i) +the identification of related party transactions or (ii) the audit procedures required when examining +known related party transactions. + +3. First, Lopez relied exclusively on BRS’s management to disclose related party +transactions to him, despite the fact that he was aware of certain red flags indicating that additional +related party transactions existed. As a result, although Blackstone Group, Inc. (“Blackstone”) +received payments of approximately $1.5 million in 2012 and was one of BRS’s largest vendors +that year, Lopez failed to apply the audit procedures set forth in AU § 334 and failed to identify +those payments as transactions involving a related party controlled by BRS’s then-CEO, Ray Davis +(“Davis”). + +4. Second, Lopez also failed to comply with PCAOB standards in Respondents’ 2012 +audit of known related party transactions because, among other things, he did not (i) properly assess +the risks associated with those transactions; (ii) complete audit procedures designed to confirm the +business purpose, nature, and extent of the payments made; or (iii) exercise due professional care in +performing his audit work. Here, again, Lopez relied exclusively on BRS management to explain +an almost three-fold increase in expenses to an individual he knew was related to Davis (“Related +Party A”) without, for example, reviewing any invoices or taking any other steps to determine the +purpose, nature, and extent of the expenses and their effect on the financial statements. + +5. Respondents also failed to comply with PCAOB standards in connection with their +EQRs for both the 2013 and 2014 BRS audits. In particular, PCAOB standards prohibit a person +who served as the engagement partner on either of the two preceding audits from serving as the +EQR partner on an audit. Thus, because Lopez served as the engagement partner on the 2012 BRS +audit, Respondents failed to comply with these PCAOB standards when Lopez served as the EQR +partner on the 2013 and 2014 audits. + +6. By failing to conduct the BRS audits in accordance with PCAOB standards, LBB +and Lopez engaged in improper professional conduct. + + 3 +B. RESPONDENTS + +7. LBB & Associates Ltd., LLP, is a PCAOB-registered accounting and auditing firm +based in Houston, Texas with approximately 28 public company clients. LBB has two partners and +approximately eight accountants on staff. + +8. Carlos Lopez, age 55, is LBB’s managing partner and majority owner. He is a +Certified Public Accountant (“CPA”) licensed in Texas and resides in Houston. Lopez served as +the engagement partner for BRS’s 2012 audit and as the EQR partner for its 2013 and 2014 audits. + +C. OTHER RELEVANT ENTITIES + +9. Behavioral Recognition Systems, Inc., now known as Giant Gray, Inc., is a private, +Texas corporation with its principal place of business in Houston, Texas and has never had an +obligation to file audited financial statements with the Commission. BRS was founded in 2005 and +sold video analytic software that allowed linked video cameras or other systems to recognize certain +abnormal or suspicious events chosen by the user. For all three fiscal years relevant to this Order, +Ray Davis served as BRS’s CEO and Chairman. On December 14, 2017, the Commission filed a +complaint against BRS, Davis, and several relief defendants alleging that BRS and Davis engaged +in a fraudulent scheme to divert BRS investor funds for Davis’s personal use, including millions of +dollars paid to Blackstone, a company controlled by Davis. SEC v. Davis et al., No. 17-cv-03774 +(S.D. Tex. Dec. 14, 2017). Davis is now deceased, and Giant Gray was forced into Chapter 7 +bankruptcy proceedings in April 2018. + +D. FACTS + +i. Background +10. Lopez first met Davis when he was working for another audit firm and was assigned +to the team responsible for auditing a company for which Davis served as CEO. + +11. Years later, after Lopez formed LBB in 2004, Davis hired LBB to conduct a review +of BRS’s 2009 financial statements. Subsequently, Davis hired LBB to conduct audits for BRS, +which LBB did for the years 2010 through 2014. Lopez served as the engagement partner for the +2010 through 2012 audits and, as noted, as the EQR partner for the 2013 and 2014 audits. + +ii. Respondents Were Aware that BRS Audits Were High Risk and that BRS Planned to +Provide Its Audited Financial Statements to Investors +12. For the 2012 audit, Respondents were aware that BRS was a high-risk audit client +based in part on their prior audit work for BRS. BRS had no chief financial officer and relied on a +single part-time bookkeeper to maintain its accounting records. BRS never had an audit committee, +and the board of directors consisted only of Davis and another BRS executive. As Lopez knew, +BRS’s board did not hold a single meeting in 2012. + + 4 +13. At the time of the 2012 audit, Respondents were also aware of control deficiencies in +BRS’s internal controls, including a lack of any controls over Davis’s unrestricted ability to +authorize, approve, and direct payments and expenses. Respondents noted in the 2012 audit’s Risk +Assessment Summary Form that management override of internal controls presented a significant +risk in connection with the audit. Respondents further indicated that they would not test or rely on +BRS’s internal controls during the audit, but rather would base the audit on substantive audit +procedures.3 + +14. Respondents knew when they conducted the 2012 audit and EQRs for the 2013 and +2014 audits that BRS planned to provide its investors with the audited financial statements. +Moreover, in each of the signed audit reports for the 2012 through 2014 audits, Respondents stated: +“We conducted our audits in accordance with the standards of the Public Company Accounting +Oversight Board (United States).” + +iii. Respondents Failed to Conduct the 2012 BRS Audit in Accordance with PCAOB +Standards + +a. Failure to Conduct Audit Steps for Identifying Related Party Transactions + +15. PCAOB audit standard (“AU”) § 334.07 provided that determining the existence of +related party relationships that are not clearly evident required the application of specific audit +procedures.4 Such procedures may include evaluating the client’s process for identifying related +parties, requesting names of related parties from management, and reviewing stockholder lists. (AU +§ 334.07.) The standard also outlined audit procedures designed to provide guidance for identifying +material transactions with unidentified related parties, including reviewing the nature of transactions +with major customers for indications of previously undisclosed relationships and reviewing +accounting records for large, unusual, or nonrecurring transactions, particularly those transactions +recognized at or near the end of the reporting period. (AU § 334.08(e) and (g).) + +16. During the 2012 audit, Lopez was aware of several red flags indicating the possible +existence of unidentified related party transactions. In particular, in response to an audit +questionnaire, BRS claimed that there were no related party transactions in 2012, but Lopez knew +that response was not accurate because he was aware of recurring transactions with at least two + +3 Under PCAOB standards, the audit procedures performed in response to the assessed risks +of material misstatement can be classified into two categories: “test of controls” and “substantive +procedures.” (AS § 13.10.) For significant risks, the substantive procedures should be specifically +responsive to the assessed risks and include tests of details. (AS § 13.11.) On the other hand, if the +auditor plans to assess control risk (at less than the maximum) by relying on controls, the auditor +must obtain evidence that the controls selected for testing are designed effectively and operated +effectively for the entire period during which those controls were relied upon. (AS § 13.16.) + +4 Citations to “AU” and “AS” refer to PCAOB standards in effect at the time of the conduct +discussed herein. + + 5 +related parties from his work on prior BRS audits. Lopez also identified control deficiencies +concerning BRS’s authorization of payments, including Davis’s unrestricted ability to direct +payments. + +17. Despite his awareness of these red flags, Lopez did not take any audit steps during +the 2012 audit to identify whether material transactions were with related parties. Rather, Lopez +relied exclusively on BRS management to identify related party transactions and did not evaluate +BRS’s procedures for identifying related parties. In fact, BRS had no policies for identifying +related parties. + +18. In 2012, BRS paid Blackstone approximately $1.5 million – comprising +approximately 9.2% of BRS’s total operating expenses – making Blackstone one of BRS’s largest +vendors for the year. Yet, Lopez did not perform the relevant audit steps outlined in AU § 334 to +evaluate whether BRS’s payments to Blackstone, which were purportedly for “web site +optimization,” involved a related party. For example, Lopez did not review stockholder lists or +examine the nature of the transactions between BRS and Blackstone by reviewing the accounting +records for large transactions. Similarly, Lopez never requested or reviewed any contract between +BRS and Blackstone. + +19. Had Lopez conducted the relevant audit steps outlined in AU §§ 334.07 and 334.08, +he may have identified that these material transactions involved a corporation created, owned, and +controlled by BRS’s CEO and Chairman, Ray Davis. + +b. Respondents Also Failed to Conduct Appropriate Audit Steps for Known Related +Party Transactions + +20. For known related party transactions, the PCAOB standards required the auditor to +apply the procedures he or she considered necessary to obtain satisfaction regarding the purpose, +nature, and extent of the transactions and their effect on the client’s financial statements. The +procedures should be directed towards obtaining and evaluating sufficient appropriate evidence to +support BRS’s accounting treatment and were required to extend beyond simply an inquiry of +management. Specifically, the audit procedures that Respondents should have considered included: +obtaining an understanding of the business purpose of the transaction; examining invoices, +contracts, and other pertinent documents; determining whether the transactions had been approved +by the board of directors; and testing the amounts for reasonableness. (AU § 334.09.) + +21. For the BRS audit in 2012, Respondents knew about the related party transactions +involving Related Party A and were aware of significant red flags surrounding those transactions. +Yet, Respondents failed to take appropriate audit steps to understand their purpose, nature, or effect +on BRS’s financial statements and simply relied on BRS management’s representations. + +22. In particular, Lopez was aware that Davis approved the payments to Related Party A, +who he knew was related to Davis. Although BRS management disclosed in its notes to its +financial statements that Related Party A was paid for consulting services and for efforts selling +BRS securities to investors, Lopez knew that there was no written agreement outlining the services + 6 +to be provided by, or the fees to be paid to, this related party. Lopez also was aware that BRS’s +board of directors did not hold any board meetings in 2012, calling into question whether the board +had approved payments to Related Party A. + +23. Moreover, during the 2012 audit, Lopez conducted an analysis showing that BRS’s +consulting expenses had increased almost ten-fold from 2011 to 2012, including a three-fold +increase in expenses for Related Party A. Specifically, consulting expenses increased from +approximately $113,000 in 2011 to approximately $1.17 million in 2012 (approximately 7.2% of +BRS’s total operating expenses for the year). In both years, the majority of BRS’s consulting +expenses concerned Related Party A. The results of this analysis should have prompted Lopez to +conduct additional audit steps, including gathering additional evidence so that Lopez could +understand what caused such a significant increase in consultant expenses. Lopez, however, did not +complete any such steps. + +24. In fact, notwithstanding the red flags outlined above, Lopez failed to obtain any +invoices, contracts, or other documents related to payments from BRS to Related Party A. Lopez +never determined whether BRS’s board of directors had approved the payments. Again, Lopez +relied exclusively on BRS’s management to explain the nature of the payments to Related Party A, +noting in his audit work papers as part of substantive analytical procedures performed that: “Per +inquiry, the increase of consulting fee is mostly due to BRS utilized [Related Party A] more this +year to help out with investor relations. Appears reasonable as the revenue is not enough to cover +the operating expenses and company needs funding through out [sic] the year.” + +25. In short, Lopez failed to perform any of the audit procedures outlined in AU § +334.09, or any other procedures, and, thus, failed to obtain an adequate understanding of the +approximately $951,000 in 2012 consulting expenses for Related Party A—which comprised +approximately 7.7% of BRS’s net loss for that year. Accordingly, Respondents had no basis for +concluding that the consulting expenses regarding Related Party A were fairly presented in BRS’s +2012 financial statements. + +c. Other 2012 Audit Failures + +26. Respondents failed to comply with other PCAOB audit standards in connection with +their work on the 2012 BRS audit. + +27. Audit standard AU § 9334 provided that the risk associated with management’s +assertions about related party transactions is often assessed higher than many other types of +transactions because of the possibility that the parties to the transaction are motivated by reasons +other than those that exist for most business transactions. (AU § 9334.18.) That audit standard +further noted that, the higher the assessment of risk, the more extensive or effective the audit tests +should be. (AU § 9334.19.) In addition, AU § 9334 provided: “In assessing the risk of the related +party transactions the auditor obtains an understanding of the business purpose of the transactions. +Until the auditor understands the business sense of material transactions, he cannot complete his +audit.” (Id.) + + 7 +28. For significant risks, the PCAOB auditing standard § 13.11 explained that the auditor +should perform substantive procedures, including tests of details that are specifically responsive to +the assessed risks. (AS §13.11.) + +29. Respondents failed to comply with both AU § 9334 and AS § 13.11. Lopez did not +assess the audit risk associated with related party transactions at BRS as high during the 2012 audit +despite the fact that he was aware of the significant red flags described above, including the lack of +contracts and controls regarding management override of payments. Payments to Related Party A, +for example, could have been motivated by Davis’s desire to funnel money to a relative. Under +these circumstances, Respondents should have expanded procedures to obtain audit evidence +regarding the services Related Party A performed and how the amounts paid for each service were +determined. Had Lopez reviewed invoices from Related Party A, he would have seen that they only +generically described the services provided as “Consulting” or “Financial Services” with no other +details or descriptions of what services, if any, were performed or how the amounts invoiced were +determined. Respondents also failed to conduct audit steps that would have allowed them to +understand the nature of the transactions. + +30. Moreover, the PCAOB standards memorialized in AU § 329 provided that, when an +auditor performs substantive analytical review procedures, its expectations should be “precise +enough to provide the desired level of assurance that differences that may be potential material +misstatements, would be identified for the auditor to investigate.” (AU § 329.17.) The standards +also noted that expectations developed at a detailed level generally have a greater chance of +detecting misstatement of a given amount than do broad comparisons. (AU §§ 329.17 and 329.19.) +Accordingly, the auditor should evaluate significant unexpected differences, and management’s +responses should ordinarily be corroborated with other evidence. (AU § 329.21.) + +31. Respondents failed to comply with AU § 329. In particular, Respondents failed to +perform audit steps with sufficient precision to adequately evaluate unexpected differences, +including, for example, the significant increase in consulting expenses from 2011 to 2012 that was +identified through the analysis described above. For the same reason, Lopez also failed to +corroborate management’s assertions that significant payments for two related parties (Related +Party A and an entity associated with a BRS executive) were made for legitimate business purposes. +In fact, Lopez did not apply any substantive audit procedures at all. Rather, he only compared year- +over-year changes in total expenses. Establishing expectations and analysis of those changes at a +more precise level was required, however, in order for the analytics to be considered substantive +audit tests. + +32. Additionally, AS § 15 required that the auditor plan and perform audit procedures to +obtain sufficient appropriate audit evidence to provide a reasonable basis for his or her opinion. +(AS § 15.04.) Notably, as the risk in an audit increases, the amount of evidence that the auditor +should obtain also increases. Ordinarily, more evidence is needed to respond to significant risks. +(AS § 15.05.) + +33. Respondents did not obtain sufficient appropriate audit evidence in their 2012 audit +of BRS and therefore failed to comply with AS § 15. As noted, rather than gather evidence + 8 +sufficient to understand the above-described transactions, Lopez instead relied on management’s +assertions. + +34. Lastly, AU § 230 required auditors to exercise due professional care when +conducting an audit and preparing a report. (AU § 230.01.) Under AU § 230, auditors were +required to maintain an attitude of professional skepticism, which included “a questioning mind and +a critical assessment of audit evidence.” (AU § 230.07.) The standard noted that gathering and +objectively evaluating audit evidence required the auditor to consider the competency and +sufficiency of the evidence. (AU § 230.08.) + +35. By failing to gather and objectively evaluate audit evidence as described above, +however, Respondents also demonstrated their failure to conduct the 2012 BRS audit with due +professional care and an attitude of professional skepticism. Therefore, Respondents violated AU § +230. + +iv. Respondents Failed to Conduct the 2013 and 2014 BRS EQRs in Accordance with +PCAOB Standards +36. As noted, after serving as the engagement partner for the 2012 audit, Lopez served as +the EQR partner for both the 2013 and 2014 audits. In order to maintain the objectivity of the EQR +partner, PCAOB standards do not permit a person to serve as the EQR partner on an audit if they +served as the engagement partner on either of the two prior audits. (AS §7.8.) Thus, Respondents +failed to comply with AS § 7.8 in connection with the EQRs of the 2013 and 2014 BRS audits. + +E. VIOLATIONS + + Section 4C of the Exchange Act and Rule 102(e) + +37. As a result of the conduct described above, Respondents engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) +provide, in pertinent part, that the Commission may censure or deny, temporarily or permanently, +the privilege of appearing or practicing before the Commission to any person who is found by the +Commission to have engaged in improper professional conduct. Exchange Act Section 4C(b) and +Rule 102(e)(1)(iv) define improper professional conduct with respect to persons licensed to practice +as accountants. + +38. Under Section 4C(b) and Rule 102(e)(1)(iv)(B), the term “improper professional +conduct” means one of two types of negligent conduct: (1) a single instance of highly unreasonable +conduct in circumstances for which heightened scrutiny is warranted; or (2) repeated instances of +unreasonable conduct that indicate a lack of competence. + +39. Respondents’ failures in the 2012 BRS audit to abide by the applicable professional +standards concerning the identification of related party transactions and audit of known related party +transactions (articulated in AU §334 and AU § 9334) constitute multiple instances of highly + 9 +unreasonable conduct in circumstances that warranted heightened scrutiny. Those violations, +Respondents’ other failures during the 2012 audit to conform to applicable professional standards +(articulated in AU § 230, AU § 329, AS § 7, AS § 13, and AS § 15), and their failures in connection +with the EQRs for the 2013 and 2014 BRS audits (articulated in AS § 7) also constitute repeated +instances of unreasonable conduct. + +III. + + In view of the allegations made by the Division of Enforcement and the Office of the Chief +Accountant, the Commission deems it necessary and appropriate that public administrative +proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in connection +therewith, to afford Respondents an opportunity to establish any defenses to such allegations; and + +B. Whether pursuant to Section 4C of the Exchange Act and Section 102(e) of the +Commission’s Rules of Practice, Respondents LBB and Lopez should be censured or denied, +temporarily or permanently, the privilege of appearing or practicing before the Commission as an +accountant. + +IV. + +IT IS ORDERED that a public hearing before the Commission for the purpose of taking +evidence on the questions set forth in Section III hereof shall be convened at a time and place to be +fixed by further order of the Commission, pursuant to Rule 110 of the Commission’s Rules of Practice, +17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondents shall file an Answer to the allegations +contained in this Order within twenty (20) days after service of this Order, as provided by Rule 220(b) +of the Commission’s Rules of Practice, 17 C.F.R. § 201.220(b). + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondents shall conduct +a prehearing conference pursuant to Rule 221 of the Commission’s Rules of Practice, 17 C.F.R. § +201.221, within fourteen (14) days of service of the Answer. The parties may meet in person or +participate by telephone or other remote means; following the conference, they shall file a statement +with the Office of the Secretary advising the Commission of any agreements reached at said +conference. If a prehearing conference was not held, a statement shall be filed with the Office of the +Secretary advising the Commission of that fact and of the efforts made to meet and confer. + +If Respondents fail to file the directed Answer, or fail to appear at a hearing or conference after +being duly notified, the Respondents may be deemed in default and the proceedings may be determined +against them upon consideration of this Order, the allegations of which may be deemed to be true as +provided by Rules 155(a), 220(f), 221(f) and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ +201.155(a), 201.220(f), 201.221(f), and 201.310. + + 10 +This Order shall be served forthwith upon Respondents by any means permitted by the +Commission’s Rules of Practice. + +Attention is called to Rule 151(b) and (c) of the Commission’s Rules of Practice, 17 C.F.R. § +201.151(b) and (c), providing that when, as here, a proceeding is set before the Commission, all +papers (including those listed in the following paragraph) shall be filed with the Office of the +Secretary and all motions, objections, or applications will be decided by the Commission. The +Commission requests that an electronic courtesy copy of each filing should be emailed to +APFilings@sec.gov in PDF text-searchable format. Any exhibits should be sent as separate +attachments, not a combined PDF. + +The Commission finds that it would serve the interests of justice and not result in prejudice to +any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. § +201.100(c), that notwithstanding any contrary reference in the Rules of Practice to filing with or +disposition by a hearing officer, all filings, including those under Rules 210, 221, 222, 230, 231, 232, +233, and 250 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, 231, 232, +233, and 250, shall be directed to and, as appropriate, decided by the Commission, and that any +motion for summary disposition shall be filed under Rule 250(a) or (b). + +The Commission finds that it would serve the interests of justice and not result in prejudice to +any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of Practice, 17 C.F.R. § +201.100(c), that the Commission shall issue a decision on the basis of the record in this proceeding, +which shall consist of the items listed at Rule 350(a) of the Commission’s Rules of Practice, 17 C.F.R. +§ 201.350(a), and any other document or item filed with the Office of the Secretary and accepted into +the record by the Commission. The provisions of Rule 351 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.351, relating to preparation and certification of a record index by the Office of the +Secretary or the hearing officer are not applicable to this proceeding. + +The Commission will issue a final order resolving the proceeding after one of the following: +(A) the completion of post-hearing briefing in a proceeding where the public hearing has been +completed; (B) the completion of briefing on a motion for a ruling on the pleadings or a motion for +summary disposition pursuant to Rule 250 of the Commission’s Rules of Practice, 17 C.F.R. § +201.250, where the Commission has determined that no public hearing is necessary; or (C) the +determination that a party is deemed to be in default under Rule 155 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.155, and no public hearing is necessary. + + + + + + + + + + 11 +In the absence of an appropriate waiver, no officer or employee of the Commission engaged in +the performance of investigative or prosecuting functions in this or any factually related proceeding +will be permitted to participate or advise in the decision of this matter, except as witness or counsel in +proceedings held pursuant to notice. Since this proceeding is not “rule making” within the meaning of +Section 551 of the Administrative Procedure Act, it is not deemed subject to the provisions of Section +553 delaying the effective date of any final Commission action. + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4015.txt b/raw/aaer/2019/AAER-4015.txt new file mode 100644 index 0000000000000000000000000000000000000000..7c70d05cc56d081905f52e85ce79c3f04b7f67dd --- /dev/null +++ b/raw/aaer/2019/AAER-4015.txt @@ -0,0 +1,179 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84994 / January 29, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4015 / January 29, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-18969 + + +In the Matter of + +CYTODYN INC. + +Respondent. + + + + + +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS, PURSUANT TO SECTION +21C OF THE SECURITIES EXCHANGE ACT +OF 1934, MAKING FINDINGS, AND +IMPOSING A CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) against CytoDyn, Inc. (“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +And-Desist Proceedings, Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-And-Desist Order (“Order”), as set forth below. + + + + 2 + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that + +Summary + + These proceedings involve violations of the federal securities laws in connection with the +Respondent’s Internal Control over Financial Reporting (“ICFR”). Respondent failed to create and +implement effective ICFR for nine consecutive annual reporting periods from 2008 through 2016. + +Respondent + + 1. CytoDyn is a clinical stage biotechnology company based in Vancouver, +Washington. Respondent is focused on the clinical development and commercialization of +humanized monoclonal antibodies to treat Human Immunodeficiency Virus (“HIV”) infection. +Respondent’s securities trade on the OTC market under the symbol CYDY. At all relevant times, +Respondent filed periodic reports with the Commission, including Forms 10-K and 10-Q, pursuant +to Section 13(a) of the Exchange Act and related rules thereunder. + +Background + + 2. Respondent disclosed material weaknesses in each of its Forms 10-K over a period +of nine years, from 2008 through 2016. Respondent’s disclosed material weaknesses often +repeated year after year, relating primarily to segregation of duties and the review, recording and +financial reporting of transactions. + +3. Respondent included in its public filings the same disclosure of material +weaknesses for nine years straight. From 2008 through 2016, CytoDyn’s boilerplate disclosure +indicated the company had “[s]everal material weaknesses… because of inadequate segregation of +duties over authorization, review and recording of transactions, as well as the financial reporting of +such transactions.” The general and sweeping description provided no information as to the +specific material weaknesses observed. + +4. From 2012 through 2015, Respondent reported no material changes in its internal +controls, but did take certain steps to improve controls. These remediation steps included doubling +its accounting staff by hiring a CPA; instituting certain controls around wire transfers, cash +disbursements, financial statement reconciliations, and quarterly financial statements; and +outsourcing certain of its information technology needs. After being contacted by Commission +staff, Respondent retained, for the first time, a SOX consultant. Respondent has remediated its +material weaknesses and determined that ICFR was effective as of May 31, 2017. + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + 3 + + 5. As a result of the conduct described above, Respondent violated Rule 13a-15(a) +of the Exchange Act, which require issuers with classes of securities registered pursuant to +Section 12 to maintain ICFR. + + 6. As a result of the conduct described above, Respondent violated Section +13(b)(2)(B) of the Exchange Act, which requires Section 12 registrants to devise and maintain a +system of sufficient internal accounting controls. + +CytoDyn’s Remedial Efforts +7. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent and cooperation afforded the Commission staff. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Section 13(b)(2)(B) of the +Exchange Act and Rule 13a-15(a), thereunder. + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $35,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + + + + 4 +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Respondent as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Melissa Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5553. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4016.txt b/raw/aaer/2019/AAER-4016.txt new file mode 100644 index 0000000000000000000000000000000000000000..44f0edd27b88685c6dc5743431017b19bdabd3e0 --- /dev/null +++ b/raw/aaer/2019/AAER-4016.txt @@ -0,0 +1,201 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84995 / January 29, 2019 + +ACCOUNTING AND AUDITING RELEASE +Release No. 4016 / January 29, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-18970 + + +In the Matter of + +LIFEWAY FOODS, INC. + +Respondent. + + + + + +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS PURSUANT TO SECTION +21C OF THE SECURITIES EXCHANGE ACT +OF 1934, MAKING FINDINGS AND +IMPOSING A CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) against Lifeway Foods, Inc. (“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +And-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings and Imposing a Cease-And-Desist Order (“Order”), as set forth below. + + + + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that + +Summary +These proceedings involve violations of the federal securities laws in connection with the +Respondent’s Internal Control over Financial Reporting (“ICFR”). Respondent failed to create and +implement effective ICFR for ten consecutive annual reporting periods and failed to complete in +certain periods the required management assessment of internal controls. In addition, Respondent +announced three financial statement restatements during the period from 2007 to 2016. +Respondent +1. Lifeway Foods, Inc. is a Morton Grove, Illinois-based dairy food producer, +incorporated in Illinois in 1986, family controlled, and known for its production of kefir, a +cultured dairy drink. Respondent’s common stock trades on NASDAQ under the symbol LWAY. +At all relevant times, Respondent filed periodic reports with the Commission, including Forms +10-K and 10-Q, pursuant to Section 13(a) of the Exchange Act and related rules thereunder. +Background +2. Respondent disclosed material weaknesses in each of its Forms 10-K for a period +of nine years, from 2007 through 2015, and significant deficiencies in the aggregate that +constituted a material weakness in 2016. Respondent’s disclosed material weaknesses often +repeated year after year, and involved certain high-risk areas for the company’s financial +statement presentation. For three consecutive years from 2007 to 2009, Respondent disclosed +that it lacked a “requirement to post monthly activity to [its] general ledger,” contributing to a +material weakness in each period. In six of the ten years, Respondent disclosed material +weaknesses related to financial reporting controls. +3. Prior to 2016, Respondent’s material weaknesses resulted from, among other +things, incomplete, inadequate and undocumented financial reporting processes; the lack of +sufficient, competent and independent financial statement review; and the failure to consistently +demonstrate effective preparation, support and review of journal entries and account +reconciliations. In four years between 2010 and 2016, Respondent disclosed a material weakness +or significant deficiencies related to its accounting for and controls related to income tax or +deferred income tax. +4. Many of Respondent’s material weaknesses were recurring, and involved either +financial reporting, accounting, or entity controls. For the most part, the material weaknesses +were identified by Respondent’s management team in the course of its annual ICFR assessment + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + + 3 +and evaluation; however, the management team failed to complete its ICFR assessment and +evaluation in 2013 and 2014. +5. Respondent initiated remediation efforts beginning in 2013, but did not begin to +include detailed disclosure in its filings regarding its material weaknesses remediation plans until +the quarter ended June 30, 2014. In its annual report for the period ending December 31, 2013, +Respondent disclosed the engagement of an outside SOX consultant to assist in developing a +remediation plan for its material weaknesses. Respondent also engaged a SOX consultant to +assist with its 2015 ICFR assessment and continues to work with that consultant currently. +Nonetheless, Respondent continued to disclose the existence of material weaknesses through +September 30, 2017, and did not fully remediate its material weaknesses and conclude that ICFR +was effective until its fiscal year ended December 31, 2017. +6. Respondent’s failure to address its material weaknesses has been compounded by +three announced restatements since fiscal 2012, including two restatements announced during +fiscal 2016. The company disclosed that its restatement announced in November 2016 was +consequential to its remediation efforts. Each of the three restatements involve Respondent’s +failures to appropriately account for and assign costs related to manufacturing, cost of goods +sold, or inventory, although none of the restatements had a material effect on Respondent’s +financial results. Respondent disclosed in four of the ten years various material weaknesses +related to inventory and assignment of cost of goods sold. +7. As a result of the conduct described above, Respondent violated Section 13(a) of +the Exchange Act and Rules 13a-1, 13a-15(a) and 13a-15(c) thereunder, which require issuers +with classes of securities registered pursuant to Section 12 to file periodic and other reports with +the Commission, maintain ICFR and to perform annual ICFR evaluations. +8. As a result of the conduct described above, Respondent violated Section +13(b)(2)(A) of the Exchange Act, which requires Section 12 registrants to make and keep books, +records, and accounts, which, in reasonable detail, accurately and fairly reflect the transactions +and dispositions of the assets of the issuer. +9. As a result of the conduct described above, Respondent violated Section +13(b)(2)(B) of the Exchange Act, which requires Section 12 registrants to devise and maintain a +system of sufficient internal accounting controls. +Lifeway’s Remedial Efforts +10. In determining to accept the Offer, the Commission considered remedial acts +undertaken by Respondent and cooperation afforded the Commission staff. + + + +IV. + + + 4 + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A) and +13(b)(2)(B) of the Exchange Act and Rules 13a-1, 13a-15(a) and 13a-15(c), thereunder. + +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $100,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Respondent as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Melissa Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5553. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a + + 5 +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4017.txt b/raw/aaer/2019/AAER-4017.txt new file mode 100644 index 0000000000000000000000000000000000000000..583e0c0aa99fb419d96528e9d6a62793274d2794 --- /dev/null +++ b/raw/aaer/2019/AAER-4017.txt @@ -0,0 +1,238 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 84996 / January 29, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4017 / January 29, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-18972 + +In the Matter of +GRUPO SIMEC S.A.B. DE C.V. +Respondent. +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS PURSUANT TO SECTION +21C OF THE SECURITIES EXCHANGE ACT +OF 1934, MAKING FINDINGS, AND +IMPOSING A CEASE-AND-DESIST ORDER + +I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) against Grupo Simec S.A.B. de C.V. +(“Respondent”or “Simec”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Cease-And-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, +Making Findings, and Imposing a Cease-And-Desist Order (“Order”), as set forth below. + + + +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that +Summary +This matter involves violations of the federal securities laws in connection with the +Respondent’s Internal Control over Financial Reporting (“ICFR”). Respondent did not +remediate material weaknesses in ICFR for ten consecutive annual reporting periods from fiscal +year ended 2008 through fiscal year ended 2017, and it failed to complete in certain periods the +required management evaluation of internal controls. + +Respondent + +1. Simec is headquartered in Guadalajara, Mexico and uses its two business segments +– one in Mexico and one in the U.S. – to manufacture, process, and distribute iron and steel alloy +products. The company’s securities trade on the New York Stock Exchange under the symbol +SIM. At all relevant times, Respondent filed periodic reports with the Commission, including +Forms 20F, pursuant to Section 13(a) of the Exchange Act and related rules thereunder. + +Background + +2. Respondent disclosed material weaknesses in each of its Forms 10-K over a +period of ten years, from 2008 through 2017. In two of those years (2015 and 2016), +management disclosed it failed to complete the required management evaluation of ICFR. + +3. Respondent’s persistent and extensive material weaknesses indicate that +management did not appropriately address, and in some periods adequately assess, its admitted +ICFR material weaknesses and associated risks. For example, in each year from 2010 through +2017 (eight years), Simec disclosed that it lacked an “appropriate consolidation system to allow +management to properly supervise the preparation of consolidated financial information...” In +certain years this disclosure was coupled with an acknowledgment that a) Simec had a “very +vulnerable procedure to determine costs due to manual calculations,” and b) “[financial +information of subsidiaries was presented at a level of detail that was insufficient to allow for a +clear and precise understanding of operations.” In each year from 2009 through 2017 (nine +years), Simec disclosed that it did not have adequate accounting resources and/or adequate +segregation of duties – corporate, or subsidiary-based, or both. In at least one year, Simec +conceded that this “prejudiced the financial statement close process.” In each year from 2011 +through 2015 (five years), Simec acknowledged “inadequate supervision and controls...resulting +in material accounting errors.” From 2014 through 2016, Simec also disclosed it lacked +“specific procedures for the approval of transactions with related parties.” + + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. +4. In addition, SIM’s CEO and CFO failed to complete their annual ICFR +evaluation in two annual reporting periods. Specifically, in both 2015 and 2016, SIM disclosed +that its “management did not assess the effectiveness” of its internal controls over financial +reporting because its “internal audit department did not carry out the functions necessary to +analyze [its] internal control during [the relevant year]; however…management considers that +the deficiencies found in [the prior year] still persist.” + +5. Although Respondent hired a SOX consultant in August 2016, there was limited +progress in devising a control structure and remediating material weaknesses prior to the staff’s +outreach in February 2017. Respondent completed the design and testing of its internal controls +during the period ending March 2018 though there continues to be material weaknesses that it is still +in the process of remediating. + +Violations + +6. As a result of the conduct described above, Respondent violated Exchange Act +Rules 13a-15(a) and 13a-15(c), thereunder, which require issuers with classes of securities +registered pursuant to Section 12 to file periodic and other reports with the Commission and +maintain ICFR. +7. As a result of the conduct described above, Respondent violated Section +13(b)(2)(B) of the Exchange Act, which requires Section 12 registrants to devise and maintain a +system of sufficient internal accounting controls. +Simec’s Remedial Efforts +In determining to accept the Offer, the Commission considered remedial acts undertaken +by Respondent and cooperation afforded the Commission staff. +Undertakings + + Respondent has undertaken to: + +8. Retain, at its own expense, a qualified independent consultant (the “Consultant”) +not unacceptable to the Commission staff, to review and evaluate Simec’s ICFR and to provide +recommendations for improvements as may be needed. This review and evaluation shall include +an assessment of Simec’s policies and procedures involving the approval and recording of +current and historic transactions with related parties. + +9. The Consultant should not have provided legal, auditing, or other services to, or +have had any affiliations with, the Respondent during the two years prior to the issuance of this +Order. + +10. Respondent and the Consultant shall agree that the Consultant is an independent +third-party and not an employee or agent of the Respondent. In addition, Respondent and the +Consultant agree that no attorney-client relationship shall be formed between them. +11. The Consultant shall be required to enter into an agreement that provides that for +the period of engagement and for a period of two years from completion of the engagement, the +Consultant shall not enter into any employment, consultant, attorney-client, auditing or other +professional relationship with Simec, or any of its present or former affiliates, directors, officers, +employees, or agents acting in their capacity. The agreement will also provide that the +Consultant will require that any firm with which he/she is affiliated or of which he/she is a +member, and any person engaged to assist the Consultant in performance of his/her duties under +this Order shall not, without prior written consent of the staff, enter into any employment, +consultant, attorney-client, auditing or other professional relationship with Simec, or any of its +present or former affiliates, directors, officers, employees, or agents acting in their capacity as +such for the period of the engagement and for a period of two years after the engagement. +12. Respondent shall provide, within forty five (45) days of the issuance of this +Order, a copy of the engagement letter detailing the Consultant’s responsibilities to Melissa +Hodgman, Associate Director, Division of Enforcement, Securities and Exchange Commission, +100 F St., NE, Washington, DC 20549-5553. +13. Respondent shall cooperate fully with the Consultant, including providing the +Consultant with access to its files, books, records, and personnel as reasonably requested for the +above-referenced review, and obtaining the cooperation of respective employees or other +persons under Simec’s control. +14. Respondent shall require the Consultant to report to the Commission staff on its +activities as the staff may request. +15. Respondent shall require the Consultant, within thirty (30) days of being retained +(unless otherwise extended by the Commission staff for good cause), to provide Simec and the +Commission staff with (i) an estimate of the time needed to complete the review and analysis, +and (ii) a proposed deadline, subject to the approval of the Commission staff, for the preparation +of a written report describing the review and analysis (“Report”). +16. Respondent shall require the Consultant to issue the Report by the approved +deadline and provide the Report simultaneously to Simec and the Commission staff. The Report +shall evaluate the adequacy of Simec’s ICFR, including controls over related party transactions, +and make recommendations for improvements, as may be needed. +17. Within thirty (30) days of the issuance of the Report, Simec and the Consultant +shall advise the staff of the date by which Simec will adopt and implement any recommendations +in the Report. As to any recommendation that Simec considers to be, in whole or in part, unduly +burdensome or impractical, Simec may submit in writing to the Consultant and the Commission +staff a proposed alternative reasonably designed to accomplish the same objectives, within thirty +(30) days of the Consultant’s issuance of the Report. Simec shall then attempt in good faith to +reach an agreement with the Consultant relating to each disputed recommendation and request +that the Consultant reasonably evaluate any alternative proposed by Simec. If, upon evaluating +Simec’s proposal, the Consultant determines that the suggested alternative is reasonably +designed to accomplish the same objectives as the recommendations in question, then the +Consultant shall approve the suggested alternative and make the recommendations. If the +Consultant determines that the suggested alternative is not reasonably designed to accomplish the +same objectives, the Consultant shall reject Simec’s proposal. The Consultant shall inform +Simec and the Commission staff of the Consultant’s final determination concerning any +recommendation that Simec considers to be unduly burdensome or impractical within fourteen +(14) days after the conclusion of the discussion and evaluation by Simec and the Consultant. +Within fourteen (14) days after the final determination of any disputed recommendation, Simec +shall submit to the Consultant and the Commission staff the date by which Simec will adopt and +implement the recommendation, subject to the approval of the Commission staff. +18. Respondent agrees that the Commission staff may extend any of the dates set +forth above at its direction. +19. Within thirty (30) days after Simec notifies the Consultant that the +recommendations have been implemented, Respondent shall certify, in writing, compliance with +the undertakings set forth above. The certification shall identify the undertaking(s), provide +written evidence of compliance in the form of a narrative, and be supported by exhibits sufficient +to demonstrate compliance. The Commission staff may make reasonable requests for further +evidence of compliance, and Respondent agrees to provide such evidence. The certification and +supporting material shall be submitted to Melissa Hodgman, Associate Director, with a copy to +the Office of Chief Counsel of the Enforcement Division, no later than sixty (60) days from the +date of the completion of the undertakings. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the +sanctions agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist +from committing or causing any violations and any future violations of Section 13(b)(2)(B) +of the Exchange Act and Rules 13a-15(a) and 13a-15(c), thereunder. +B. Respondent shall comply with the undertakings enumerated in Paragraphs 8- +19. +C. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $200,000 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. +Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or +United States postal money order, made payable to the Securities and +Exchange Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Respondent as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Melissa Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5553. +D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +By the Commission. + + +Brent J. Fields +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4019.txt b/raw/aaer/2019/AAER-4019.txt new file mode 100644 index 0000000000000000000000000000000000000000..e2269dd8a74054ff019a646b1c28a49f5cb3e99b --- /dev/null +++ b/raw/aaer/2019/AAER-4019.txt @@ -0,0 +1,500 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85081 / February 8, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4019 / February 8, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-18994 + + +In the Matter of + +Joseph S. Amundsen, CPA, +Michael T. Remus, CPA, and +Michael Remus CPA, + +Respondents. + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE +AND NOTICE OF HEARING + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate +that public administrative and cease-and-desist proceedings be, and hereby are, instituted +pursuant to Sections 4C(a)(2)1 and (a)(3) and 21C of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(ii) and (iii)2 of the Commission’s Rules of Practice + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . . (1) not to possess the requisite qualifications to represent others . . . +(2) to be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations issued +thereunder. + +2 Rule 102(e)(1)(ii) and (iii) provide, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct; or to have willfully violated, or willfully aided and +abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. + + +2 +against Joseph S. Amundsen (“Amundsen”), Michael T. Remus (“Remus”) and Michael +Remus CPA (“Remus CPA” or the “Firm”) (collectively “the Respondents”). + +II. + +After an investigation, the Division of Enforcement alleges that: + +SUMMARY + + 1. These proceedings arise out of multiple violations of the auditor +independence requirements in audits conducted of seven broker-dealers in both 2015 and +2016. Specifically, Amundsen, a certified public accountant who in 1983 was permanently +enjoined from appearing or practicing before the Commission in any way, served as the +Engagement Quality Reviewer (“EQR”) on fourteen audits of certain broker-dealers for +which Amundsen’s daughter was the financial and operations principal (“FINOP”). The +engagement partner on these audits, Remus, of Remus CPA, was aware of Amundsen’s +familial relationship and nevertheless engaged him as EQR on these fourteen audits, and +directed the Firm to issue audit reports for each of these clients that falsely stated that they +were conducted in accordance with standards of the Public Company Accounting +Oversight Board (“PCAOB”). + + A. RESPONDENTS + + 2. Respondent Amundsen, age 73, is a resident of Easton, +Pennsylvania. Amundsen has been a certified public accountant (“CPA”) in New York and +California since 2002. He has been registered with the Public Company Accounting +Oversight Board (“PCAOB”) since 2008. + + 3. Respondent Remus, age 61, is a resident of Hamilton Square, New +Jersey. Remus has been a CPA in New Jersey and Missouri since 1988, and he is a member +of the American Institute of Certified Public Accountants. He has been registered with the +PCAOB since at least 2014. Remus is the sole proprietor of his accounting firm, Remus +CPA. + + 4. Remus CPA is a two-person accounting firm based in Remus’s home +in Hamilton Square, New Jersey. In addition to Remus (who is the Firm’s sole proprietor), +Remus CPA employs Remus’ son. The Firm prepares audit and tax documents for +individuals, small companies and broker-dealers, including broker-dealers that Respondent +Amundsen and his daughter referred to Remus CPA for auditing services. Remus shares the +Firm’s income with his son, at his own discretion. + + + + + +3 + B. THE COMMISSION’S LITIGATION HISTORY WITH AMUNDSEN + + 5. In 1983, the Commission brought a civil action in the United States +District Court for the Northern District of California (the “Civil Action”) against +Amundsen, alleging violations of the federal securities laws stemming from, among other +things, Amundsen’s sign-off on an audit report for a public issuer that falsely stated that the +issuer’s financial statements fairly presented its financial positions and results of its +operations in conformity with generally accepted accounting principles, and that the audit +was conducted in accordance with generally accepted auditing standards. That same year, +Amundsen consented to an injunction, without admitting or denying the allegations of the +complaint, that permanently enjoined Amundsen from (a) committing or causing future +violations of the antifraud provisions of the federal securities laws, and (b) appearing or +practicing before the Commission in any way. + + 6. On the basis of this injunction, in 1986, the California Board of +Accountancy, revoked Amundsen’s CPA license. Amundsen applied for reinstatement of +his California CPA license, and for a New York CPA license, both of which were issued in +2002. + + 7. Notwithstanding the 1983 injunction, from approximately 2003 to +2011, Respondent Amundsen had a practice of auditing financial statements of broker- +dealers, which financial statements, together with his audit reports, were filed with the +Commission. In 2011, the Commission sought a contempt order in the Civil Action against +Respondent Amundsen for violating the injunction against appearing or practicing before +the Commission. The Court held that Amundsen “should never have begun the practice in +question [of auditing financial statements of broker-dealers destined for filing with the +Commission] in the first place,” and that his “narrow reading [of the injunction] was +unreasonable in light of the regulation, as it read then as well as now.” The Court, although +declining then to hold Amundsen in contempt, ordered him “to cease preparation of all +audit reports destined for filing with the Commission, including audit reports on financial +statements for broker dealers so destined for filing with the Commission.” + + 8. In 2011, the Financial Industry Regulatory Authority (“FINRA”) +barred Respondent Amundsen from association with its member firms, based on his failure +to disclose his litigation history with the Commission, and his regulatory history with the +California State Board of Accountancy, on FINRA forms he submitted in order to serve as +FINOP. + + 9. From approximately 2006 to 2010, while Respondent Amundsen +was working as a FINOP at various broker-dealers, his daughter apprenticed for him in his +FINOP work. In 2010, when Amundsen stopped serving as FINOP, his daughter became a +licensed FINOP. Since then, she has served as a FINOP at more than twenty broker- +dealers, including at least seven where Amundsen previously held that position. + + + +4 + C. RESPONDENTS’ REGULATORY + OBLIGATIONS AND PROFESSIONAL STANDARDS + + Regulatory Obligations + + 10. Broker-dealers are required by Section 17(a)(1) of the Exchange Act +and Rule 17a-5(d) thereunder to file annual reports containing, among other things, a +financial report and a compliance report or an exemption report, as well as reports prepared +by an independent public accountant covering the financial report and the compliance +report or the exemption report. Under Rule 17a-5(f)(1), the independent public accountant +must be qualified and independent in accordance with Rule 2-01 of Regulation S-X.3 +Pursuant to Exchange Act Rule 17a-5(g)(1) and (2), the independent public accountant +engaged by the broker-dealer must undertake to prepare its reports, in accordance with +standards of the PCAOB, based on an examination of the broker-dealers’ financial report, +and an examination of certain statements in the compliance report or a review of the +exemption report. Rule 17a-5(d)(1)(i)(C), furthermore, generally requires that broker- +dealers’ annual reports include reports prepared by an independent public accountant under +the engagement provisions of paragraph (g) of Rule 17a-5. + + 11. Rule 2-01(b) of Regulation S-X provides, among other things, that +“the Commission will not recognize an accountant as independent, with respect to an audit +client, if the accountant is not … capable of exercising objective and impartial judgment.” +In weighing independence, “the Commission will consider all relevant circumstances, +including all relationships between the accountant and the audit client.” + + 12. Rule 2-01(c)(2)(ii) of Regulation S-X specifically provides that +independence is impaired if “a close family member of a covered person in the [audit] firm +is in an accounting role or financial reporting oversight role at an audit client, or was in +such a role during any period covered by an audit.” + + 13. Rule 2-01(f)(9) of Regulation S-X explicitly provides that a “close +family member” includes a nondependent child. Rule 2-01(f)(11) of Regulation S-X +provides that a “covered person” includes partners, principals, shareholders and employees +on the audit team. Rule 2-01(f)(3)(i) provides that an “accounting role” means a role in +which a person exercises, or is in a position to exercise, more than minimal influence over +the contents of accounting records, or over anyone who prepares them. + + 14. Pursuant to its Auditing Standard (“AS”) 7 (currently titled AS +1220) issued on July 28, 2009, the PCAOB requires an engagement quality review for each +audit engagement undertaken by the independent public auditor, and, among other things, +that the EQR have “competence, independence, integrity, and objectivity.” Under PCAOB +AS 1220, an EQR from outside the accounting firm is, for independence purposes, +considered an “audit partner” and “member of the audit team” under these definitions. + + +3 17 C.F.R. § 210.2-01. + + +5 + 15. PCAOB Rule 3520, furthermore, also directly requires that “[a] +registered public accounting firm and its associated persons must be independent of the +firm’s audit client throughout the audit and professional engagement.” For this purpose the +PCAOB requires the firm and its associated persons to comply with “the independence +criteria set out in the rules and regulations of the Commission under the federal securities +laws.” PCAOB Auditing Standards (“AU”) 4 also state that “[i]n all matters relating to the +assignment, an independence in mental attitude is to be maintained by the auditor or +auditors,” AU § 150.02, and that independent auditors should “not only be independent in +fact,” but that they should “avoid situations that may lead outsiders to doubt their +independence.” AU § 220.03. In expressly allowing accounting firms to engage EQRs +from outside the firm, the PCAOB noted that in such circumstances, the firm would “likely +need to make additional inquiries to obtain necessary information about the individual’s +qualifications,” including information about the EQR’s independence. AS 1220. + + 16. Each of the foregoing regulatory obligations were in effect and +applicable to Respondents at all relevant times. + + Professional Standards + + 17. Under PCAOB System of Quality Control for a CPA Firm’s +Accounting and Auditing Practice (“QC”), Section 20, auditors are required to maintain a +system providing it with reasonable assurance that its personnel comply with applicable +professional standards, “[b]ecause of the public interest in the services provided by and +reliance placed on the objectivity and integrity of, CPAs.” These quality control systems +are required to include assurances and monitoring of, among other things, the integrity, +objectivity, independence, impartiality and competence or auditor personnel. QC § 20.02. +Under QC § 20.09, “[p]olicies and procedures should be established to provide the firm +with reasonable assurance that personnel maintain independence (in fact and appearance) in +all required circumstances.” An auditing firm is required to have policies and procedures +relating to personnel that maintain the quality of the firm’s work, which “ultimately +depends on the integrity, objectivity, intelligence, competence, experience, and motivation +of personnel who perform, supervise, and review the work.” QC § 20.12. Finally, quality +control systems for auditing firms require ongoing monitoring of the various elements to +provide reasonable assurance that the “elements of quality control … are suitably designed +and are being effectively applied.” QC § 20.20. + + 18. Auditing standards also require that an auditor plan and perform his +or her work with due professional care. AU § 230.02. Due professional care concerns +“what the independent auditor does and how well he or she does it,” requiring the auditor +to, among other things, exercise auditing skills “with ‘reasonable care and diligence’ (that +is, with due professional care).” AU § 230.04-.05. + +4 The PCAOB adopted as interim standards, on a transitional basis, the auditing standards +promulgated by the Auditing Standards Board of the American Institute of Certified Public +Accountants as in existence on April 16, 2003, to the extent not superseded or amended by the +PCAOB. See PCAOB Rule 3200T, Interim Auditing Standards. Standards identified by the letters +“AU” are such standards + + +6 + + 19. Each of the foregoing professional standards were in effect and +applicable to Respondents at all relevant times. + + D. AMUNDSEN’S EQR WORK ON BROKER-DEALER AUDITS + + 20. In 2015 and again in 2016, Remus and Remus CPA engaged +Amundsen to be the EQR on a total of 28 year-end audits of at least sixteen broker-dealers +for the fiscal years ended December 31, 2014, and December 31, 2015. Amundsen’s +daughter was the FINOP for seven of these broker-dealers. Remus and Remus CPA thus +engaged Amundsen to be EQR on a total of fourteen audits of broker-dealer clients for +these two audit periods where the FINOP was Amundsen’s daughter. Remus and Remus +CPA received fees in connection with these fourteen audits in an amount not less than +$35,000, and Amundsen received fees for his EQR services on these fourteen audits in an +amount not less than $7,000. + + 21. As FINOP for these seven broker-dealers, Amundsen’s daughter had +final responsibility for their financial reports and record-keeping obligations, including +reconciliation of bank and brokerage statements, calculation of net capital, signing and +filing FOCUS reports and supplemental statement of income reports. + + 22. Amundsen and his daughter maintained a close and mutually +supportive professional and business relationship of long-standing, in addition to their close +familial relationship, before and during Amundsen’s EQR work for Remus CPA. For +example: + + a. Amundsen’s daughter apprenticed for Amundsen in his + FINOP business as a bookkeeper and accountant for + approximately four years before 2010. + + b. When Amundsen’s daughter became a FINOP, Amundsen + regularly conferred with her in her transition into the + position, and provided informal assistance to her. In at least + one instance, Amundsen unsuccessfully attempted to prevent + a broker-dealer from terminating his daughter as FINOP by + threatening to quit as the tax preparer for the broker-dealer’s + president. + + c. At one broker-dealer (“Broker-Dealer A”), for which + Amundsen was acting as EQR and his daughter was FINOP, + Amundsen personally assisted the broker-dealer in a 2015 + SEC examination, and also personally intervened to + negotiate his daughter’s fees. + + d. At another broker-dealer for which Amundsen was EQR and + his daughter was FINOP (and for which Amundsen had + + +7 + previously acted as FINOP) (“Broker-Dealer B”), Amundsen + remained personally involved in resolving operational and + accounting issues. + + e. Amundsen’s daughter has regularly referred tax preparation + clients to Amundsen for his side business as a tax preparer. + + 23. At the time Respondents Remus and Remus CPA engaged +Amundsen as EQR, Remus knew of the father-daughter relationship between Respondent +Amundsen and his daughter, and that Amundsen’s daughter was the FINOP for seven of +the broker-dealer clients that Remus CPA was auditing, and for which he had engaged +Amundsen to act as EQR. + + 24. Respondents each knew, or recklessly and/or unreasonably +disregarded, that Amundsen’s relationship with his daughter impaired their independence +in connection with the audits they participated in, and for the audit reports they signed and +participated in, for the broker-dealer clients for which Amundsen’s daughter was FINOP. + + 25. Remus and Remus CPA prepared a letter for Amundsen to sign, and +Amundsen signed it, stating that Amundsen was aware of the independence standards, that +Amundsen was independent with respect to eleven broker-dealers named in the letter +(including six named broker-dealers where Amundsen’s daughter was currently the +FINOP), and that he had “no relationships that may be reasonably thought to bear on my +independence.” Remus and Amundsen both knew, or recklessly or unreasonably +disregarded, that these assertions of Amundsen’s independence were false. + + 26. For each audit engagement in which Amundsen served as EQR for +Remus and Remus CPA, he participated in pre-audit engagement team discussions about +identifying and addressing significant risks; completed an extensive checklist for each audit +of all the items he reviewed and approved, including checking net capital calculations for +each broker-dealer; proofreading the underlying financial statements, making corrections +and fixing typographical errors as necessary; and approved the audit with his signature. +Following Amundsen’s approval, Respondent Remus CPA released the audit report to its +broker-dealer clients for inclusion in their annual filings with the Commission. + + 27. Remus and Remus CPA submitted purportedly independent public +accountant’s reports for these fourteen audits that falsely represented that their audits were +conducted in accordance with the standards of the PCAOB. In turn, their broker-dealer +clients submitted fourteen statements with their annual reports for 2015 and 2016 that +falsely represented that Remus CPA had conducted its audits in accordance with the +standards of the PCAOB. + + + +8 +E. VIOLATIONS + + 28. As a result of the conduct described above, Respondent Remus CPA +willfully violated Exchange Act Rules 17a-5(g) and (i) by conducting fourteen audits in +2015 and 2016 for the 2014 and 2015 audit periods that were not in accordance with the +standards of the PCAOB, and by causing broker-dealers to file reports in connection with +each that falsely represented that they were conducted in accordance with standards of the +PCAOB. + + 29. As a result of the conduct described above, Respondents Remus and +Amundsen willfully aided and abetted, and/or caused, the foregoing violations of Rules +17a-5(g) and (i) by Remus CPA. + + 30. As a result of the conduct described above, Respondents Remus +CPA, Remus and Amundsen caused at least seven broker-dealers to violate Section 17(a) +of the Exchange Act and Rule 17a-5(f) for the 2014 and 2015 audit periods, when these +broker-dealers, based on the false representations in the Firm’s independent public +accountant’s report, submitted annual reports to the Commission including reports by an +accountant who was not independent. + + 31. As a result of the conduct described above, Respondents Remus +CPA and Remus engaged in improper professional conduct within the meaning of Section +4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, +by: (i) not maintaining independence in connection with the fourteen audits and +professional engagement periods for the seven broker-dealers for which Amundsen’s +daughter was FINOP, and Remus CPA engaged Amundsen as the EQR in violation of the +Commission’s independence requirements; (ii) failing to have policies and procedures that +provide reasonable assurance that personnel maintain independence, integrity, and +objectivity, and that such policies were monitored; and (iii) failing to exercise due +professional care when it engaged Respondent Amundsen as EQR on at least fourteen +audits where his daughter prepared the financial statements subject to the audit. + + 32. As a result of the conduct described above, Respondent Amundsen +engaged in improper professional conduct within the meaning of Section 4C(a)(2) of the +Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, by acting as EQR +in connection with the fourteen audits and professional engagement periods for the seven +broker-dealers for which his daughter was FINOP, in violation of the Commission’s +independence requirements. + + 33. As a result of the conduct described above, Respondents Remus and +Amundsen willfully aided and abetted violations of Exchange Act Rules 17a-5(g) and (i) +and are subject to relief pursuant to Section 4C(a)(3) of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. + + + +9 +III. + +In view of the allegations made by the Division of Enforcement, the Commission +deems it necessary and appropriate in the public interest that public administrative and +cease-and-desist proceedings be instituted to determine: + +A. Whether the allegations set forth in Section II hereof are true and, in +connection therewith, to afford Respondents an opportunity to establish any defenses to such +allegations; + +B. Whether, pursuant to Section 21C of the Exchange Act, Respondents should +be ordered to cease and desist from committing or causing violations of and any future +violations of Section 17(a) of the Exchange Act and Rule 17a-5 thereunder; whether +Respondents should be ordered to pay a civil penalty pursuant to Section 21B(a) of the +Exchange Act; and whether Respondents should be ordered to pay disgorgement pursuant to +Sections 21B(e) and 21C(e) of the Exchange Act; and; + +C. Whether, pursuant to Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, Respondents should be censured or denied, temporarily or +permanently, the privilege of appearing or practicing before the Commission in any way. + +IV. + +IT IS ORDERED that a public hearing before the Commission for purposes of +taking evidence on the questions set forth in Section III hereof shall be convened not earlier +than 30 days and not later than 60 days from service of this Order at a time and place to be +fixed by further order of the Commission, pursuant to Rule 110 of the Commission’s Rules +of Practice, 17 C.F.R. § 201.110. + +IT IS FURTHER ORDERED that Respondents shall file an Answer to the +allegations contained in this Order within twenty (20) days after service of this Order, as +provided by Rule 220 of the Commission’s Rules of Practice, 17 C.F.R. § 201.220. + +IT IS FURTHER ORDERED that the Division of Enforcement and Respondents +shall conduct a prehearing conference pursuant to Rule 221 of the Commission’s Rules of +Practice, 17 C.F.R. § 201.221, within fourteen (14) days of service of the Answer. The +parties may meet in person or participate by telephone or other remote means; following +the conference, they shall file a statement with the Office of the Secretary advising the +Commission of any agreements reached at said conference. If a prehearing conference +was not held, a statement shall be filed with the Office of the Secretary advising the +Commission of that fact and of the efforts made to meet and confer. + +If any Respondent fails to file the directed Answer, or fails to appear at a hearing or +conference after being duly notified, the Respondent may be deemed in default and the +proceedings may be determined against him or it upon consideration of this Order, the +allegations of which may be deemed to be true as provided by Rules 155(a), 220(f), 221(f) + + +10 +and 310 of the Commission’s Rules of Practice, 17 C.F.R. §§ 201.155(a), 201.220(f), +201.221(f) and 201.310. + +This Order shall be served forthwith upon Respondents by any means permitted by +the Commission’s Rules of Practice. + +Attention is called to Rule 151(b) and (c) of the Commission’s Rules of Practice, +17 C.F.R. § 201.151(b) and (c), providing that when, as here, a proceeding is set before +the Commission, all papers (including those listed in the following paragraph) shall be +filed with the Office of the Secretary and all motions, objections, or applications will be +decided by the Commission. The Commission requests that an electronic courtesy copy of +each filing should be emailed to APFilings@sec.gov in PDF text-searchable format. Any +exhibits should be sent as separate attachments, not a combined PDF. + +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that notwithstanding any contrary reference in the Rules +of Practice to filing with or disposition by a hearing officer, all filings, including those +under Rules 210, 221, 222, 230, 231, 232, 233, and 250 of the Commission’s Rules of +Practice, 17 C.F.R. §§ 201.210, 221, 222, 230, 231, 232, 233, and 250, shall be directed +to and, as appropriate, decided by the Commission. + +The Commission finds that it would serve the interests of justice and not result in +prejudice to any party to provide, pursuant to Rule 100(c) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.100(c), that the Commission shall issue a decision on the basis +of the record in this proceeding, which shall consist of the items listed at Rule 350(a) of +the Commission’s Rules of Practice, 17 C.F.R. § 201.350(a), and any other document or +item filed with the Office of the Secretary and accepted into the record by the +Commission. The provisions of Rule 351 of the Commission’s Rules of Practice, 17 +C.F.R. § 201.351, relating to preparation and certification of a record index by the Office +of the Secretary or the hearing officer are not applicable to this proceeding. + +The Commission will issue a final order resolving the proceeding after one of the +following: (A) the completion of post-hearing briefing in a proceeding where the public +hearing has been completed; (B) the completion of briefing on a motion for a ruling on the +pleadings or a motion for summary disposition pursuant to Rule 250 of the Commission’s +Rules of Practice, 17 C.F.R. § 201.250, where the Commission has determined that no +public hearing is necessary; or (C) the determination that a party is deemed to be in default +under Rule 155 of the Commission’s Rules of Practice, 17 C.F.R. § 201.155 and no public +hearing is necessary. + + + +11 +In the absence of an appropriate waiver, no officer or employee of the Commission +engaged in the performance of investigative or prosecuting functions in this or any factually +related proceeding will be permitted to participate or advise in the decision of this matter, +except as witness or counsel in proceedings held pursuant to notice. Since this proceeding is +not “rule making” within the meaning of Section 551 of the Administrative Procedure Act, it +is not deemed subject to the provisions of Section 553 delaying the effective date of any +final Commission action. + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4020.txt b/raw/aaer/2019/AAER-4020.txt new file mode 100644 index 0000000000000000000000000000000000000000..e69fdf17504e04ab71ba5331f5742361f3e60b17 --- /dev/null +++ b/raw/aaer/2019/AAER-4020.txt @@ -0,0 +1,598 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85115 / February 13, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4020 / February 13, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-18997 + + +In the Matter of + +DELOITTE TOUCHE TOHMATSU +LLC, +FUTOMICHI AMANO, and +YUJI ITAGAKI, + +Respondents. +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice,2 against Deloitte Touche Tohmatsu LLC +(“Deloitte Japan”), Futomichi Amano (“Amano”), and Yuji Itagaki (“Itagaki’) (collectively +“Respondents”). + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found . . . (1) not to possess +the requisite qualifications to represent others . . . (2) to be lacking in character or integrity, or to have +engaged in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided +and abetted the violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure any person, or deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper professional +conduct. + + +2 + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (“Offers”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting +Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as +set forth below. + +III. + +On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +A. SUMMARY + +This matter arises from violations of the independence rules regarding personal financial +relationships between certain covered persons in the firm of Deloitte Japan and its audit client, +Company A, during Company A’s 2013 through 2016 fiscal years. These personal financial +relationships included personal accounts at a banking subsidiary of Company A that carried +balances exceeding the amount insured by the Deposit Insurance Corporation of Japan, in +violation of Rule 2-01(c)(1)(ii)(B) of Regulation S-X, among other things. As detailed below, +through their acts and omissions in this matter, all three respondents engaged in improper +professional conduct and were a cause of certain reporting violations by Company A. Deloitte +Japan also violated, and Amano and Itagaki were a cause of Deloitte Japan’s violations of, Rule +2-02(b) of Regulation S-X. + +B. RESPONDENTS + +Deloitte Touche Tohmatsu LLC (“Deloitte Japan”) is an audit firm headquartered in +Tokyo, Japan. Since 2004, Deloitte Japan has been registered with the Public Company +Accounting Oversight Board (“PCAOB”), pursuant to the Sarbanes Oxley Act of 2002, to +prepare and issue audit reports. Deloitte Japan is an affiliate of Deloitte Tohmatsu LLC, which +was at all relevant times a member firm of Deloitte Touche Tohmatsu Limited, a U.K. private +company limited by guarantee, which is a multinational network of professional services firms. + +Futomichi Amano, a resident of Tokyo, Japan, served as Deloitte Japan’s Chief +Executive Officer (“CEO”) from November 2010 to July 2015. Amano is licensed by the +Japanese Institute of Certified Public Accountants. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. + + +3 + +Yuji Itagaki, a resident of Tokyo, Japan, served as Deloitte Japan’s acting Reputation +and Risk Leader (“RRL”)4 from January 2015 to July 2015, its RRL from July 2015 to August +2015, and its Director of Independence (“DOI”) from May 2015 to August 2015. Itagaki is +licensed by the Japanese Institute of Certified Public Accountants. + +C. RELEVANT ISSUER + +Company A is a financial holding company headquartered in Tokyo, Japan. Company A +files annual reports on Form 20-F with the Commission as a foreign private issuer, and has +American Depositary Receipts listed on the New York Stock Exchange. At all relevant times, +Deloitte Japan has served as Company A’s external auditor. + +D. FACTS + +1. The Nature of the Independence Violations + +The subject auditor independence violations primarily relate to bank accounts held by +numerous Deloitte Japan partners and/or audit engagement team members5 at a banking +subsidiary of Company A (“Bank A”) that, at certain times, carried balances exceeding the +amount insured by the Deposit Insurance Corporation of Japan in violation of Rule 2- +01(c)(1)(ii)(B) of Regulation S-X. That rule provides: “[a]n accountant is not independent … +when any covered person in the firm, or any of his or her immediate family members has … +[a]ny savings, checking, or similar account at a bank, savings and loan, or similar institution that +is an audit client, if the account has a balance that exceeds the amount insured by the Federal +Deposit Insurance Corporation or any similar insurer ….”6 + +(a) March 2014 Independence Inspection Uncovers Independence +Violations + +In February 2014, Amano was selected for an independence inspection as part of Deloitte +Japan’s periodic independence inspections for covered persons. As part of this inspection, +Amano returned materials in March 2014 indicating that from September through November +2013, he had a bank account balance at Bank A that exceeded the amount insured by the Deposit +Insurance Corporation of Japan.7 This violation was due, in part, to a lump-sum deposit of + +4 Deloitte Japan’s Office of Independence is part of its Reputation and Risk Office (“RRO”), which is led by its +RRL. + +5 Members of the audit engagement team, partners in the office in which the lead audit engagement partner +practices, and individuals in the chain of command are “covered persons” as defined by Rule 2 -01(f)(11) of +Regulation S-X. In 2015, there were approximately 1,000 covered persons at Deloitte Japan with respect to +Company A. + +6 The insurance limit of the Deposit Insurance Corporation of Japan is 10 million yen (which averaged +approximately $97,000, based on conversion rates during the relevant time). + +7 Prior to this inspection, in December 2013, Amano had indicated he had no independence violations in a + + +4 +partnership compensation from Deloitte Japan into Amano’s account at Bank A in late 2013 that +alone exceeded the deposit insurance limit. In providing the materials to the Office of +Independence, Amano acknowledged his excessive bank account balance and stated he would +change the bank account for partnership distributions. + +Even though the facts about Amano’s independence violation were known to staff in the +Office of Independence, including the then-DOI, as early as March 2014, the staff did not fully +appreciate whether this violation by Deloitte Japan’s CEO could affect the independence of the +audits conducted by Deloitte Japan. Accordingly, this violation was not promptly reported at the +time to the audit engagement team. As such, even though the then-DOI and Office of +Independence were aware of the violation, it was not adequately communicated to Company A +until July 2015, as described below. + +Despite the acknowledgement of this violation in March 2014, the Office of +Independence did not complete Amano’s inspection until November 2014, due in part to +inadequate staffing in the Office of Independence. In March 2014, Deloitte Japan’s Office of +Independence was staffed by approximately 7.8 full time equivalents (compared with 40.5 in +October 2018) and the then-DOI spent less than half of his time on independence matters. +During the eight-month period between the discovery of the violation and the completion of the +inspection report, no corrective actions were taken by Deloitte Japan. At the conclusion of the +inspection, the then-DOI emailed a reprimand to Amano. + +(b) Disclosure of Independence Violations + +Disclosures to the Audit Engagement Team: In November 2014, the Office of +Independence communicated several violations, including that of Amano, to the audit +engagement team. Pursuant to then-existing Deloitte Japan policy, the names of violators were +not provided to the engagement team and were only identified by the category of “covered +persons” to which they belonged. Initial communications from the Office of Independence +correctly identified Amano as being in the chain of command with respect to the audit of +Company A. Additional communications between the Office of Independence and audit +engagement team personnel confused the issue, leading the audit engagement team to incorrectly +conclude that the violation was by a partner in the office and not by an individual in the chain of +command. + +Disclosures to Company A: In January 2015, Deloitte Japan sent a semi-annual PCAOB +Rule 3526 letter to the Company A Audit Committee that identified several personal financial +relationship violations, including that of Amano, but did not identify the violators by name.8 The +letter also wrongly stated that Amano’s (still anonymous) violation was not committed by a +member of Deloitte Japan’s chain of command based on the confused communications and +incorrect conclusion referenced above. Moreover, the existence of this violation by Amano was + +monthly independence confirmation covering the period of October 2013. + +8 PCAOB Rule 3526 describes communications that the auditor must make to client Audit Committees +concerning all relationships that may reasonably be thought to bear on independence. + + +5 +not adequately disclosed to Company A until July 2015, including through a second semi-annual +PCAOB Rule 3526 letter in July 2015. + +(c) Additional Violations Discovered + +During the first half of 2015, Deloitte Japan identified other personal financial +relationship violations by Amano. Deloitte Japan voluntarily disclosed Amano’s violations and +other violations then known to Deloitte Japan to the Commission in July 2015. After this +voluntary disclosure to the Commission, Deloitte Japan hired a Japanese law firm to conduct an +independent internal investigation into Amano’s violations and the causes of those violations. +Deloitte Japan also conducted extensive additional further testing to determine whether other +violations existed. Overall, at various times between 2012 and 2016, eighty-eight (88) Deloitte +Japan covered persons had personal financial relationship violations with respect to Company A. +These individuals notably included Amano, as discussed above, and its RRL and DOI Itagaki, +who were not members of the audit engagement team, but were otherwise both covered persons +and had independence violations in successive years wherein Deloitte Japan asserted that it was +independent of Company A. + +Several of the violations of Rule 2-01(c)(1)(ii)(B) were caused by Deloitte Japan’s +special distributions of year-end partnership compensation directly into personal accounts held +by covered persons at Bank A in late 2013 and late 2014. Although Deloitte Japan’s Office of +Independence knew that the 2013 payments caused at least two violations, the firm repeated this +same process in 2014, causing additional violations. CEO Amano was among those who twice +received partnership compensation into his Bank A account that caused a violation of personal +financial relationship rules with respect to audit client Company A. + +Deloitte Japan’s investigations into these issues also uncovered multiple additional +personal financial relationship violations by Deloitte Japan covered persons, including credit +card balances with a subsidiary of Company A in violation of Rule 2-01(c)(1)(ii)(E) of +Regulation S-X, which prohibits “[a]ny aggregate outstanding credit card balance owed to a +lender that is an audit client that is not reduced to $10,000 or less on a current basis ….” During +those investigations, Itagaki was found to have such a balance. + +2. Deficiencies in Quality Controls Concerning Independence + +Deloitte Japan’s system of quality controls did not provide reasonable assurance that the +firm and its covered persons maintained independence from its audit clients. These deficiencies +included: + +Systemic deficiencies: In late 2013, Deloitte Japan initiated a practice of paying firm +partners their special year-end partnership draws via lump sum payments deposited directly into +their personal bank accounts, including accounts at Bank A. These payments caused the account +balances of certain partners to exceed the Japanese insured deposit limit of 10 million yen in +violation of Rule 2-01(c)(1)(ii)(B) and, in certain cases, the size of the payment alone exceeded +the limit. Although Deloitte Japan warned its partners to make sure that these special +distributions did not cause violations of the deposit insurance limits, those warnings were +insufficient to avoid violations from the 2013 payments, and the firm did not take any corrective + +6 +action before the second round of payments in late 2014 caused additional violations. + +Inadequate supervision, training, and staffing: From at least 2012 to 2015, Deloitte +Japan’s RRO did not adequately supervise or staff its Office of Independence. Acting RRL and +RRL Itagaki did not supervise the independence functions of the Office of Independence, and the +firm’s DOI during most of the subject period served on only a part-time basis, spending the +majority of his time on audit work. Additionally, certain personnel in the Office of +Independence had misconceptions about the provisions of Regulation S-X as it related to +insurance deposit limits, which contributed to the inadequacy of Deloitte Japan’s response to the +initial Amano violation. In the aftermath of its investigations into the firm’s independence +issues, Deloitte Japan more than tripled the staffing of its Office of Independence. + +An internal policy of not disclosing independence violators by name: During the +subject period, Deloitte Japan had an internal policy of not disclosing the names of independence +violators, either internally or in communications with its audit clients and others. This policy led +to miscommunications and difficulties in correcting and disclosing independence violations, +including confusion regarding the initial violation by Amano. Deloitte Japan has since changed +its policy and now identifies violators by name. + +E. LEGAL ANALYSIS + +1. The Financial Relationship Provisions of Regulation S-X + +The basic elements of an auditor independence violation in the financial-relationship +context are (1) an independence-impairing relationship; (2) existing during all or part of the +period covered by the audit, or the period of the audit work, or both; followed by (3) issuance of +an audit report asserting the auditor’s independence from the client. See Rule 2-01(c)(1) of +Regulation S-X.9 + +The insured deposit limit violations and the other personal financial relationship +violations with subsidiaries of Deloitte Japan audit client Company A, during periods covered by +Deloitte Japan’s audit reports asserting its independence from Company A, fall within +Regulation S-X’s prohibition. + +2. Violation of, and Causing Violation of, Rule 2-02(b) of Regulation S-X + +Each time Deloitte Japan signed an audit report for Company A, where either the period +covered by the audit or the period of the audit work (or both) overlapped with personal financial + +9 Rule 2-01(c)(3) provides: + +An accountant is not independent if, at any point during the audit and professional engagement period, the +accountant has a direct financial interest or a material indirect financial interest in the accountant’s audit +client, such as … [a]ny savings, checking, or similar account at a bank, savings and loan, or similar +institution that is an audit client, if the account has a balance that exceeds the amount insured by the [FDIC] +or any similar insurer … [or] [a]ny aggregate outstanding credit card balance owed to a lender that is an +audit client that is not reduced to $10,000 or less on a current basis. . . . + + +7 +relationship violations by its covered persons, Deloitte Japan directly violated Rule 2-02(b) of +Regulation S-X. See Rule 2-02(b) (requiring accountant’s report to “state whether the audit was +made in accordance with generally accepted auditing standards” [“GAAS”] which, in turn, +require auditors to maintain independence — both in fact and appearance — from their audit +clients.10). Thus, the Deloitte Japan year-end audit reports for Company A’s 2013 through 2016 +fiscal years incorrectly stated that they were performed in accordance with GAAS. + +Further, Amano and Itagaki were a cause of Deloitte Japan’s violations of Rule 2-02(b) +of Regulation S-X as a result of their respective violations of the personal financial relationship +provisions of Regulation S-X, which were a cause of Deloitte Japan’s lack of independence +during this period. + +3. Improper Professional Conduct + +Deloitte Japan’s failure to meet the requirements of Rule 2-01 of Regulation S-X +described above constitutes improper professional conduct under Section 4C of the Exchange +Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice, which provide, in pertinent +part, that the Commission may “censure a person or deny, temporarily or permanently, the +privilege of appearing or practicing before it... to any person who is found... to have engaged in... +improper professional conduct.” Such conduct can be established by, inter alia, negligence in +the form of either “a single instance of highly unreasonable conduct … in circumstances +[warranting] heightened scrutiny”11 or of “repeated instances of unreasonable conduct...” See +Rule 102(e)(1)(iv)(B)(1) and (2). + +Further, Amano and Itagaki both engaged in improper professional conduct by violating +the personal financial relationship provisions of Regulation S-X with respect to Company A, and +failing to correct or disclose their above-described violations in a timely manner. + +4. Causing Company A’s Annual Report Violations + +Each time audit reports were filed with Company A’s annual reports on Form 20-F for +the fiscal years ended March 31, 2013, March 31, 2014, March 31, 2015, and March 31, 2016, +Company A violated Section 13(a) of the Exchange Act and Rule 13a-1 thereunder, which +requires such annual reports to contain financial statements audited by “independent public + +10 Securities Act Release No. 33-8422 (May 24, 2004) states that reference to GAAS are to mean PCAOB +standards. Pursuant to PCAOB Professional Standards Rule 3200T, the PCAOB adopted certain preexisting +generally accepted auditing standards, as described in AICPA SAS No. 95. Those standards include AU 161 and +220. PCAOB Rule 3500T also explicitly requires compliance with the independence standards described in +AICPA’s Code of Professional Conduct Rule 101 as in existence on April 15, 2003, to the extent not superseded or +amended by the PCAOB. Rule 3500T further provides that “The Board's Interim Independence Standards do not +supersede the Commission's auditor independence rules.” Identical language was previously found in PCAOB rule +3600T until certain PCAOB rules were revised in 2014. + +11 Auditor independence is always an area warranting heightened scrutiny. See Adopting Release for Rule +102(e) [Rel. Nos. 33-7593, 34-40567, 1998 SEC LEXIS 2256 (Oct. 19, 1998)] (“Because of the importance of an +accountant’s independence to the integrity of the financial reporting system, the Commission has concluded that +circumstances that raise questions about an accountant’s independence always merit heightened scrutiny.”). + + +8 +accountants.” Deloitte Japan, Amano, and Itagaki each caused these reporting violations because +each should have known the subject personal financial relationship violations would cause +Company A to violate the provisions listed above. + +F. COOPERATION AND REMEDIAL ACTION + +In determining to accept Respondent Deloitte Japan’s Offer, the Commission considered +the steps taken by the firm to enhance its independence quality control system and the +cooperation afforded the Commission staff. Since the conduct discussed in this Order, the firm +has continued to improve its independence policies and procedures concerning personal financial +relationships. The firm has, among other things, prohibited covered persons of the firm from +holding bank accounts with audit clients or subsidiaries of audit clients; restructured and +substantially increased staffing of its independence function; ended the practice of keeping the +identities of independence violators anonymous in internal and external communications; +adopted stronger disciplinary measures for independence violators; enhanced independence +training and communications throughout the firm; increased the number and frequency of its +procedures for prevention and detection of independence-impairing financial relationships as +well as its monitoring to ensure the firm’s independence controls are working effectively. In +addition, Deloitte Japan voluntarily shared the results, details, and documents related to its +internal investigation; provided translations of key documents; and facilitated the voluntary +testimony of overseas witnesses, all of which reduced the time and resources necessary for the +Commission staff to conclude the investigation. + +G. FINDINGS + +Based on the foregoing, the Commission finds that (a) Respondents Deloitte Japan, +Amano, and Itagaki engaged in improper professional conduct pursuant to Section 4C(a)(2) of +the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice; (b) Deloitte +Japan violated, and Amano and Itagaki caused Deloitte Japan to violate, Rule 2-02(b) of +Regulation S-X; and (c) Deloitte Japan, Amano, and Itagaki caused Company A to violate +Section 13(a) of the Exchange Act, and Rule 13a-1 thereunder. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent Deloitte Japan, Amano, and Itagaki shall cease and desist from +committing or causing any violations and any future violations of Rule 2-02 of Regulation S-X. + +B. Respondents Deloitte Japan, Amano, and Itagaki shall cease and desist from +committing or causing any violations and any future violations of Section 13(a) of the Exchange +Act, and Rule 13a-1 thereunder. + +C. Respondent Deloitte Japan be, and hereby is, censured. + +9 + +D. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, Respondent Amano is denied the privilege of appearing or +practicing before the Commission as an accountant. + +E. After two years from the date of this order, Amano may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission (other than as a member of an audit committee, as that +term is defined in Section 3(a)(58) of the Securities Exchange Act of +1934). Such an application must satisfy the Commission that Amano’s +work in his practice before the Commission as an accountant will be +reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934. Such +an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + +(a) Amano, or the public accounting firm with which he is associated, +is registered with the Public Company Accounting Oversight +Board (“Board”) in accordance with the Sarbanes-Oxley Act of +2002, and such registration continues to be effective; + +(b) Amano, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did +not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that Amano will not receive appropriate supervision; + +(c) Amano has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed +by the Board (other than reinstatement by the Commission); and + + +10 +(d) Amano acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +F. The Commission will consider an application by Amano to resume appearing or +practicing before the Commission provided that his Japanese Institute of Certified Public +Accountants (“JICPA”) license is current and he has resolved all other disciplinary issues with +all other boards of accountancy. However, if Amano’s licensure is dependent on reinstatement +by the Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced above, +any other matters relating to Amano’s character, integrity professional conduct, or qualifications +to appear or practice before the Commission as an accountant. Whether an application +demonstrates good cause will be considered on a facts and circumstances basis with due regard +for protecting the integrity of the Commission’s processes. + +G. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, Respondent Itagaki is denied the privilege of appearing or +practicing before the Commission as an accountant. + +H. After one year from the date of this order, Itagaki may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission (other than as a member of an audit committee, as that +term is defined in Section 3(a)(58) of the Securities Exchange Act of +1934). Such an application must satisfy the Commission that Itagaki’s +work in his practice before the Commission as an accountant will be +reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934. Such +an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + +3. an independent accountant. + + +11 +Such an application must satisfy the Commission that: + +(a) Itagaki, or the public accounting firm with which he is associated, +is registered with the Public Company Accounting Oversight +Board (“Board”) in accordance with the Sarbanes-Oxley Act of +2002, and such registration continues to be effective; + +(b) Itagaki, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did +not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that Itagaki will not receive appropriate supervision; + +(c) Itagaki has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed +by the Board (other than reinstatement by the Commission); and + +(d) Itagaki acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +I. The Commission will consider an application by Itagaki to resume appearing or +practicing before the Commission provided that his JICPA license is current and he has resolved +all other disciplinary issues with all other boards of accountancy. However, if Itagaki’s JICPA +licensure is dependent on reinstatement by the Commission, the Commission will consider an +application on its other merits. The Commission’s review may include consideration of, in +addition to the matters referenced above, any other matters relating to Itagaki’s character, +integrity professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + +J. Respondent Deloitte Japan shall, within ten (10) days of the entry of this Order, +pay (i) disgorgement of $971,722, plus prejudgment interest of $159,397.70, and (ii) a civil +money penalty in the amount of $880,000, for a total of $2,011,119.70, to the Securities and +Exchange Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). If timely payment of disgorgement and prejudgment interest is +not made, additional interest shall accrue pursuant to SEC Rule of Practice 600. If timely +payment of a civil penalty is not made, additional interest shall accrue pursuant to 31 U.S.C. § +3717. + +K. All payments required by this Order must be made in one of the following ways: + +1. Respondent may transmit payment electronically to the Commission, + +12 +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +2. Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +3. Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Deloitte Japan as a Respondent in these proceedings, and the file number of these proceedings. +A copy of the cover letter and check or money order, or documentation of whatever other form +of payment is used, must be simultaneously sent to Melissa R. Hodgman, Associate Director, +Division of Enforcement, Securities and Exchange Commission, 100 F St., N.E., Washington, +DC 20549. + +L. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated as +penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, it +shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty +in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not +be deemed an additional civil penalty and shall not be deemed to change the amount of the +civil penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor +Action” means a private damages action brought against Respondent by or on behalf of one or +more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +By the Commission. + + +Brent J. Fields +Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4021.txt b/raw/aaer/2019/AAER-4021.txt new file mode 100644 index 0000000000000000000000000000000000000000..75a53e1e82ffad08792e395fb80a6046fd61978a --- /dev/null +++ b/raw/aaer/2019/AAER-4021.txt @@ -0,0 +1,466 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85149 / February 15, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4021 / February 15, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19000 + + +In the Matter of + + COGNIZANT TECHNOLOGY + SOLUTIONS CORPORATION, + +Respondent. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + + +I + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Cognizant Technology Solutions Corporation +(“Cognizant” or “Respondent”). + +II + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + + +2 + +III + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. These proceedings arise from violations of the antibribery, books and records, and +internal accounting controls provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”). +[15 U.S.C. § 78dd]. Cognizant is a global provider of information technology and business process +services. Much of its business involves using technically skilled workers around the world, +including in India, to provide such services to companies in the United States and Western Europe. +Between 2014 and 2016 Cognizant, acting through executives in the United States and India, +authorized contractors to pay on the company’s behalf and reimbursed them for a total of +approximately $3.6 million in bribes to Indian government officials to obtain government +construction-related permits and operating licenses in connection with the construction and +operation of commercial office buildings. + +2. In 2014 Cognizant authorized a contractor to pay a $2 million bribe to a senior +government official for the issuance of a planning permit for a project in Chennai, India. The +payment, along with a scheme to conceal a $2.5 million reimbursement to the contractor, was +authorized by two senior executives at Cognizant’s U.S. headquarters. In 2013 and 2014, +Cognizant’s Indian subsidiary authorized the same third party contractor to pay a bribe of +approximately $770,000 to a government official for an environmental clearance for a project in +Pune, India. In 2015, the Indian subsidiary retroactively authorized and reimbursed the same third +party contractor for approximately $870,000 in bribes that it had paid to government officials for +construction-related permits in Siruseri, India. Cognizant received ill-gotten gains of approximately +$16,394,351 as a result of the conduct. + +3. The unlawful payments were paid from Cognizant India’s bank accounts and were +not accurately reflected in Cognizant’s consolidated books and records. During the relevant period +Cognizant also failed to devise and maintain a sufficient system of internal accounting controls at its +corporate headquarters and at Cognizant India. This conduct took place in an environment in which +Cognizant failed to adequately enforce its corporate antibribery and anticorruption policies. + +4. As a result of its conduct Cognizant violated Exchange Act Sections 30A, +13(b)(2)(A), and 13(b)(2)(B). + +Respondent + +5. Cognizant is a New Jersey corporation headquartered in Teaneck, N.J. Throughout +the relevant period its common stock was registered with the Commission under Exchange Act + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on +any other person or entity in this or any other proceeding. + + + + +3 + +Section 12(b) and publicly traded on NASDAQ (symbol: CTSH). Cognizant files annual and +quarterly reports under Exchange Act Section 13. Although it operates in several countries, the +majority of Cognizant’s operations are conducted in India through Cognizant India, its largest +subsidiary. +Other Relevant Individuals and Entities + +6. Senior Executive-1 served in several senior executive positions at Cognizant in the +United States until his resignation in 2016. + +7. Senior Legal Executive-1 served in Cognizant’s legal function in the United States +until his resignation in 2016. + +8. Operations Officer-1 served in a senior operation role based in India until 2016. + +9. Real Estate Officer-1 served in Cognizant India’s corporate workplace function. + +10. Contracting Firm-1 is a multinational engineering and construction firm based in +India. It is publicly traded on exchanges in India but its securities are not registered with the +Commission. + +Facts + +Bribe Payments in Chennai, Tamil Nadu + +11. Cognizant’s construction project in Chennai, referred to as the KITS campus, +represents the company’s largest owned facility in India, encompassing 2.7 million square feet +with a capacity for approximately 17,500 employees. Cognizant engaged Contracting Firm-1 to +build the facility and obtain all necessary government permits. Construction began in 2011 prior to +the issuance of a required planning permit. +12. In 2014, during the course of construction, Real Estate Officer-1 was made aware +that an Indian government official had made a $2 million bribe demand to Contracting Firm-1 as a +condition for issuing the planning permit. Real Estate Officer-1 passed the information along to +his supervisor, Operations Officer-1. On April 21 and 22, 2014, the demand was discussed by +video conference among Real Estate Officer-1, Operations Officer-1, Senior Executive-1, and +Senior Legal Executive-1. Senior Executive-1 and Senior Legal Executive-1 participated in the +conference from the United States. Real Estate Officer-1 described the bribe demand in detail, +asked Senior Executive-1 and Senior Legal Executive-1 for guidance on how to proceed, and +suggested that Contracting Firm-1 could be reimbursed for the payment through a series of sham +change order requests to its contract. Senior Legal Executive-1 approved the method of +reimbursement and Senior Executive-1 authorized both the bribe payment and the suggested +method for disguising it. Real Estate Officer-1 was given the task of executing the scheme. His +direct supervisor Operations Officer-1 made no objection. + +13. In addition to discussing the bribe demand and the suggested method of disguising +the reimbursement during the videoconferences, Senior Executive-1 directed his subordinates to + + + +4 + +withhold future payments to Contracting Firm-1 if it resisted paying the bribe on Cognizant’s +behalf. Contracting Firm-1, which had been urging Cognizant to make the payment itself, +ultimately yielded to Senior Executive-1’s pressure and made the payment in late May or early +June 2014. Cognizant received the planning permit in November of that year. + +14. Following Real Estate Officer-1’s suggestion, Cognizant concealed the $2.5 million +reimbursement to Contracting Firm-1, including both the $2 million bribe and a $500,000 +commission for paying it, through a series of falsified contract change orders. Real Estate +Officer-1 selected change order requests from Contracting Firm-1 invoices that Cognizant had +previously rejected and retroactively “accepted” them, adjusting the cost amounts so that they +would total $2.5 million. The falsified invoices and supporting Excel spreadsheets were forwarded +to Senior Executive-1 for approval, with copies to Operations Officer-1. Senior Executive-1 +approved payments in February and March 2015, and the payments were made to Contracting +Firm-1 in installments between March 2015 and January 2016. +Bribe Payment in Pune, Maharashtra + +15. The bribe scheme in Pune also involved the construction of a commercial office +facility with Contracting Firm-1 as Cognizant’s builder. Construction began in 2012, prior to the +issuance of necessary permits. On this occasion, Cognizant India authorized Contracting Firm-1 to +pay an Indian official $770,000 in return for issuing an environmental clearance. The payment was +made in early 2013, and the environmental clearance was issued thereafter. In April of that year, +Contracting Firm-1 sought reimbursement through a change order request with a line item for +“Liasoning [sic] and consultations charge towards Environmental clearance.” Cognizant India +rejected the change order, but later approved the payment after Contracting Firm-1 changed the +rationale to “Change in the make of Workstation from Featherlite to Art matrix.” Cognizant India +reimbursed Contracting Firm-1 for the bribe payment in January 2014. +Bribe Payment in Siruseri, Tamil Nadu + +16. In Siruseri, Cognizant India authorized Contracting Firm-1 to pay bribes totaling +$840,000 to government officials for the issuance of several construction-related permits, including +a planning permit, a power permit from the local electricity board, and an environmental clearance. +Contracting Firm-1 made the payments in or around 2012, and Cognizant subsequently received +the permits in the second half of that year. The contractor submitted change order requests for +several inflated or unjustified work items. Cognizant India rejected the initial requests, but later +approved the change orders after the sham descriptions were revised. Cognizant India reimbursed +Contracting Firm-1 for the bribe payments in installments between 2015 and 2016. + +Bribes for Operating Licenses + +17. In addition to payments involving the above construction projects, Cognizant India +also made approximately $27,000 in bribe payments to government officials for the purpose of +obtaining certain operating licenses at six Indian facilities. The payments were made between +2013 and early 2016, mostly by lower to mid-level employees in Cognizant India’s corporate +workplace services department, with the assistance of collusive third party vendors. The licenses + + + +5 + +were for kitchen operating facilities, air and water consents, fire protection, and other purposes +related to operation of the buildings. The payments were disguised in Cognizant’s books and +records by the use of false generic descriptions, such as “liaison,” “consulting,” and +“miscellaneous” charges. + +Legal Standards and Violations + +18. Under Exchange Act Section 21C(a), the Commission may impose a cease-and- +desist order upon any person who is violating, has violated, or is about to violate any provision of +the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, or +would be a cause of the violation, due to an act or omission the person knew or should have known +would contribute to such violation. + +FCPA Violations + +19. Exchange Act Section 30A prohibits any issuer with a class of securities registered +pursuant to Section 12 of the Exchange Act, or any officer, director, employee, or agent acting on +behalf of such issuer, in order to obtain or retain business, from corruptly giving or authorizing the +giving of, anything of value to any foreign official for the purposes of influencing the official or +inducing the official to act in violation of his or her lawful duties, or to secure any improper +advantage, or to induce a foreign official to use his influence with a foreign governmental +instrumentality to influence any act or decision of such government or instrumentality. [15 U.S.C. +§ 78dd-1]. + +20. As described above, Cognizant paid bribes to an Indian government official to +induce that official to direct that a permit be issued to facilitate the completion of a construction +project. Cognizant made use of the means and instrumentalities of interstate commerce by hosting +video conferences at which American executives participated in formulating the scheme and by +exchanging email messages to and from the United States to approve the concealing of the +payment. Two U.S. senior executives at Cognizant took active steps to advance the scheme, and +Cognizant is liable for their conduct by respondeat superior. As a result, Cognizant violated +Exchange Act Section 30A. + +21. Exchange Act Section 13(b)(2)(A) requires every issuer with a class of securities +registered pursuant to Exchange Act Section 12 to make and keep books, records, and accounts, +which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the +assets of the issuer. [15 U.S.C. § 78m(b)(2)(A)]. + +22. Cognizant violated Exchange Act Section 13(b)(2)(A) by falsely characterizing +illicit payments to government officials as legitimate business expenses in its books and records. + +23. Exchange Act Section 13(b)(2)(B) requires every issuer with a class of securities +registered pursuant to Exchange Act Section 12 to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in +accordance with management’s general or specific authorization; (ii) transactions are recorded as + + + +6 + +necessary (I) to permit preparation of financial statements in conformity with generally accepted +accounting principles or any other criteria applicable to such statements, and (II) to maintain +accountability for assets; (iii) access to assets is permitted only in accordance with management’s +general or specific authorization; and (iv) the recorded accountability for assets is compared with +the existing assets at reasonable intervals and appropriate action is taken with respect to any +differences. [15 U.S.C. § 78m(b)(2)(B)]. + +24. Cognizant violated Section 13(b)(2)(B) by failing to devise and maintain a +sufficient system of internal accounting controls at its corporate headquarters and at Cognizant +India. Cognizant’s system for handling contractor change orders in India permitted managers to +conceal bribe payments through the manipulation of bogus construction charges. The company’s +procurement process did not include an effective review of the disbursement of funds for change +orders. Nor did it include an effective review of the application or renewal of facility permits and +licenses. Cognizant also did not adequately enforce its corporate policy against making improper +payments to government officials. And it failed to provide reasonable assurances that its Indian +subsidiary maintained accurate and complete records of transactions involving payments to +government officials. + +Cognizant’s Self-Disclosure, Cooperation, and Remedial Efforts + +25. In determining to accept the Offer, the Commission considered Respondent’s self- +disclosure, cooperation, and remedial efforts. Cognizant voluntarily disclosed this misconduct to +the Commission staff and timely shared the facts developed during the course of an internal +investigation by the audit committee of its board. Cognizant also cooperated by voluntarily +producing and translating documents, and making current or former employees, including those +who needed to travel internationally, available for interviews by the Commission staff. + +26. Cognizant’s remedial actions included: (i) terminating or imposing other discipline +on officers and employees who participated in or were aware of the improper conduct; +(ii) appointing new executive personnel, including a new president, general counsel, and heads of +global real estate and procurement; (iii) enhancing its existing compliance function and headcount; +(iv) consolidating its facility management operations and removing licensure responsibilities from +third parties; (v) enhancing its internal accounting controls and compliance functions with respect +to the construction of new facilities; (vi) enhancing its FCPA compliance policies relating to due +diligence and contracting of vendors and suppliers; and (vii) conducting enhanced anticorruption +training. + +Undertakings + + Respondent Cognizant has undertaken to: + +27. Cooperate fully with the Commission in any and all investigations, litigations or +other proceedings relating to or arising from the matters described in the Order. Cognizant agrees +that cooperation includes the following: + + + + +7 + +a. On an ongoing basis, producing, without service of a notice or subpoena, to +the Commission nonprivileged documents and other materials, wherever +located, in Respondent’s possession, custody, or control, and appropriate +privilege logs, as requested by the Division of Enforcement’s (“Division”) +staff and within 14 days of request unless otherwise agreed to in writing by +the Division’s staff; + +b. Using its best efforts to secure the full, truthful, and continuing cooperation +of Respondent’s current and former directors, officers, employees and +agents, including making those persons available for interviews and the +provision of testimony in any and all investigations, litigation or other +proceedings relating to or arising from matters described in the Order when +requested to do so by the Division’s staff, at Respondent’s expense; + +c. Using its best efforts to ensure its directors, officers and employees respond +to all inquiries related to any and all investigations, litigation or other +proceedings relating to or arising from the matters described in the Order +and any related proceedings when requested to do so by the Division’s staff; +and + +d. Using its best efforts to ensure its directors, officers, and employees testify +at trial and other judicial or administrative proceedings when requested to +do so by the Division’s staff. + +28. In determining whether to accept the Offer, the Commission has considered these +undertakings. + +IV + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Cognizant’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent Cognizant cease and +desist from committing or causing any violations and any future violations of Sections 30A, +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act. + + B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +$16,394,351, prejudgment interest of $2,773,017, and a civil monetary penalty of $6,000,000 to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to 31 U.S.C. §3717 or SEC Rule of Practice 600. Payment must be +made in one of the following ways: + + + + +8 + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Cognizant as a Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Charles E. Cain, Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + D. Respondent undertakes to: +1) Report to the Commission staff periodically during a two-year term, the +status of its remediation and implementation of compliance measures, particularly as to +the areas of due diligence on prospective and existing third-party consultants and +vendors, FCPA training and the testing of relevant controls including the collection and +analysis of compliance data. During this period, should Respondent discover credible +evidence, not already reported to Commission staff, that questionable or corrupt + + + +9 + +payments or questionable or corrupt transfers of value may have been offered, promised, +paid, or authorized by Respondent, or any entity or person acting on behalf of +Respondent, or that related false books and records have been maintained, Respondent +shall promptly report such conduct to the Commission staff. During this two-year period, +Respondent shall: (1) conduct an initial review and submit an initial report and +(2) conduct and prepare two follow-up reviews and reports, as described below: +a. Respondent shall submit to the Commission staff a written report +within 180 calendar days of the entry of this Order setting forth a complete +description of its FCPA and anti-corruption related remediation efforts to date, its +proposals reasonably designed to improve the policies and procedures of +Respondent for ensuring compliance with the FCPA and other applicable +anticorruption laws, and the parameters of the subsequent review (the “Initial +Report”). The Initial Report shall be transmitted to Robert I. Dodge, Assistant +Director, United States Securities and Exchange Commission, 100 F Street, NE, +Washington, DC, 20549-5631. Respondent may extend the time period for +issuance of the Initial Report with prior written approval of the Commission staff. +b. Respondent shall undertake two follow-up reviews, incorporating +any comments provided by the Commission staff on the previous report, to further +monitor and assess whether the policies and procedures of Respondent are +reasonably designed to detect and prevent violations of the FCPA and other +applicable anti-corruption laws (the “Follow-Up Reports”). +c. The Follow-up Report shall be completed by no later than 270 +days after the Initial Report. The second Follow-up Report shall be completed by +no later than 450 days after the completion of the Initial Report. Respondent may +extend the time period for issuance of the Follow-up Reports with prior written +approval of the Commission staff. +d. The periodic reviews and reports submitted by Respondent will +likely include proprietary, financial, confidential, and competitive business +information. Public disclosure of the reports could discourage cooperation, +impede pending or potential government investigations and thus undermine the +objectives of the reporting requirement. For these reasons, among others, the +reports and the contents thereof are intended to remain and shall remain +nonpublic, except (a) pursuant to court order, (b) as agreed by the parties in +writing, (c) to the extent that the Commission staff determines in its sole +discretion that disclosure would be in furtherance of the Commission’s discharge +of its duties and responsibilities, or (d) is otherwise required by law. +e. During this two-year period of review, Respondent shall provide +its external auditors with its annual internal audit plan and reports of the results of +internal audit procedures and its assessment of its FCPA compliance policies and +procedures. + + + +10 + +f. During the two-year period of review, Respondent shall provide +Commission staff with any written reports or recommendations provided by +Respondent’s external auditors in response to Respondent’s annual internal audit +plan, reports of the results of internal audit procedures, and its assessment of its +FCPA compliance policies and procedures. +2) Certify, in writing, compliance with the undertaking(s) set forth above. +The certification shall identify the undertaking(s), provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for +further evidence of compliance, and Respondent agrees to provide such evidence. The +certification and supporting material shall be submitted to Robert I. Dodge, Assistant +Director, United States Securities and Exchange Commission, 100 F Street, NE, +Washington, DC, 20549-5631 no later than sixty (60) days from the date of the +completion of the undertakings. + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4022.txt b/raw/aaer/2019/AAER-4022.txt new file mode 100644 index 0000000000000000000000000000000000000000..fcfc374e7a7b0ccf9831cac393d6fdb3aff593f6 --- /dev/null +++ b/raw/aaer/2019/AAER-4022.txt @@ -0,0 +1,171 @@ + + 1 + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85159 / February 15, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4022 / February 15, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19001 + +In the Matter of + +JEFFREY M. MATTICH, + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Jeffrey +M. Mattich (“Respondent” or “Mattich”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently +enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the +Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of +the rules and regulations thereunder. + + + 2 +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 and III.5 below, which are admitted, +Respondent consents to the entry of this Order Instituting Administrative Proceedings Pursuant to +Rule 102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Mattich, age 5 7, a resident of Plano, Texas, was a certified public accountant +licensed to practice in t he State of Pennsylvania, until his license expired in 2007. He served as +Chief Financial Officer of Home Solutions of America, Inc. (“HSOA”) from January 2006 until +January 2008. Mattich was not employed by HSOA in any capacity before that time. + +2. HSOA was, at all relevant times, a Delaware corporation, headquartered in Dallas, +Texas, until it moved to New Orleans, Louisiana. HSOA was engaged construction and disaster +remediation. At all relevant times, HSOA’s common stock was registered with the Commission +pursuant to Section 12(g) of the Securities Exchange Act of 1934 (“Exchange Act”). HSOA’s stock +traded on the NASDAQ National Market, until it was delisted on January 7, 2008 for failure to file +timely periodic reports. After that, HSOA traded in the Pink Sheets OTC until January 5, 2010, +when the registration of HSOA’s securities was revoked. + +3. On November 30, 2009, the Commission filed a complaint against Mattich and +others in Securities and Exchange Commission v. Home Solutions of America, Inc., Frank +Fradella, Brian M. Marshall, Jeffery M. Mattich, Rick J. O’Brien, Stephen C. Gingrich, Thomas L. +Davis, and Jeffrey T. Craft, Civil Action Number 3:09-cv-2269, in the United States District Court +for the Northern District of Texas. + +4. The Commission’s complaint alleged that, among other things, while serving as +CFO for HSOA, Mattich participated in conduct that constituted violations of antifraud and books +and records provisions of the federal securities laws. Specifically, the complaint alleged that +Mattich participated in various revenue-inflation, expense deferral, and account receivable +schemes that resulted in HSOA materially misstating its financial condition and operating results +in filings with the Commission, in offering documents, and in other statements to investors. + +5. On December 20, 2018, the court entered an order permanently enjoining Mattich, +by consent, from future violations of Sections 17(a)(2) and (a)(3) of the Securities Act of 1933 +(“Securities Act”), Section 13(b)(5) of the Exchange Act and Rules 13a-14, 13b2-1, and 13b2-2 +thereunder, and from aiding and abetting violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) +of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 thereunder. Mattich was also ordered to +pay $86,620 in disgorgement and a $50,000 civil money penalty. + + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Mattich’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Mattich is suspended from appearing or practicing before the Commission as +an accountant. + + B. After one year from the date of this order, Mattich may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission +(other than as a member of an audit committee, as that term is defined in Section 3(a)(58) +of the Securities Exchange Act of 1934). Such an application must satisfy the +Commission that Mattich’s work in his practice before the Commission as an accountant +will be reviewed either by the independent audit committee of the public company for +which he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in Section +3(a)(58) of the Securities Act of 1934. Such an application will be considered on a +facts and circumstances basis with respect to such membership, and the applicant’s +burden of demonstrating good cause for reinstatement will be particularly high given +the role of the audit committee in financial and accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + + (a) Mattich, or the public accounting firm with which he is associated, +is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + + (b) Mattich, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did not identify any +criticisms of or potential defects in Mattich’s or the firm’s quality control system that +would indicate that the respondent will not receive appropriate supervision; + + 4 + (c) Mattich has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Mattich acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not limited to, all +requirements relating to registration, inspections, concurring partner reviews and quality +control standards. + +C. The Commission will consider an application by Mattich to resume +appearing or practicing before the Commission provided that his state CPA license is +current and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Mattich’s character, integrity, professional conduct, or +qualifications to appear or practice before the Commission as an accountant. Whether an +application demonstrates good cause will be considered on a facts and circumstances basis +with due regard for protecting the integrity of the Commission’s processes. + + By the Commission. + + + + Brent J. Fields + Secretary + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4023.txt b/raw/aaer/2019/AAER-4023.txt new file mode 100644 index 0000000000000000000000000000000000000000..92df49f0351147223ffa2a75e79ce943b7fa9810 --- /dev/null +++ b/raw/aaer/2019/AAER-4023.txt @@ -0,0 +1,182 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85171 / February 21, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4023 / February 21, 2019 + +Admin. Proc. File No. 3-17950 + + +In the Matter of + +DAVID PRUITT, CPA + + + +ORDER DENYING MOTION TO AMEND THE ORDER INSTITUTING PROCEEDINGS + +David Pruitt, CPA, the former Vice President of Finance at the Army Sustainment +Division (“ASD”) of L3 Technologies, Inc., requests that we amend the order instituting +proceedings (“OIP”) in this matter.1 The OIP alleges that Pruitt caused L3 to violate Section +13(b)(2)(A) of the Securities Exchange Act of 1934, which requires that an issuer maintain +accurate books, records and accounts, and willfully violated Exchange Act Section 13(b)(5) and +Rule 13b2-1, which prohibit a person from knowingly circumventing or failing to implement a +system of internal accounting controls or knowingly falsifying any required book, record, or +account of an issuer. According to Pruitt, evidence contradicts three of the OIP’s factual +allegations. The Division of Enforcement opposes Pruitt’s request. We deny the motion. + +I. Background + The OIP alleges that Pruitt ordered subordinates to generate, but not submit, invoices for +an L3 client, the U.S. Army, thus causing L3 to improperly recognize revenue. The OIP further +alleges that Pruitt misled L3’s accounting staff and auditor that the invoices had been submitted. + +Pruitt claims that “key events in the OIP are false and without basis.” First, paragraph 21 +of the OIP alleges that Pruitt acted without the permission of his supervisors to invoice items as +part of L3’s contract with the Army. Pruitt claims that testimony and affidavits from Timothy +Keenan, Pruitt’s former accounting supervisor, to the effect that Keenan directed Pruitt to +prepare the invoices at issue and that Pruitt lacked the authority to determine the appropriate +accounting treatment disprove this allegation. Second, paragraph 27 of the OIP alleges that +Pruitt’s motive for generating the improper invoices was to help ASD reach its revenue goals so +that he could obtain a bonus. According to Pruitt, Keenan’s testimony that revenue recognition +did not trigger bonuses and that Pruitt was not involved in subsequent discussions regarding +adjustments senior management made to ASD’s financial results that determined bonus + +1 Exchange Act Release No. 80548, 2017 WL 1539857 (Apr. 28, 2017). +2 + + + +eligibility contradicts this allegation. Third, paragraphs 30 and 36 of the OIP allege that the +Army was not prepared to accept the invoices at issue and that it was therefore unreasonable for +Pruitt to prepare them. Pruitt claims that an affidavit from Roderick Hynes, a former L3 Senior +Program Manager, stating that the Army did request invoices, was prepared to accept them, and +paid for a substantial portion of the work invoiced undermines this allegation. +The Division responds that the allegations in paragraph 21 that Pruitt acted without his +supervisor’s approval remain in dispute because earlier statements Keenan made supported the +allegation; the Division states that Keenan “is subject to being impeached at trial and it is the +providence of the finder of fact at trial . . . to determine which of Keenan’s versions is factual.”2 +The Division also argues that the allegation in paragraph 27 that Pruitt was motivated by the +possibility of receiving a bonus is in dispute because the relevant time is when the invoices were +created “and not some later time when adjustments may have been made by others to achieve” +the requisite bonus threshold. According to the Division, Keenan also “said that the issuance of +the invoices ‘certainly’ played a part in reaching the bonus threshold . . . .” The Division argues +further that the allegations in paragraphs 30 and 36 of the OIP that the Army was not prepared to +accept the invoices at issue are in dispute based on the testimony of Karen Fletcher, the relevant +Army contracting officer, who testified that it was premature to submit the invoices. +II. Analysis + Rule of Practice 200(d)(1) provides that the Commission may amend an OIP to include +new matters of fact or law at any time, and Rule 200(d)(2) provides that prior to the filing of an +initial decision the administrative law judge presiding over the hearing may amend an OIP to +include new matters of fact or law that are within the scope of the original OIP.3 The Division +states that the claims in Pruitt’s motion concern facts that “are within the scope of the original +OIP and are so specific to the facts that will be disputed at the hearing” that the presiding +administrative law judge “is better situated to make the initial determination regarding the +content of the OIP.” We agree with the Division that the issues Pruitt’s motion raises are best +addressed by the administrative law judge at this stage in the proceeding. +We have applied Rule 200(d)(1) repeatedly to grant requested amendments that +incorporate subsequent developments in the case or correct clear errors—particularly when the +parties agree. As Pruitt notes, our practice has been to freely grant such requests subject to the +consideration that other parties not be surprised or prejudiced by the amendment.4 For example, + +2 The Division does not oppose amending paragraph 21 to read that Keenan “denied” and +“did recall” as opposed to the current version that says Keenan “denies” and does recall.” +3 17 C.F.R. § 201.200(d). +4 See Carl L. Shipley, Exchange Act Release No. 10870, 1974 WL 161761, at *4 (June 21, +1974) (“Where the purpose is merely to correct an error in pleading, to conform the pleadings to +the proof, or to take into account subsequent developments which should be considered in +disposing of the proceeding, amendment should be freely granted, subject only to the +consideration that other parties should be not surprised nor should their rights be prejudiced.”); +see also Rules of Practice, Exchange Act Release No. 35833, 1995 WL 370829, at * (June 23, +1995) (comment (d) to Rule 200) (citing Shipley and reiterating the standards therein). +3 + + + +we have granted motions to amend an OIP to clarify relevant corporate relationships and the +proper names of parties,5 and to reflect the results of subsequent related criminal proceedings.6 +But Pruitt cites no precedent—and we are unaware of any—where we have deleted allegations +based merely on a respondent’s disputed claim that they are not supported by the evidence. And +we have denied a motion to amend where a party opposed the motion on the ground that the +motion was “based on incomplete facts” and we determined that the record in the case +“require[d] further development.”7 We make that same determination here. + As we have stated, an “OIP does not establish facts, it alleges them.”8 In the case of an +OIP that sets the matter down for a hearing before an administrative law judge, the hearing +before the administrative law judge is normally the proper forum for the Division to try to +establish the basis for the allegations in the OIP and for a respondent to challenge them. Here, +the parties disagree about critical circumstances related to the allegations at issue. Given those +differences, and consistent with our rules and longstanding practice, the evidence regarding those +allegations can best be developed and assessed by the law judge in the first instance. As we have +made clear in other contexts, we are reluctant to “interfere[] with the orderly hearing process.”9 +Courts have shown similar reluctance to resolve disputes that are better handled, in the first +instance, by the trier of fact, reflecting a “particular wariness about forcing appellate courts to +prematurely untangle ‘factual controversies . . . that, before trial, may seem nebulous.’”10 + +5 See, e.g., Siming Yang, Exchange Act Release No. 73637, 2014 WL 6477195 (Nov. 19, +2014) (granting Division’s unopposed motion to amend OIP to include a subsidiary and add a +statutory basis for the proceedings); Birman Managed Care, Inc., Exchange Act Release No. +59074, 2008 WL 5169503 (Dec. 10, 2008) (granting joint motion to amend OIP to remove a +company that was not in fact a successor entity); IFG Network Secs., Inc., Exchange Act Release +No. 50008, 2004 WL 1563011 (July 13, 2004) (granting joint motion to amend OIP to dismiss +party that no longer existed and that received none of the commissions the Division sought to +disgorge); Steven Wise, Exchange Act Release No. 48850, 2003 WL 22827675 (Nov. 26, 2003) +(granting Division’s unopposed motion to amend OIP to correct identifying information). +6 See, e.g., James S. Tagliaferri, Exchange Act Release No. 31804, 2015 WL 5139389 +(Sept. 2, 2015) (granting motion to amend OIP to add respondent’s criminal conviction); Daniel +J. Gallagher, Exchange Act Release No. 70305, 2013 WL 4716026 (Sept. 3, 2013) (same); +Robert David Beauchene, Exchange Act Release No. 68974, 2013 WL 661619 (Feb. 25, 2013) +(same). +7 Laminaire Corp. (n/k/a Cavico Corp.), Exchange Act Release No. 56685, 2007 WL +3085021 (Oct. 22, 2007). +8 Tagliaferri, 2015 WL 5139389, at *2. +9 Eric David Wanger, Exchange Act Release No. 66678, 2012 WL 1037682, at *2 (Mar. +29, 2012); see also, e.g., Gary L. McDuff, Exchange Act Release No. 78066, 2016 WL 3254513 +(June 14, 2016) (denying interlocutory review on the basis of the Commission’s preference for a +single petition for review after the full development of a record). +10 Barham v. Ramsey, 434 F.3d 565, 577 (D.C. Cir. 2006) (quoting Johnson v. Jones, 515 +U.S. 304, 316-17 (1995)); see also Johnson, 515 U.S. at 317 (noting that interlocutory appeals + (continued. . . .) +4 + + + + Pruitt argues that he “should not be forced to expend limited resources to prepare a +defense against unfairly prejudicial allegations that lack factual basis.” We fail to see how his +situation differs from that of the typical respondent who disputes the allegations made in the OIP. +To the extent a respondent believes it is entitled to a ruling as a matter of law and that there are +no disputes of material fact, Rule of Practice 250 authorizes dispositive motions.11 + Although we have determined to deny Pruitt’s request under Rule of Practice 200(d)(1), +he may renew it before the law judge pursuant to Rule 200(d)(2).12 Pruitt claims that the +Division “espoused . . . new facts and legal theories” in its opposition brief and that as a result +“this motion cannot properly be directed to the ALJ for decision.” But the only motion before us +is Pruitt’s, and that motion, which seeks to delete allegations from the OIP, is clearly within the +scope of the OIP and, therefore, subject to the law judge’s authority under Rule 200(d)(2). + Pruitt also moves to stay the proceeding during our consideration of his motion to amend. +We deny that request as moot in light of our denial of the request to amend the OIP. We also +deny Pruitt’s request for oral argument because we have not determined that, pursuant to Rule of +Practice 451(a), “the presentation of facts and legal arguments in the briefs and record and the +decisional process would be significantly aided by oral argument.”13 +Accordingly, IT IS ORDERED that David Pruitt’s motion to amend the Order Instituting +Proceedings is denied; and it is further ORDERED that Pruitt’s request to stay these proceedings +is denied; and it is further ORDERED that Pruitt’s request for oral argument is denied. + +By the Commission. + + + + Brent J. Fields + Secretary + +(. . . .continued) +force appellate panels “to decide in the context of a less developed record, an issue very similar +to one they may well decide anyway later, on a record that will permit a better decision”). +11 17 C.F.R. § 201.250. +12 The parties may stipulate as to any amendments to the OIP that they agree should be +made as part of any renewed motion before the law judge pursuant to Rule 200(d)(2). See supra +note 2. We do not intend to suggest any view as to the outcome of any motion to amend the OIP +directed to the law judge or to the merits of this proceeding generally. +13 17 C.F.R. § 201.451(a) (setting forth the standard for granting oral argument). + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4024.txt b/raw/aaer/2019/AAER-4024.txt new file mode 100644 index 0000000000000000000000000000000000000000..b92fce69a3337bfd7c7aeaffe84b8273c35c9247 --- /dev/null +++ b/raw/aaer/2019/AAER-4024.txt @@ -0,0 +1,493 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85233 / March 1, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4024 / March 1, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19010 + + +In the Matter of + +DLL CPAS, LLC and +DEBRA LEE LINDAMAN, +CPA, + +Respondents. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND SECTION 21C OF +THE SECURITIES EXCHANGE ACT OF +1934, AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + + I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice against DLL CPAS, LLC (“DLL”) and +Debra Lee Lindaman (“Lindaman”) (collectively “Respondents”).2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . .(1) not to possess the requisite qualifications to represent others ; (2) to be +lacking in character or integrity, or to have engaged in unethical or imprope r professional +conduct; or (3) to have willfully violated, or willfully aided and abetted the violation of, any +provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + +2 + + + II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V., Respondents +consent to the entry of this Order Instituting Public Administrative and Cease-and-Desist +Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + + III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +SUMMARY + +1. This matter concerns securities violations by Lindaman and her audit firm, DLL, in +conducting deficient audits and interim reviews of five public company clients in violation of the +Public Company Accounting Oversight Board’s (“PCAOB”) Auditing Standards and Regulation +S-X. Lindaman’s audits and reviews for the five issuer clients involved numerous audit +deficiencies including, among other things, the failure to obtain sufficient appropriate audit +evidence, maintain audit documentation, reconcile underlying accounting records to the issuers’ +financial statements or footnotes, and perform adequate reviews of interim financial information. +In addition, with regard to two of the issuer clients, Lindaman’s audits were so deficient that they +could not be relied upon to verify the accuracy of the financial statements she audited. As a +result of these failures, Lindaman’s representations in audit reports that she conducted her audits +“in accordance with the standards of the Public Company Accounting Oversight Board” were +false. + + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +RESPONDENTS AND RELEVANT ENTITIES + +Respondents + +2. DLL, a Florida limited liability corporation, is a public accounting firm based in +Savannah, Georgia. Lindaman is DLL’s sole owner and proprietor. DLL, which registered with +the PCAOB on June 17, 2016, performed audits and interim reviews of the financial statements +for five issuers that are the subject of this recommendation, all of which file periodic reports with +the Commission pursuant to Section 13(a) and 15 (d) of the Securities Exchange Act of 1934 +(“Exchange Act”). On July 16, 2018, after the staff put Lindaman on notice regarding potential +securities law violations by her in connection with the audits at issue, DLL applied to the +PCAOB to have its registration withdrawn, and effective August 29, 2018, DLL’s registration +was withdrawn. + +3. Debra Lee Lindaman, age 57, who resides in Savannah, Georgia, is a licensed +certified public accountant (“CPA”) in Florida, New Jersey and Georgia. Prior to forming DLL, +Lindaman had no prior experience in serving as an auditor for SEC registrants. Lindaman has no +disciplinary history, and she is no longer auditing public companies. + +Relevant Entities + +4. CES Synergies, Inc. (“CES”), is a Nevada corporation with headquarters in +Crystal Springs, Florida. During the relevant period, CES’s common stock was registered with +the Commission pursuant to Section 12(g) of the Exchange Act, and the company filed periodic +reports with the Commission pursuant to Section 13(a) of the Exchange Act. On July 17, 2017, +CES filed a Form 15-12G with the Commission terminating its registration under the Exchange +Act, and the company is now a voluntary filer with the Commission. CES’s common stock is +quoted on OTC Link operated by OTC Markets Group Inc. (formerly the “Pink Sheets”) (“OTC +Link”). + +5. Kibush Capital Corp. (“Kibush”), is a Nevada corporation with headquarters in +Scottsdale, Arizona. Kibush’s common stock is registered with the Commission pursuant to +Section 12(g) of the Exchange Act, and the company files periodic reports with the Commission +pursuant to Section 13(a) of the Exchange Act. Kibush’s common stock is quoted on OTC Link. + +6. Leo Motors, Inc., (“Leo Motors”), is a Nevada corporation with headquarters in +Seoul, South Korea. Leo Motors’ common stock is registered with the Commission pursuant to +Section 12(g) of the Exchange Act, and the company files periodic reports with the Commission +pursuant to Section 13(a) of the Exchange Act. Leo Motors’ common stock is quoted on OTC +Link. + +7. American International Ventures, Inc. (“American International”), is a +Delaware corporation with headquarters in Lithia, Florida. During the relevant period, American +International’s common stock was registered with the Commission pursuant to Section 12(g) of +the Exchange Act during the relevant time, and the company filed periodic reports with the +Commission pursuant to Section 13(a) of the Exchange Act. On December 27, 2017, American + +4 + +International filed a Form 15-12G with the Commission terminating its registration under the +Exchange Act, and the company is now a voluntary filer with the Commission. American +International’s common stock is quoted on OTC Link. + +8. Omni Shrimp, Inc. f/k/a NaturalNano, Inc. (“Omni Shrimp”), is a Nevada +corporation with headquarters in Rochester, New York. Omni Shrimp’s common stock is +registered with the Commission pursuant to Section 12(b) of the Exchange Act, and the company +files periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act. Omni +Shrimp’s common stock is quoted on OTC Link. + +FACTS + +Background + +9. On June 2, 2016, Lindaman created DLL, and she registered DLL with the +PCAOB on June 17, 2016. Lindaman was a sole practitioner who had no prior experience in +serving as an auditor for Commission registrants. From December 2016 through February 2017, +Lindaman acquired CES, Kibush, Leo Motors, American International and Omni Shrimp +(collectively, the “Five Issuers”) as audit clients. The Five Issuers were previously audited by +another auditor who, in December 2016, was censured and barred by the PCAOB from being an +associated person of a registered public accounting firm. The PCAOB also had revoked the +registration of that auditor’s public accounting firm. + +10. Lindaman’s audits and reviews for the 2015 and 2016 fiscal year-end financial +statements for CES, Kibush, Leo Motors, and Omni Shrimp and quarterly reviews of American +International were deficient, evidencing numerous and repeated violations of auditing standards +concerning audit documentation, reconciliation of underlying accounting records to the issuers’ +financial statements or footnotes, audit evidence, and interim reviews. + +Failure to Obtain Audit Documentation + +11. PCAOB Auditing Standard (“AS”) No. 1215, Audit Documentation, requires that +the auditor must document the procedures performed, evidence obtained, and conclusions +reached with respect to relevant financial statement assertions. Audit documentation must +contain sufficient information to enable an experienced auditor, having no previous connection +with the engagement: (a) to understand the nature, timing, extent, and results of the procedures +performed, evidence obtained, and conclusions reached, and (b) to determine who performed the +work and the date such work was completed as well as the person who reviewed the work and +the date of such review. AS No. 1215, ¶ 6, Audit Documentation. + +12. Lindaman produced deficient audit workpapers related to the audits of Leo +Motors, Kibush, CES and Omni Shrimp. The audits consistently did not include evidence of the +procedures performed, evidence obtained, and conclusions reached with respect to relevant +financial statement assertions. + + +5 + +13. In particular, Lindaman’s audits of Leo Motors’ financial statements for the years +ended December 31, 2015, and 2016, and Kibush’s financial statements for the years ended +September 30, 2015, and September 30, 2016, were so deficient that they could not be relied +upon to verify the accuracy of the financial statements she audited. For these audits, the vast +majority of the balance sheet and income statement line items in the financial statements either +completely lacked any associated workpapers in the audit files, or there was not appropriate +documentation included in the workpapers that existed such as the procedures performed, +evidence obtained, or conclusions reached. + + 14. Lindaman’s workpapers for the Leo Motor’s audits also contained no testing of +several acquisitions, including a March 31, 2015 acquisition of Leo Motors Factory 1 &2 and +Leo Trading and a June 3, 2016 acquisition of LEO AIC, even though these acquisitions were +identified as “significant transactions” in an audit planning workpaper. Lindaman also did not +confirm or agree the Leo Motors’ largest single cash account to any bank statement or test any of +the inventory balances. + +15. In several of the audits, Lindaman’s workpapers lack documentation as to +confirmations relating to significant accounts receivable and accounts payable, as detailed by the +following: + +a. CES 2015 and 2016 year-end audits: Lindaman identified accounts receivable as a +significant and fraud risk area for both audit years. Although she selected 22 and 27 +receivable balances to confirm, respectively, for the 2015 and 2016 audits, the +workpapers reflect that she obtained merely three receivable confirmations back for each +audit year, did not include any documentation on the actual receivable confirmations +received from customers or conduct any follow-up as to confirmations that remained +unaddressed by customers. + +b. Omni Shrimp 2016 year-end audit: Although Lindaman identified accounts receivable as +a significant and fraud risk area, the workpapers contained no copies of confirmations +that were either sent or received relating to 6 account receivable balances (comprising of +85% of the total account receivable balance) that she selected for testing. + +c. Kibush 2015 and 2016 year-end audits: The workpapers lacked documentation of +confirmations received in connection with the testing of “Notes Payables” and “Related +Party Payables.” + +Failure to Reconcile Financial Statements and Underlying Accounting Records + +16. AS No. 2301, ¶ 41, The Auditor's Responses to the Risks of Material +Misstatement, requires that the auditor reconcile the financial statements with the underlying +accounting records. For the 2015 and 2016 audits of CES, Leo Motors, Omni Shrimp and +Kibush, Lindaman did not include in her workpapers documents demonstrating that she +reconciled underlying accounting records to the issuers’ financial statements or footnotes. +Lindaman included limited audit evidence in the workpapers evidencing that she tested any of +the financial statement footnotes or reconciled the footnotes to supporting documentation. Also, + +6 + +the audit files contained no documentation evidencing that she had reviewed any of the +company’s public filings before they were filed with the Commission. In this regard, none of the +audit workpapers contained a Form 10-K or a complete set of notes to the financial statements. + +17. In conducting the Kibush audit, Lindaman did not address several significant +inconsistencies contained in the company’s 2016 Form 10-K issued on February 10, 2017, +including that: (1) certain information in the “Derivative Financial Instruments” section of +footnote No. 2 did not agree to the financial statements (September 30, 2016 derivative liability +balance and September 30, 2015 change in fair value); (2) the shares of common stock issued to +convertible note holders, as discussed in footnote No. 7, did not agree to the Statement of +Stockholders’ Equity; (3) the amounts of $100,000 and $250,000 included in footnote No. 11 +were denoted in U.S. Dollars, while in Part 1, Item 2 of the Form 10-K those same amounts were +denoted in Australian Dollars; (4) Kibush’s income statement contained two incorrect line items +for “discontinued operations,” which were not corrected until Kibush filed a subsequent Form +10-K/A on February 21, 2017; and (5) Kibush reached a legal settlement concerning an +ownership dispute over “Angel Jade” on February 10, 2017, the same day Kibush filed its Form +10-K, but the Form 10-K made no mention of this legal settlement. Moreover, even though +Kibush filed an amended Form 10-K/A on February 21, 2017 (to correct an income statement +line item), Lindaman did not make sure the company disclosed the outcome of the “Angel Jade” +legal settlement as a subsequent event in the Company’s footnotes. Lindaman’s failure to +identify this issue did not rise to the standards as expected given that Kibush disclosed the +settlement in a Form 8-K filed on February 15, 2017. + +Failure to Obtain Audit Evidence + +18. AS No. 1105, ¶ 4, Audit Evidence, requires that the auditor plan and perform audit +procedures to obtain sufficient appropriate audit evidence to provide a reasonable basis for his or +her opinion. Sufficiency is the measure of the quantity of audit evidence. Appropriateness is the +measure of the quality of audit evidence, that is, its relevance and reliability. To be appropriate, +audit evidence must be both relevant and reliable in providing support for the conclusions on +which the auditor's opinion is based. AS No. 1105, ¶ 5-6, Audit Evidence. + +19. For the audits of CES, Leo Motors, Omni Shrimp, and Kibush, Lindaman did not +obtain appropriate audit evidence that was sufficient to support the opinion expressed in her audit +reports. For example, for the 2015 and 2016 audits, Lindaman did not obtain appropriate audit +evidence for her audit of CES’ accounts receivable, inventory, deferred tax asset, revenue, cost +of sales, general and administrative expenses, and going concern. Lindaman did not obtain +appropriate audit evidence for Leo Motor’s cash, inventory, and accounts receivable. For the +2016 audit of Omni Shrimp, she did not obtain appropriate audit evidence for inventory, +derivative liability, revenue, and cost of sales; and she did not obtain appropriate audit evidence +for Kibush’s derivative liability. + +Deficient Interim Reviews and Procedures + + 20. AS No. 4105, Reviews of Interim Financial Information, provides that the +procedures for conducting a review of interim financial information generally are limited to + +7 + +analytical procedures, inquiries, and other procedures that address significant accounting and +disclosure matters relating to the interim financial information to be reported. Analytical +procedures should include, among other things, comparing the quarterly interim financial +information with comparable information for the immediately preceding interim period and the +quarterly and year-to-date interim financial information with the corresponding period(s) in the +previous year, giving consideration to knowledge about changes in the entity's business and +specific transactions. The accountant performs these procedures to obtain a basis for +communicating whether he or she is aware of any material modifications that should be made to +the interim financial information for it to conform with generally accepted accounting principles. +AS No. 4105, ¶ 15-16, Reviews of Interim Financial Information. The auditor should also obtain +evidence that the interim financial information agrees or reconciles with the accounting records. +AS No. 4105, ¶ 18. Reviews of Interim Financial Information. Further, during an initial review +of interim financial information, an accountant should perform procedures that will enable him +or her to obtain sufficient knowledge of the entity's business and its internal control. If the +accountant has not audited the most recent annual financial statements, the accountant should +perform procedures to obtain such knowledge. AS No. 4105, ¶ 12-13, Reviews of Interim +Financial Information. + +21. Lindaman’s interim reviews of the Five Issuers were often perfunctory and +contained no meaningful analysis of variances in account balances from one period to another. +There was no documented rationale for which variances were investigated or, in many instances, +material variances were not investigated at all. For example, for the March 31, 2017 Omni +Shrimp review, Lindaman’s workpapers did not address a $66,573 decrease related to cash (a +33% variance). Further, the analytical procedures pertaining to the balance sheet and income +statement accounts did not contain comparisons of the current interim financial information to +the immediately preceding interim period or the quarterly and year-to-date interim financial +information with the corresponding period(s) in the previous year. For all interim reviews she +conducted there is no evidence that the financial information was agreed or reconciled to the +issuer’s accounting records and no interim review workpaper file included a copy of the issuer’s +Form 10-Q. + + 22. In addition, some of Lindaman’s interim reviews contained other substantial flaws. +For example, no interim review workpapers were produced by Lindaman for the June 30, 2017, +interim review of Kibush’s financial statements. In the case of the November 30, 2016 interim +review of American International’s financial statements, Lindaman did not include any +documents in the workpapers demonstrating that she obtained sufficient knowledge of the +company’s business and its internal controls. Further, there is no evidence that an EQR was +completed for the November 30, 2016 interim review of American International. + +Failure to Issue Accurate Audit Reports + +23. AS No. 3101, Report on Audited Financial Statements, requires that the auditor’s +report contain an opinion on the financial statements taken as a whole and contain a clear +indication of the character of the auditor’s work. The auditor is in a position to express an +unqualified opinion on the financial statements when the auditor conducted an audit in +accordance with the standards of the PCAOB and concludes that the financial statements, taken + +8 + +as a whole, are presented fairly, in all material respects, in conformity with the applicable +financial reporting framework. Additionally, Regulation S-X, 17 CFR § 210 et seq., prescribes +the qualifications of accountants and the contents of the accountants’ reports that must be +submitted with corporate financial statements. + + 24. The culmination of Lindaman’s numerous audit deficiencies rendered any +representations that the audits were conducted in accordance with PCAOB standards materially +false and misleading because the audits were out of compliance. Lindaman made such +representations in each of her audit reports for CES, Kibush, Leo Motors, and Omni Shrimp, +falsely certifying that her audits of the issuers’ financial statements were conducted in +accordance with the standards of the PCAOB. + +Applicable Securities Laws + + +25. Rule 2-02(b)(1) of Regulation S-X requires an accountant to state “whether the +audit was made in accordance with generally accepted auditing standards.” As used with respect +to Regulation S-X in relation to audits of issuers, the phrase “generally accepted auditing +standards” means the “the standards of the PCAOB plus any applicable rules of the Commission.” +SEC Release No. 34-49708 (May 14, 2004). + +26. In administrative proceedings, the Commission may impose sanctions upon any +person who is, was, or would be a cause of a violation, due to an act or omission the person knew +or should have known would contribute to such violation. In order to establish that a person +caused a violation, the Commission has specifically ruled that a showing of negligence will +suffice. + +27. An issuer violates Section 13(a) of the Exchange Act, and Exchange Act Rules +13a-1 and 13a-13, when such issuer of registered securities files with the Commission factually +inaccurate annual and quarterly reports. +28. Exchange Act Section 4C(a) and Rule 102(e)(1) of the Commission’s Rules of +Practice authorize the Commission to institute administrative proceedings to determine whether a +person has engaged in “improper professional conduct, and censure or temporarily or +permanently deny that person of the privilege of appearing or practicing before the Commission. +In administrative proceedings, the Commission may impose sanctions upon any person who is, +was, or would be a cause of a violation, due to an act or omission the person knew or should +have known would contribute to such violation. In order to establish that a person caused a +violation, negligence will suffice. + +FINDINGS + +29. Based on the foregoing, the Commission finds that DLL violated Regulation S-X +Rule 2-02(b)(1); and that DLL caused violations of Exchange Act Section 13(a), and Exchange +Act Rules 13a-1 and 13a-13 thereunder. + +30. Based on the foregoing, the Commission finds that Lindaman caused violations of + +9 + +Regulation S-X Rule 2-02(b)(1), Exchange Act Section 13(a), and Exchange Act Rules 13a-1 +and 13a-13 thereunder. + +31. Based on the foregoing, the Commission finds that DLL and Lindaman engaged +in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. + + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondents DLL and Lindaman shall cease and desist from committing or +causing any violations and any future violations of Exchange Act Section and 13(a), and +Exchange Act Rules 13a-1, and 13a-13 promulgated thereunder, and Regulation S-X Rule 2- +02(b)(1). + +B. Respondents DLL and Lindaman are denied the privilege of appearing or +practicing before the Commission as accountants. + +C. Respondents DLL and Lindaman shall be held jointly and severally liable for, and +shall within 10 days of the entry of this Order, pay disgorgement of $25,000 and prejudgment +interest of $1,387.27 to the Securities and Exchange Commission for transfer to the general fund of +the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not +made, additional interest shall accrue pursuant to SEC Rule of Practice 600. + +D. Respondents DLL and Lindaman shall be held jointly and severally liable for, and +shall, within 10 days of the entry of this Order, pay a civil money penalty in the amount of +$25,000 to the Securities and Exchange Commission for transfer to the general fund of the United +States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. §3717. + +E. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via +Pay.gov through the SEC website at +http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or + +10 + +United States postal money order, made payable to the Securities +and Exchange Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +F. Payments by check or money order must be accompanied by a cover letter +identifying each Respondent in these proceedings, and the file number of these proceedings. +A copy of the cover letter and check or money order must be simultaneously sent to Anita +Bandy, Associate Director, Division of Enforcement, Securities and Exchange Commission, +100 F St., N.E., Washington, DC 20549. + +G. Amounts ordered to be paid as civil money penalties pursuant to this Order +shall be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees that in any +Related Investor Action, he shall not argue that he is entitled to, nor shall he benefit by, offset +or reduction of any award of compensatory damages by the amount of any part of +Respondent’s payment of a civil penalty in this action (“Penalty Offset”). If the court in any +Related Investor Action grants such a Penalty Offset, Respondent agrees that he shall, within +30 days after entry of a final order granting the Penalty Offset, notify the Commission’s +counsel in this action and pay the amount of the Penalty Offset to the Securities and +Exchange Commission. Such a payment shall not be deemed an additional civil penalty and +shall not be deemed to change the amount of the civil penalty imposed in this proceeding. For +purposes of this paragraph, a “Related Investor Action” means a private damages action +brought against Respondent by or on behalf of one or more investors based on substantially the +same facts as alleged in the Order instituted by the Commission in this proceeding. + + +11 + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondent, Lindaman, and further, any debt for disgorgement, prejudgment +interest, civil penalty or other amounts due by Respondents under this Order or any other +judgment, order, consent order, decree or settlement agreement entered in connection with this +proceeding, is a debt for the violation by Respondents of the federal securities laws or any +regulation or order issued under such laws, as set forth in Section 523(a)(19) of the +Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4025.txt b/raw/aaer/2019/AAER-4025.txt new file mode 100644 index 0000000000000000000000000000000000000000..32ec40ceb5da98c7867060f9cf5f3d8267bad2f4 --- /dev/null +++ b/raw/aaer/2019/AAER-4025.txt @@ -0,0 +1,441 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85234 / March 1, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4025 / March 1, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19011 + + +In the Matter of + + +ARTHUR VIOLA, + + +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND SECTION 21C OF +THE SECURITIES EXCHANGE ACT OF +1934, AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice against Arthur Viola (“Viola” or +“Respondent”).2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . .(1) not to possess the requisite qualifications to represent others ; (2) to be +lacking in character or integrity, or to have engaged in unethical or improper professional +conduct; or (3) to have willfully violated, or willfully aided and abetted the violation of, any +provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct. + + +2 + + + II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over him and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V., Respondent +consents to the entry of this Order Instituting Public Administrative and Cease-and-Desist +Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + + III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This matter concerns deficient Engagement Quality Reviews (“EQRs”) Viola +conducted of five public company clients of DLL CPAS LLC (“DLL”), a Florida limited liability +corporation, and Debra Lee Lindaman (“Lindaman”), DLL’s sole owner and proprietor, in +violation of the Public Company Accounting Oversight Board’s (“PCAOB”) Auditing Standards +and Regulation S-X. Lindaman’s audits and reviews for the five issuer clients involved +numerous audit deficiencies including, among other things, the failure to obtain sufficient +appropriate audit evidence, maintain audit documentation, reconcile underlying accounting +records to the issuers’ financial statements or footnotes, and perform adequate reviews of interim +financial information. In addition, with regard to two of the issuer clients, Lindaman’s audits +were so deficient that they could not be relied upon to verify the accuracy of the financial +statements she audited. Viola, who conducted the EQRs on these audits, did not conduct his +reviews pursuant to PCAOB standards. As a result, Viola’s EQRs of Lindaman’s audits and +reviews were deficient. + + + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +RESPONDENT AND RELEVANT ENTITIES + +Respondent + +2. Arthur Viola resides in New York City, New York. Viola served as the +engagement quality reviewer for eleven of the deficient audits and reviews Lindaman conducted +of the five issuers. Viola is not a CPA and has never been a licensed CPA. + +Relevant Persons and Entities + +3. DLL, a Florida limited liability corporation, is a public accounting firm based in +Savannah, Georgia. Lindaman is DLL’s sole owner and proprietor. DLL, which registered with +the PCAOB on June 17, 2016, performed audits and interim reviews of the financial statements +for five issuers that are the subject of this recommendation, all of which file periodic reports with +the Commission pursuant to Section 13(a) and 15 (d) of the Securities Exchange Act of 1934 +(“Exchange Act”). On July 16, 2018, after the staff put Lindaman on notice regarding potential +securities law violations by her in connection with the audits at issue, DLL applied to the +PCAOB to have its registration withdrawn, and effective August 29, 2018, DLL’s registration +was withdrawn. + +4. Debra Lee Lindaman, age 57, who resides in Savannah, Georgia, is a licensed +certified public accountant (“CPA”) in Florida, New Jersey and Georgia. Prior to forming DLL, +Lindaman had no prior experience in serving as an auditor for SEC registrants. Lindaman has no +disciplinary history, and she is no longer auditing public companies. + +5. CES Synergies, Inc. (“CES”), is a Nevada corporation with headquarters in Crystal +Springs, Florida. During the relevant period, CES’s common stock was registered with the +Commission pursuant to Section 12(g) of the Exchange Act, and the company filed periodic +reports with the Commission pursuant to Section 13(a) of the Exchange Act. On July 17, 2017, +CES filed a Form 15-12G with the Commission terminating its registration under the Exchange +Act, and the company is now a voluntary filer with the Commission. CES’s common stock is +quoted on OTC Link operated by OTC Markets Group Inc. (formerly the “Pink Sheets”) (“OTC +Link”). + + 6. Kibush Capital Corp. (“Kibush”), is a Nevada corporation with headquarters in +Scottsdale, Arizona. Kibush’s common stock is registered with the Commission pursuant to +Section 12(g) of the Exchange Act, and the company files periodic reports with the Commission +pursuant to Section 13(a) of the Exchange Act. Kibush’s common stock is quoted on OTC Link. + + 7. Leo Motors, Inc., (“Leo Motors”), is a Nevada corporation with headquarters in +Seoul, South Korea. Leo Motors’ common stock is registered with the Commission pursuant to +Section 12(g) of the Exchange Act, and the company files periodic reports with the Commission +pursuant to Section 13(a) of the Exchange Act. Leo Motors’ common stock is quoted on OTC +Link. + + + +4 + + 8. American International Ventures, Inc. (“American International”), is a +Delaware corporation with headquarters in Lithia, Florida. During the relevant period, American +International’s common stock was registered with the Commission pursuant to Section 12(g) of +the Exchange Act during the relevant time, and the company filed periodic reports with the +Commission pursuant to Section 13(a) of the Exchange Act. On December 27, 2017, American +International filed a Form 15-12G with the Commission terminating its registration under the +Exchange Act, and the company is now a voluntary filer with the Commission. American +International’s common stock is quoted on OTC Link. + + 9. Omni Shrimp, Inc. f/k/a NaturalNano, Inc. (“Omni Shrimp”), is a Nevada +corporation with headquarters in Rochester, New York. Omni Shrimp’s common stock is +registered with the Commission pursuant to Section 12(b) of the Exchange Act, and the company +files periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act. Omni +Shrimp’s common stock is quoted on OTC Link. + + +FACTS + +Viola’s Deficient EQRs + + 10. Viola performed EQRs for Lindaman’s audits of the 2015 and 2016 fiscal years for +Leo Motors, Omni Shrimp, and Kibush. Viola also performed EQRs for Lindaman’s interim +reviews of the first quarters-ended March 31, 2017, for CES, Leo Motors, and Omni Shrimp. +Viola also performed EQRs for Lindaman’s review of Kibush’s quarter-ended December 31, +2016, and for American International’s quarter-ended February 28, 2017. + + 11. The EQR must possess the level of knowledge and competence related to +accounting, auditing, and financial reporting required to serve as the engagement partner on the +engagement under review. AS No. 1220, ¶ 5 Engagement Quality Review. As the EQR, Viola +was subject to several additional requirements, including: + +a. AS No. 1220, ¶ 12, Engagement Quality Review, which requires that an EQR perform her +review with due professional care; + +b. AS No. 1015, ¶ 4-5, Due Professional Care in the Performance of Work, which sets forth +that due professional care concerns what the independent auditor does and how well he or +she does it. An auditor should possess “the degree of skill commonly possessed” by +other auditors and should exercise it with “reasonable care and diligence” (that is, with +due professional care); and + +c. AS No. 1220, ¶ 10-11, Engagement Quality Review, which requires an EQR to evaluate +the engagement team’s assessment of, and audit responses to significant risks identified +by the engagement team, including fraud risks and failing to evaluate whether the +engagement documentation reviewed indicates the engagement team responded +appropriately to significant risks and supports the conclusions reached by the engagement +team. + +5 + + + 12. Viola did not possess the necessary qualifications to be an EQR. Viola has never +been a licensed CPA, and he has not taken any auditing or accounting academic courses (other +than in college) or continuing professional education courses as it relates to accounting or +auditing matters. Further, he had no prior auditing experience and never previously served as an +EQR. + +13. Viola repeatedly did not perform adequate EQRs for Lindaman’s audits and +interim reviews. For example, in connection with his EQRs of Kibush’s 2015 and 2016 audits, +Viola did not properly identify discrepancies relating to the accounting and disclosure of +Kibush’s acquisition and subsequent deconsolidation of an entity called “Angel Jade,” which +was described in detail in Kibush’s 2016 Form 10-K. Kibush’s Form 10-K was also restated +twice for issues related to Angel Jade. Viola, however, did not identify Angel Jade as an area of +significant judgment in the audit engagement planning. Further, the lack of documentation in the +audit file concerning Angel Jade should have raised a red flag for Viola given the unusual +circumstances relating to Angel Jade, including the change in control and litigation matters that +were discussed in the Form 10-K filed September 30, 2016. Moreover, the audit workpapers +contained no audit testing of the Angel Jade acquisition or of the subsequent accounting for the +deconsolidation and recording of a “discontinued operations” line item on the company’s income +statement. Viola, however, held no discussions with Lindaman about Angel Jade nor raised any +questions as to why there was no documentation concerning these transactions. + +14. Viola’s EQRs of Lindaman’s audits of Leo Motors and Omni Shrimp were also +deficient. In assessing significant and fraud risks, Viola reviewed a “risk assessment summary +form” in the workpapers for Leo Motors and Omni Shrimp, highlighting that sales and accounts +receivable were identified as significant and fraud risks. These workpapers, however, did not +document how the risks would be addressed other than a generic description that sales and +accounts receivable should be subject to “Extended Procedures.” Lindaman’s audit programs for +sales and accounts receivable contained no procedures specifically responsive to the assessed +risks, the substantive testing audit workpapers for sales and accounts receivable lacked +appropriate audit documentation and did not contain sufficient appropriate evidence supporting +the conclusions reached. However, there is no evidence in the workpapers that Viola discussed +the fraud risks with Lindaman or reviewed these areas at all. + + 15. Viola did not evaluate the identified areas of risks or determine whether +Lindaman appropriately responded to the risks or whether her conclusions were supported given +that the underlying audit workpapers lacked documentation concerning the responses to and +disposition of the risks. + +a. Viola did not exercise due professional care in his review of the audit planning +workpapers or engagement completion document. He represented on the EQR +checklists for these audits that he reviewed the audit “engagement completion +document” (as required by AS No. 1220, ¶ 10, Engagement Quality Review). +The engagement completion workpaper in the Leo Motors and Omni Shrimp +audit files contained no documentation except the notation “none” placed next to +each of eleven checklist items that required a response. These included items + +6 + +such as “Other significant findings or issues, including any significant unusual +transactions” and “Risks of material misstatement determined to be significant +risks and the results of auditing procedures in response to such risks.” However, +other planning workpaper reflected the existence of several “unusual +transactions” and “significant risks” including: (1) Leo Motors workpapers +reflecting that “Purchase of 50% of Subsidiaries” was a “significant unusual +transaction;” (2) Omni Shrimp planning workpapers reflecting that “Assuming +derivative liability from “shell” company” was a “significant unusual +transaction;” and (3) the risk assessment forms for Leo Motors and Omni Shrimp +reflecting that sales and accounts receivable were significant and fraud risk areas. +Viola, however, did not question that the engagement completion documents +directly contradicted other planning audit workpapers that he purportedly +reviewed, nor did he review further audit documentation concerning the +“significant unusual transactions.” + +b. For the EQRs of Leo Motors, Viola did not exercise due professional care in +evaluating significant judgements relating to engagement planning – an area that +he indicated that he reviewed on the EQR checklist. In planning the audit, +Lindaman made a significant judgement in deciding not to observe the +company’s inventory, its second largest asset (representing 19% of the total +assets at December 31, 2016). Viola did not ask Lindaman why she did not +observe the inventory because he did not know that observing inventory was a +standard auditing practice. + +16. For the American International reviews, Viola did not identify that Lindaman had +not obtained a sufficient understanding of American International’s business and internal +controls, and that she had not appropriately considered risks of material misstatement due to +fraud. Neither the November 30, 2016 nor the February 28, 2017 interim review workpapers +contained evidence that Lindaman considered misstatement risk, despite the company reporting +in its first and second quarter Forms 10-Q that its disclosure controls and procedures were not +effective. + +17. For all Five Issuers, Viola did not conduct an adequate EQR and identify +significant engagement deficiencies in the interim reviews. Specifically, Viola did not identify +that Lindaman’s interim financial statement analytical procedures did not comply with the +relevant auditing standards, were perfunctory and void of any meaningful analysis of variances +in account balances from one period to another. Further, the analytical procedures pertaining to +the balance sheet and income statement accounts did not contain comparisons of the current +interim financial information to the immediately preceding interim period or the quarterly and +year-to-date interim financial information with the corresponding period(s) in the previous year. + +Applicable Securities Laws + +18. Rule 2-02(b)(1) of Regulation S-X requires an accountant to state “whether the +audit was made in accordance with generally accepted auditing standards.” As used with respect +to Regulation S-X in relation to audits of issuers, the phrase “generally accepted auditing + +7 + +standards” means the “the standards of the PCAOB plus any applicable rules of the Commission.” +SEC Release No. 34-49708 (May 14, 2004). + +19. In administrative proceedings, the Commission may impose sanctions upon any +person who is, was, or would be a cause of a violation, due to an act or omission the person knew +or should have known would contribute to such violation. In order to establish that a person +caused a violation, the Commission has specifically ruled that a showing of negligence will +suffice. + +20. An issuer violates Section 13(a) of the Exchange Act, and Exchange Act Rules +13a-1 and 13a-13, when such issuer of registered securities files with the Commission factually +inaccurate annual and quarterly reports. +21. Exchange Act Section 4C(a) and Rule 102(e)(1) of the Commission’s Rules of +Practice authorize the Commission to institute administrative proceedings to determine whether a +person has engaged in “improper professional conduct, and censure or temporarily or +permanently deny that person of the privilege of appearing or practicing before the Commission. +In administrative proceedings, the Commission may impose sanctions upon any person who is, +was, or would be a cause of a violation, due to an act or omission the person knew or should +have known would contribute to such violation. In order to establish that a person caused a +violation, negligence will suffice. + +FINDINGS + +22. Based on the foregoing, the Commission finds that Viola caused violations of +Regulation S-X Rule 2-02(b)(1), Exchange Act Section 13(a), and Exchange Act Rules 13a-1 +and 13a-13 thereunder. + +23. Based on the foregoing, the Commission finds that Viola engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice. + + + IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in the Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent Viola shall cease and desist from committing or causing any +violations and any future violations of Exchange Act Section 13(a), and Exchange Act Rules +13a-1 and 13a-13 promulgated thereunder, and Regulation S-X Rule 2-02(b)(1). + +B. Respondent Viola is denied the privilege of appearing or practicing before the +Commission as an accountant. + + +8 + +C. After five years from the date of this order, Respondent Viola may request +that the Commission consider his reinstatement by submitting an application (attention: Office +of the Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934). Such an application must satisfy the Commission that +Respondent Viola’s work in his practice before the Commission as an accountant will be +reviewed either by the independent audit committee of the public company for which he works +or in some other acceptable manner, as long as he practices before the Commission in this +capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act +of 1934. Such an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating good cause for +reinstatement will be particularly high given the role of the audit committee in financial and +accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + + (a) Respondent Viola, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Respondent Viola, or the registered public accounting firm with +which he is associated, has been inspected by the Board and that inspection did not identify any +criticisms of or potential defects in the Respondent’s or the firm’s quality control system that +would indicate that the respondent will not receive appropriate supervision; + (c) Respondent Viola has resolved all disciplinary issues with the +Board, and has complied with all terms and conditions of any sanctions imposed by the Board +(other than reinstatement by the Commission); and + + (d) Respondent Viola acknowledges his responsibility, as long as he +appears or practices before the Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and quality control standards. + +D. The Commission will consider an application by Respondent Viola to +resume appearing or practicing before the Commission provided that his state CPA license +is current and he has resolved all other disciplinary issues with the applicable state boards +of accountancy. However, if state licensure is dependent on reinstatement by the + +9 + +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced +above, any other matters relating to Respondent Viola’s character, integrity, professional +conduct, or qualifications to appear or practice before the Commission as an accountant. +Whether an application demonstrates good cause will be considered on a facts and +circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + +E. Respondent Viola shall pay disgorgement of $4,800 and prejudgment interest +of $228.48, but the payment of such amounts is waived based upon Respondent's sworn +representations in his Statement of Financial Condition dated September 10, 2018 +("Financial Statement"), and other documents submitted to the Commission. Based upon +Respondent's sworn representations in his Financial Statement and other documents +submitted to the Commission, the Commission is not imposing a civil money penalty +against Respondent Viola. + +F. The Division of Enforcement ("Division") may, at any time following the +entry of this Order, petition the Commission to: (1) reopen this matter to consider whether +Respondent Viola provided accurate and complete financial information at the time such +representations were made; and (2) seek an order directing payment of disgorgement, pre- +judgment interest and a maximum civil penalty allowable under the law. No other issue +shall be considered in connection with this petition other than whether the financial +information provided by Respondent Viola was fraudulent, misleading, inaccurate, or +incomplete in any material respect. Respondent Viola may not, by way of defense to any +such petition: (1) contest the findings in this Order; (2) assert that payment of +disgorgement, interest or a penalty should not be ordered; (3) contest the amount of +disgorgement and interest to be ordered; (4) contest the imposition of the maximum penalty +allowable under the law; or (5) assert any defense to liability or remedy, including, but not +limited to, any statute of limitations defense. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. +§523(a)(19). + + By the Commission. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4026.pdf b/raw/aaer/2019/AAER-4026.pdf new file mode 100644 index 0000000000000000000000000000000000000000..b805757a55146240fc8ce576b9901717e698f64b Binary files /dev/null and b/raw/aaer/2019/AAER-4026.pdf differ diff --git a/raw/aaer/2019/AAER-4026.txt b/raw/aaer/2019/AAER-4026.txt new file mode 100644 index 0000000000000000000000000000000000000000..8a914ba9a12c843bb9d8ed901ae2fa2b41881b7a --- /dev/null +++ b/raw/aaer/2019/AAER-4026.txt @@ -0,0 +1,53 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85237 / March 1, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4026 / March 1, 2019 + +Admin. Proc. File No. 3-18994 + + +In the Matter of + +JOSEPH S. AMUNDSEN, CPA, +MICHAEL T. REMUS, CPA, AND +MICHAEL REMUS CPA. + + + +ORDER +On February 8, 2019, the Commission issued an order (the “OIP”) instituting +administrative and cease-and-desist proceedings pursuant to Sections 4C(a)(2) and (a)(3) and +21C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) and (iii) of the Commission’s +Rules of Practice against Joseph S. Amundsen, CPA, Michael T. Remus, CPA, and Michael +Remus CPA (collectively, Respondents).1 In compliance with the statutory provision governing +cease-and-desist proceedings, the OIP specified that a “public hearing before the Commission for +the purposes of taking evidence . . . shall be convened not earlier than 30 days and not later than +60 days” from service of the OIP.2 The statute also provides that “an earlier or later date” for the +hearing may be “set by the Commission with the consent of any respondent so served.”3 +Respondents were served with the OIP by February 11, 2019. As a consequence, in the +absence of consent by all respondents regarding a later hearing date, a public hearing will be set +for a date on or before April 12, 2019. To facilitate the orderly and expeditious resolution of this +matter, it is ORDERED that the parties shall file a statement advising the Commission of any +agreement to a later hearing date (or a statement that no agreement could be reached) as soon as +practicable, and not later than the day after the prehearing conference contemplated by the OIP. +The Commission will specify further procedures by subsequent order. + + +1 Exchange Act Release No. 85081, 2019 WL 497277 (Feb. 8, 2018). +2 Id. at *8. +3 15 U.S.C. § 78u-3(b). +2 + +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4028.txt b/raw/aaer/2019/AAER-4028.txt new file mode 100644 index 0000000000000000000000000000000000000000..e9803994a631e4144d7cb0fbf7d6bc6b39133ab2 --- /dev/null +++ b/raw/aaer/2019/AAER-4028.txt @@ -0,0 +1,801 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85261 / March 6, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4028 / March 6, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19022 + + +In the Matter of + +Mobile TeleSystems PJSC, + +Respondent. + +ORDER INSTITUTING CEASE-AND-DESIST +PROCEEDINGS, PURSUANT TO SECTION +21C OF THE SECURITIES EXCHANGE ACT +OF 1934, MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + + +I + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that cease-and-desist proceedings be, and hereby are, instituted pursuant to Section +21C of the Securities Exchange Act of 1934 (“Exchange Act”), against Mobile TeleSystems PJSC +(“MTS” or “Respondent”). + +II + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings, Pursuant to 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + + + + 2 +III + +On the basis of this Order and Respondent’s Offer, the Commission finds1 that + +Summary + +A. These proceedings arise out of violations of the anti-bribery, books and records, and +internal accounting controls provisions of the Foreign Corrupt Practices Act (“FCPA”) [15 U.S.C. +§§ 78dd-1, 78m(b)(2)(A), and 78m(b)(2)(B)] by MTS. + +B. From 2004 to at least 2012, MTS offered and paid bribes in violation of Section +30A of the Exchange Act, to a government official in Uzbekistan in connection with its Uzbek +operations. The improper payments enabled MTS to enter the Uzbek market, to operate as a +telecommunications provider, and to receive commercial benefits to its operations. Those benefits +continued until 2012, when the Uzbek government expropriated MTS’s Uzbek operations. During +the course of the scheme, MTS made at least $420 million in illicit payments for the purpose of +obtaining and retaining business, and those payments generated more than $2.4 billion in revenues. +These illicit payments were made through a variety of means, including equity transactions with +the government official, sham contracts, and in the form of charitable contributions or sponsorships +at the direction of the government official. These payments were improperly characterized as +legitimate expenses in MTS’s books and records. MTS filed its financial statements, incorporating +the falsely recorded payments, with the Commission throughout the relevant period. + +C. As a result of the scheme, MTS violated Exchange Act Section 30A by agreeing to +make corrupt payments to a government official in Uzbekistan for the purpose of obtaining or +retaining business. MTS also violated Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B) by +improperly recording the payments as legitimate expenses in its books and records and by failing +to devise and maintain a reasonable system of internal accounting controls. + +Respondent + +D. Mobile TeleSystems PJSC is a provider of telecommunications services organized +under the laws of Russia and headquartered in Moscow, Russia. It issues and maintains a class of +publicly traded securities registered pursuant to Exchange Act Section 12(b) that traded on the +New York Stock Exchange throughout the relevant period. + +Other Relevant Entities + +E. JV Uzdunrobita (“Uzdunrobita”) was a telecommunications operator in Uzbekistan +from the 1990s until 2012. Uzdunrobita became a subsidiary of MTS in 2004 and operated as such +until 2012. Uzdunrobita was managed by local managers and had a supervisory board that included +MTS senior managers. + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + 3 + +F. Government Official A is a family member of the former President of Uzbekistan +and was herself an Uzbek government official. She had influence over decisions made by UzACI, +the regulatory authority governing telecommunications in Uzbekistan and held an ownership +interest in Uzdunrobita through Swisdorn Ltd. + +G. Swisdorn Ltd is a company beneficially owned and operated by Government +Official A. Swisdorn was formed in Gibraltar and was the entity through which MTS made most +of its payments for the benefit of Government Official A. + +H. Takilant Ltd is a company beneficially owned and operated by Government +Official A. Takilant was formed in Gibraltar and was the entity through which MTS made some +payments for the benefit of Government Official A. + +Facts + +Entry Into Uzbekistan + +I. In July 2004 MTS entered the Uzbek telecommunications market by purchasing a +majority interest in Uzdunrobita, a company with existing operations in Uzbekistan. At the time, +Government Official A beneficially owned 59% of Uzdunrobita’s shares through Swisdorn and +chaired Uzdunrobita’s supervisory board. + +J. In July 2004, MTS purchased 74% of the shares of Uzdunrobita for $121 million. +MTS paid $100 million to Swisdorn for 33% of the shares of Uzdunrobita, which represented a +significantly higher value per share than the amount paid to the other seller, which sold MTS 41% +of the shares of Uzdunrobita. A majority of the payment to Swisdorn represented an illicit +payment to Government Official A for the purpose of allowing MTS’s entry into the Uzbek +telecommunications market. + + K. MTS’s Board of Directors approved the acquisition of 74% of Swisdorn on July +26, 2004, and the members of Uzdunrobita approved the transaction on August 2, 2004. From +that point forward until 2012, Uzdunrobita was managed by a local manager who had a personal +relationship with Government Official A. + + L. From 2004 to 2012, Uzdunrobita entered into a number of transactions that +benefitted Government Official A. +Expansion of Uzbek Operations + M. In 2005, MTS began investing in an expansion of its telecommunications network +in Uzbekistan. As part of its expansion strategy, MTS sought to acquire a block of new +telecommunications frequencies in the 900 MHz range, which would complement the emerging +3G technology. Under Uzbek law, however, private parties were prohibited from purchasing and +selling regulatory assets such as frequencies. + + + 4 + N. In order to circumvent this prohibition, MTS entered into an agreement with a +small telecommunications operator named Buztel that was partially owned by Government +Official A. Buztel held a block of frequencies in the 900 MHz range. Under the agreement, +Uzdunrobita agreed to pay Buztel $12 million, of which $4 million would go to Government +Official A. In return, Buztel agreed to repudiate its rights to the frequencies and allow them to +be reallocated to Uzdunrobita. Government Official A, who also exercised control over the +Uzbek telecommunications regulatory authority, ensured that the regulator approved the intended +reallocation. + +Option Amendment + + O. At the time MTS purchased 33% of the shares of Uzdunrobita from Swisdorn, it +entered into a three-year put and call option agreement with Swisdorn pertaining to Swisdorn’s +remaining 26% interest in Uzdunrobita. Pursuant to the agreement, Swisdorn received a 3-year +put option to sell its remaining 26% interest in the company to MTS. MTS received a +corresponding 3-year call option to purchase the 26% block from Swisdorn. The exercise price +of the put and call options was set at 26% of $145,000,000, or $37.7 million, plus five percent +interest per annum for each year after the signing of the agreement until the put or call option +was exercised. + + P. On August 17, 2006, as requested by Government Official A, MTS and Swisdorn +entered into an amendment to the 2004 put and call option agreement that (1) eliminated MTS’s +call option; (2) extended the expiration date of Swisdorn’s put option to July 14, 2008; and +(3) amended the purchase price to a valuation to be determined by a mutually-agreeable +investment bank. Each of these changes provided a unilateral benefit to Swisdorn and, through +it, to Government Official A. + + Q. According to an estimate prepared for MTS’s investment committee, the value of +Swisdorn’s put option increased from $44,000,000 to a fair market valuation of at least +$150,000,000, while MTS lost its opportunity to exercise the call option at a fixed price. The +benefit transferred to Government Official A was one of the series of payments that MTS, through +Uzdunrobita, made to the official to ensure Uzdunrobita’s continued operation in Uzbekistan. + +Option Exercise Package + + R. On April 2, 2007, Uzdunrobita received 3G and WiMax frequencies from the +Uzbek telecommunications regulator that had the effect of increasing Uzdunrobita’s fair market +value by approximately $126 million to $140 million, and proportionally increased the value of +Swisdorn’s 26% share of Uzdunrobita. + + S. Following the acquisition of the 3G and WiMax licenses, Swisdorn on April 12, +2007, gave MTS notice of its intent to exercise the put option. On April 27, 2007, consistent +with the option amendment, Swisdorn and MTS engaged an international investment bank to +prepare a valuation of Uzdunrobita. In its report the investment bank valued the 26% minority +interest in Uzdunrobita, including the 3G and WiMax frequencies, at between $235 and $256. In +June 2007, MTS paid Swisdorn $250 million for its remaining 26% interest in Uzdunrobita. + + 5 +4G/LTE Transaction + + T. In August 2008, an MTS subsidiary incorporated in Bermuda entered into a +transaction in which Uzdunrobita would receive the rights to certain frequencies in the 800 MHz +range in return for a $30 million payment to Takilant Ltd, which was beneficially owned by +Government Official A. + + U. On August 21, 2008, Takilant and an MTS subsidiary executed an agreement +under which Takilant’s subsidiary would waive its rights to the 800 MHz frequencies and return +them to the Uzbek telecommunications regulator. On August 25, Government Official A +exercised her control over the Uzbek telecommunications regulator to ensure that the 800 MHz +frequency rights were assigned to Uzdunrobita. + + V. MTS made its $30 million payment to Takilant in six installments of $5 million +each, beginning in October 2008 and ending in July 2009. + + W. In connection with the transaction, MTS retained an investigative firm to conduct +due diligence on Takilant. When the investigator reported back that Takilant's nominal owner +had no telecommunications background and was a known proxy for Government Official A, +MTS ignored the information. + + X. MTS provided its due diligence investigator with Takilant's certificates of +incorporation and corporate registration, both of which identified a proxy of Government +Official A as Takilant's director and shareholder. MTS did not provide the investigator with any +information referring to Government Official A, including whether Government Official A held +a beneficial interest in Takilant. + + Y. On August 29, 2008, the investigative firm reported to MTS that "Uzbek sources +regard Takilant Ltd as being beneficially owned by the family of the Uzbek president. . . . +Confidential sources close to, and knowledgeable about, Uzbek business and political circles, +regard [the director of Takilant] as being a trustee of [Government Official A], a [relative] of the +Uzbek president. Sources believe that [the director of Takilant] works for [Government Official +A], being in charge of the latter's fashion business and PR matters." + + Z. After receiving the firm's findings, MTS conducted no further investigation and +proceeded with the transaction. + + AA. In the months leading up to the 800 MHz transaction, senior managers at MTS +discussed additional demands for payment from Government Official A. One senior MTS +manager stated that the consequences for refusing payment included the possible suspension of +Uzdunrobita's operations and Uzdunrobita's forced sale. + + BB. The same senior MTS manager sent a document to an MTS senior executive +listing the status of MTS's payment commitments to Government Official A, as well as the status +of the benefits the company had requested from the official. + + + 6 +Status of our commitments + +1. Payment of the total amount of $50 million, with the +following breakdown: + $30 million through the purchase of CDMA frequencies, +prior to 01/11/08. + MTS is ready to make the payment immediately. + $20 million in an agreed form, prior to 01/01/09, tied to +the growth of the subscriber base. + The basis for payment and the draft agreement are being +worked out, but no scheme exists other than making the +payment as a fee for services. Proposing to increase the +amount of the contract pertaining to CDMA, with delayed +payments. +2. Beginning in 2009, for the assistance in creating favorable +conditions for the growth of the Company and its +subscriber base, guarantee the payment of an average of +$20 million/year. + The basis for payment and the draft agreement are being +worked out. + +KolorIt Design Transaction + + CC. In September 2009, MTS agreed to have Uzdunrobita enter into an acquisition +that would satisfy a portion of MTS’s obligation to confer a $20 million benefit on Government +Official A. Uzdunrobita and MTS acquired 100% of an Uzbek advertising company named +KolorIt Design ("KolorIt") that Government Official A indirectly controlled. The acquisition +was a non-core transaction for MTS because KolorIt had no telecommunications operations and +MTS was not in the advertising business. + + DD. MTS engaged the same investigative firm to conduct due diligence on KolorIt that +it had with Takilant. The firm reported that one of KolorIt's two listed shareholders was the +same proxy of Government Official A who had appeared in the records of Takilant. + + EE. When MTS received the investigator's findings in August 2009 it conducted no +further investigation and proceeded with the transaction. MTS paid the equivalent of +approximately $40 million for KolorIt, substantially more than the $23 million valuation of the +company that JPMorgan had prepared at MTS's request. + + FF. Following the KolorIt transaction, the senior MTS manager who had earlier +prepared the document listing the status of MTS's payment commitments to Government Official +A updated the document. The updated document, which now referred to Government Official A + + 7 +as “the local partner,” stated that an obligation to pay $20 million by January 1, 2009 was +satisfied in part by the KolorIt acquisition. + +July 2008' Agreements with the local partner +status on their fulfilment (on 02.11.2009 r.) + +Our obligations + +1. To pay $50 [million] by + CDMA frequencies acquisition for $30 [million] by +01.11.08 + Paid in full in July 2009 + a way to agree additionally $20 [million] by 01.01.09 +(linked to the customers number growth) + Paid in full in September 2009 through ColorIT acquisition +($10 [million]) and out of the vendor's additional discount +($10 [million]) +2. Starting year 2009 to pay up to $20 [million] annually for +the assistance in creating favorable conditions for the +operations linked to the customers number growth + +Contributions to Charities Supported by Government Official A + + GG. Acting through Uzdunrobita, MTS also made payments to charities supported by, +and a sponsorship payment to a company connected to, Government Official A. The payments +were made in the expectation that they were necessary to ensure Government Official A’s +continued support for Uzdunrobita’s business. The payments were falsely recorded in +Uzdunrobita’s books and records as advertising and non-operating expenses, rather than as +charitable expenses. The payments also failed to comply with appropriate internal controls. The +payments were not approved until after payment was made and were not memorialized in +agreements with anti-corruption representations. Below is a table of the payments made by +Uzdunrobita in 2012: + + +Date Payment +Amount +Charity Name +3/27/2012 $135,612 Center for Youth Initiatives +“Kelajak ovozi” +3/27/2012 $135,612 Fund for Support of Social +Initiatives +3/27/2012 $135,612 Republic Social Association +“Zhenskoye Sobraniye” +3/27/2012 $135,611 Public Fund “Mehr Nuri” + + 8 +3/27/2012 $189,856 Fund Forum +3/27/2012 $162,734 Fund Forum +3/27/2012 $189,856 Fund Forum +4/24/2012 $54,244 Terra Group +Total $1,139,137 + + +Currency Conversion Transactions + + HH. Between 2005 and 2012, Uzdunrobita entered into equipment purchase contracts +denominated in U.S. dollars. Due to restrictions on the conversion of Uzbek soums into U.S. +dollars, Uzdunrobita was unable to convert enough currency to pay its equipment vendors. In +order to make its payments under the contracts, Uzdunrobita entered into debt reassignment and +equipment purchase agreements with third party companies who agreed to pay the required +amounts of U.S. dollars to pay Uzdunrobita’s vendors. + + II. During the 2009-11 period, Uzdunrobita paid approximately $461.5 million to +third party companies to effectuate purchases of network equipment in Uzbekistan. Of this total, +approximately $142.7 million represented the difference between the Uzbek Central Bank +exchange rate and the exchange rate agreed to by the parties and other markups. Approximately +$92.6 million represented taxes and customs costs. + + JJ. Uzdunrobita’s books and records, which were consolidated into MTS's books and +records, did not reflect, in an appropriate level of detail and support, the $142.7 million in +currency rate differentials and markups. These transactions had a material effect on the financial +statements of Uzdunrobita. In addition, Uzdunrobita failed to conduct appropriate due diligence +on the third party intermediaries to determine whether they were under the ownership or control +of Government Official A or other Uzbek government officials. + + KK. As a result of the conduct described above, MTS violated Exchange Act Sections +30A, 13(b)(2)(A), and 13(b)(2)(B). + +Undertakings + +Cooperation + + LL. Respondent undertakes to cooperate fully with the Commission in any and all +investigations, litigation, or other proceedings relating to or arising from the matters described in +this Order. In connection with such cooperation, Respondent shall: + +(1) produce, without service of a notice or subpoena, any and all non- +privileged documents and other information requested by the Commission +staff subject to any restrictions under the laws and regulations of any +foreign jurisdiction; + + + 9 +(2) use its best efforts to cause its current or former officers, employees, +agents, and directors to be interviewed by Commission staff at such times +and places as the staff reasonably may direct; and + +(3) use its best efforts to cause its current or former officers, employees, +agents, and directors to appear and testify without service of a notice or +subpoena in such investigations, depositions, hearings, or trials as may be +requested by the Commission staff. + + MM. Should Respondent during the period which the Monitor is retained discover +credible evidence, not previously reported to the Commission staff, that questionable or corrupt +payments or questionable or corrupt transfers of property or interests may have been offered, +promised, paid, or authorized by Respondent or by any entity or person while working directly +for Respondent; that related false books and records have been maintained; or that Respondent +has failed to implement adequate internal accounting controls, Respondent shall undertake to +promptly report such conduct to the Commission staff. + + NN. During the period which the Monitor is retained, Respondent shall provide its +external auditors with its annual internal audit plan and reports of the results of internal audit +procedures and its assessment of its FCPA compliance policies and procedures. + + OO. During the period which the Monitor is retained, Respondent shall provide the +Commission staff with any written reports or recommendations provided by Respondent’s +external auditors in response to Respondent’s annual internal audit plan, reports of the results of +internal audit procedures, and its assessment of its FCPA compliance policies and procedures. + +Retention of Monitor and Term of Engagement + + PP. Respondent shall engage an independent compliance monitor (the "Monitor") not +unacceptable to the staff of the Commission within sixty (60) calendar days of the entry of the +Order. The Monitor shall have, at a minimum, the following qualifications: (i) demonstrated +expertise with respect to the FCPA and other applicable anti-corruption laws, including +experience counseling on FCPA issues; (ii) experience designing or reviewing corporate +compliance policies, procedures, and internal accounting controls, including FCPA and anti- +corruption policies and procedures; (iii) the ability to access and deploy resources as necessary to +discharge the Monitor's duties as described in the Offer; and (iv) sufficient independence from +Respondent to ensure effective and impartial performance of the Monitor's duties as described in +the Offer. The Commission staff may extend Respondent's time period to retain the Monitor, in +its sole discretion. If the Monitor resigns or is otherwise unable to fulfill the obligations +described in the Offer, Respondent shall within forty-five (45) days retain a successor Monitor +that has the same minimum qualifications as the original Monitor and that is not unacceptable to +the Commission staff. + + QQ. Respondent shall retain the Monitor for a period of not less than thirty-six (36) +months, unless the Commission staff finds, in its sole discretion, that there exists a change in +circumstances sufficient to eliminate the need for the Monitor, in which case the Monitorship + + 10 +may be terminated early. The term of the Monitorship can be extended as set forth in Paragraph +FF, below. Respondent shall provide the Commission staff with a copy of the agreement +detailing the scope of the Monitor's responsibilities within thirty (30) days after the Monitor is +engaged. + + RR. During the Term of the Monitorship and for a period of one year from the +conclusion of the Monitorship, neither the Respondent nor any of its then-current or former +affiliates, subsidiaries, directors, officers, employees, or agents acting in their capacity as such +shall enter into, or discuss the possibility of, any employment, consultant, attorney-client, +auditing, or other professional relationship with the Monitor. + +Respondent's Obligations + + SS. Respondent shall cooperate fully with the Monitor and provide the Monitor with +access to all non-privileged information, documents, books, records, facilities, and personnel as +reasonably requested by the Monitor; such access shall be provided consistent with Respondent's +and the Monitor's obligations under applicable local laws and regulations, including applicable +data privacy and national security laws and regulations. Respondent shall use its best efforts, to +the extent reasonably requested, to provide the Monitor with access to Respondent's former +employees, third party vendors, agents, and consultants. Respondent does not intend to waive +the protection of the attorney work product doctrine, attorney-client privilege, or any other +privilege applicable as to third parties. + + TT. The parties agree that no attorney-client relationship shall be formed between the +Respondent and the Monitor. In the event that Respondent seeks to withhold from the Monitor +access to information, documents, books, records, facilities, current or former personnel of the +Respondent, its third-party vendors, agents, or consultants that may be subject to a claim of +attorney-client privilege or to the attorney work-product doctrine, or where Respondent +reasonably believes production would otherwise be inconsistent with the applicable laws and +regulations, Respondent shall work cooperatively with the Monitor to resolve the matter to the +satisfaction of the Monitor. If, during the Term of the Monitorship, the Monitor believes that +Respondent is unreasonably withholding access on the basis of a claim of attorney-client +privilege, attorney work-product doctrine, or other asserted applicable law, the Monitor shall +notify the Commission staff. + + UU. Any disclosure by Respondent to the Monitor concerning potential corrupt +payments, false books and records, or internal accounting control issues shall not relieve +Respondent of any otherwise applicable obligation to truthfully disclose such matters to the +Commission staff. + +Monitor's Mandate + + VV. The Monitor shall review and evaluate the effectiveness of the Respondent's +policies, procedures, practices, internal accounting controls, recordkeeping, and financial +reporting as they relate to Respondent's current and ongoing compliance with the anti-bribery, +books and records, and internal accounting controls provisions of the FCPA and other applicable + + 11 +anti-corruption laws, and make recommendations reasonably designed to improve the +effectiveness of Respondent's internal accounting controls and FCPA corporate compliance +program (the "Mandate"). This Mandate shall include an assessment of the board of directors' +and senior management's commitment to, and effective implementation of, the FCPA corporate +compliance program. In carrying out the Mandate, to the extent appropriate under the +circumstances, the Monitor may coordinate with Respondent personnel, including in-house +counsel, compliance personnel, and internal auditors. To the extent the Monitor deems +appropriate, it may rely on Respondent's processes, and on sampling and testing methodologies. +The Monitor is not expected to conduct a comprehensive review of all business lines, all business +activities, and all markets. Any disputes between Respondent and the Monitor with respect to the +work plan shall be decided by the Commission staff in its sole discretion. + + WW. During the term of the Monitorship, the Monitor shall conduct three reviews, +issue a report following each review, and issue a final certification report, as described below. +The Monitor's work plan for the first review shall include such steps as are reasonably necessary +to conduct an effective first review. It is not intended that the Monitor will conduct its own +inquiry into historical events. In developing each work plan and in carrying out the reviews +pursuant to such plans, the Monitor is encouraged to coordinate with Respondent's personnel, +including auditors and compliance personnel. +First Review and Report + + XX. The Monitor shall commence the first review no later than one hundred twenty +(120) calendar days from the date of the engagement of the Monitor (unless otherwise agreed by +Respondent, the Monitor, and the Commission staff). Promptly upon being retained, the Monitor +shall prepare a written work plan, which shall be submitted to Respondent and the Commission +staff for comment no later than sixty (60) days after being retained. + + YY. In order to conduct an effective first review and to understand fully any existing +deficiencies in Respondent's internal accounting controls and FCPA corporate compliance +program, the Monitor's work plan shall include such steps as are reasonably necessary to +understand Respondent's business and its global anti-corruption risks. The steps shall include: + +(1) inspection of relevant documents, including the internal accounting +controls, recordkeeping, and financial reporting policies and procedures as +they relate to Respondent's compliance with the books and records, +internal accounting controls, and anti-bribery provisions of the FCPA and +other applicable anti-corruption laws; + +(2) onsite observation of selected systems and procedures comprising +Respondent's FCPA corporate compliance program, including +anticorruption compliance procedures, internal accounting controls, +recordkeeping, due diligence, and internal audit procedures, including at +sample sites; + +(3) meetings with, and interviews of, as relevant, Respondent’s employees, +officers, directors, and, where appropriate and feasible, its third-party + + 12 +vendors, agents, or consultants and other persons at mutually convenient +times and places; and + +(4) risk-based analyses, studies, and testing of Respondent's FCPA corporate +compliance program. + + ZZ. The Monitor may take steps as reasonably necessary to develop an understanding +of the facts and circumstances surrounding prior FCPA violations that gave rise to this action or +violations of other applicable anti-corruption laws, but shall not conduct his or her own inquiry +into those historical events. + + AAA. After receiving the first review work plan, Respondent and Commission staff +shall provide any comments concerning the first review work plan within thirty (30) days to the +Monitor. Any disputes between Respondent and the Monitor with respect to the first review +work plan shall be decided by the Commission staff in its sole discretion. Following comments +by Respondent and Commission staff, the Monitor will have fifteen (15) days to submit a final +first review work plan. + + BBB. The first review shall commence no later than one hundred twenty (120) days +from the date of the engagement of the Monitor (unless otherwise agreed by Respondent, the +Monitor, and the Commission staff). The Monitor shall issue a written report within one hundred +eighty (180) days of commencing the first review, setting forth the Monitor's assessment and, if +necessary, making recommendations reasonably designed to improve the effectiveness of +Respondent's internal accounting controls and FCPA corporate compliance program as they +relate to Respondent's compliance with the FCPA and other applicable anti-corruption laws. The +Monitor should consult with Respondent concerning his or her findings and recommendations on +an ongoing basis and should consider Respondent's comments and input to the extent the +Monitor deems appropriate. The Monitor may also choose to share a draft of his or her report +with Respondent and Commission staff prior to finalizing it. The Monitor shall provide the +report to the Board of Directors of Respondent and contemporaneously transmit a copy to +Commission staff. + + CCC. Within one hundred eighty (180) days after receiving the Monitor's first review +report, Respondent shall adopt and implement all recommendations in the Review, provided, +however, that as to any recommendation that Respondent considers unduly burdensome, +impractical, costly, or inconsistent with applicable law or regulation, Respondent need not adopt +that recommendation at that time, but may submit in writing to the Monitor and the Commission +staff within thirty (30) days of receiving the report an alternative policy, procedure, or system +designed to achieve the same objective. + + DDD. In the event Respondent and the Monitor are unable to agree on an acceptable +alternative proposal, Respondent shall promptly consult with the Commission staff. Any +disputes between Respondent and the Monitor with respect to the recommendations shall be +decided by the Commission staff in its sole discretion. The Commission staff shall consider the +Monitor's recommendation and Respondent's reasons for not adopting the recommendation in + + 13 +determining whether Respondent has fully complied with its obligations. Pending such +determination, Respondent shall not be required to implement any contested recommendation(s). + + EEE. With respect to any recommendation that the Monitor determines cannot +reasonably be implemented within one hundred and eighty (180) days after receiving the report, +the Monitor may extend the time period for implementation with prior written approval of the +Commission staff. +Second Review + + FFF. Within one hundred twenty (120) days after the issuance of the first review report, +the Monitor shall submit a written work plan for the second review to Respondent and +Commission staff. Respondent and Commission staff shall provide any comments concerning the +work plan within thirty (30) days in writing to the Monitor. Any disputes between Respondent +and the Monitor with respect to the written work plan shall be decided by the Commission staff +in its sole discretion. Following comments by Respondent and Commission staff, the Monitor +will have fifteen (15) days to submit a final second review work plan. + + GGG. The second review shall commence no later than one hundred eighty (180) days +after the issuance of the first review report (unless otherwise agreed by Respondent, the Monitor, +and the Commission staff). The Monitor shall issue a written second review report within one +hundred twenty (120) days of commencing the second review. The second review report shall +set forth the Monitor's assessment of, and any additional recommendations regarding, +Respondent's internal accounting controls and FCPA corporate compliance program as they +relate to Respondent's compliance with the FCPA and other applicable anti-corruption laws; the +Monitor's assessment of the implementation by Respondent of any recommendations made in the +first review report; and the Monitor's assessment of the commitment of Respondent's board of +directors and senior management to compliance with anti-corruption laws. + + HHH. Within one hundred twenty (120) days after receiving the Monitor's second +review report, Respondent shall adopt and implement all recommendations in the report, +provided, however, that as to any recommendation that Respondent considers unduly +burdensome, impractical, costly, or inconsistent with applicable law or regulation, Respondent +need not adopt that recommendation at that time, but may submit in writing to the Monitor and +the Commission staff within thirty (30) days of receiving the report an alternative policy, +procedure, or system designed to achieve the same objective. + + III. In the event Respondent and the Monitor are unable to agree on an acceptable +alternative proposal within thirty (30) days, Respondent shall promptly consult with the +Commission staff. Any disputes between Respondent and the Monitor with respect to the +recommendations shall be decided by the Commission staff in its sole discretion. The +Commission staff shall consider the Monitor's recommendation and Respondent's reasons for not +adopting the recommendation in determining whether Respondent has fully complied with its +obligations. Pending such determination, Respondent shall not be required to implement any +contested recommendation(s). + + + + 14 +Third Review + + JJJ. The Monitor shall commence a third review no later than one hundred twenty +(120) days after the issuance of the second review report (unless otherwise agreed by +Respondent, the Monitor, and the Commission staff). The monitor shall issue a written third +review report within ninety (90) days of commencing the third review, setting forth the Monitor's +assessment and, if necessary, making recommendations in the same fashion as with the prior +reviews. + KKK. Within ninety (90) days after receiving the Monitor's third review report, +Respondent shall adopt and implement all recommendations in the report, provided, however, +that as to any recommendation that Respondent considers unduly burdensome, impractical, +costly, or inconsistent with applicable law or regulation, Respondent need not adopt that +recommendation at that time, but may submit in writing to the Monitor and the Commission staff +within thirty (30) days of receiving the report an alternative policy, procedure, or system +designed to achieve the same objective. + + LLL. In the event Respondent and the Monitor are unable to agree on an acceptable +alternative proposal within thirty (30) days, Respondent shall promptly consult with the +Commission staff. Any disputes between Respondent and the Monitor with respect to the +recommendations shall be decided by the Commission staff in its sole discretion. The +Commission staff shall consider the Monitor's recommendation and Respondent's reasons for not +adopting the recommendation in determining whether Respondent has fully complied with its +obligations. Pending such determination, Respondent shall not be required to implement any +contested recommendation(s). +Certification + + MMM. No later than seventy-five (75) days before the end of the term of the +Monitorship, the Monitor shall certify whether the Respondent's compliance program, including +its policies and procedures, is reasonably designed and implemented to prevent and detect +violations of the FCPA and is functioning effectively. Such certification shall be supported by a +written final certification report that certifies Respondent's compliance with its obligations under +the Order, and which shall set forth an assessment of the sustainability of the Respondent's +remediation efforts and may also recommend areas for further follow-up by Respondent. + + NNN. The monitor shall orally notify the Commission staff at least fourteen (14) days +prior to the issuance of the final certification report whether he or she expects to be able to +certify as provided herein. In the event the Monitor is unable to certify within the three year +term of the monitor period, the following extension provisions shall be in effect. + +Extension of Monitor Period + + OOO. If, as informed by the Monitor's inability to certify that the Respondent's +compliance program, including its policies and procedures, is reasonably designed and +implemented to prevent and detect violations of the FCPA and is functioning effectively, the +Commission staff concludes that Respondent has not successfully satisfied its obligations under the + + 15 +Monitorship, the Monitor period shall be extended for a reasonable time not to exceed one year +absent extenuating circumstances. + + PPP. Under such circumstances, the Monitor shall commence a fourth review no later +than sixty (60) days after the Commission staff concludes that Respondent has not successfully +satisfied its compliance obligations under the Order (unless otherwise agreed by Respondent, the +Monitor, and the Commission staff). The Monitor shall issue a written fourth review report +within ninety (90) days of commencing the fourth review in the same fashion as set forth in +Paragraph BBB with respect to the first review and in accordance with the procedures for follow- +up reports set forth in Paragraphs FFF to LLL. A determination to terminate the Monitorship +shall then be made in accordance with Paragraph MMM. + + QQQ. If, after completing the fourth review the Monitor is unable to certify, the +Monitorship shall be extended, and the Monitor shall commence a fifth review (unless otherwise +agreed by Respondent, the Monitor, and the Commission staff). The Monitor shall issue a written +fifth review report within ninety (90) days of commencing the fifth review in the same fashion as +set forth in Paragraph BBB with respect to the first review and in accordance with the procedures +for follow-up reports set forth in Paragraphs FFF to LLL. These reviews shall continue until the +Monitor is able to certify, or unless as otherwise agreed by Respondent and Commission staff. + +Monitor's Discovery of Potential or Actual Misconduct + + RRR. Throughout the term of the Monitorship, the Monitor shall disclose to the +Commission staff any credible evidence that corrupt or otherwise suspicious transactions +occurred, or payments or things of value were offered, promised, made, or authorized by any +entity or person within Respondent, or any entity or person working directly or indirectly for or +on behalf of Respondent, or that related false books and records may have been maintained by or +on behalf of Respondent or that relevant internal accounting controls were circumvented or were +not reasonably designed or implemented. The Monitor shall contemporaneously notify +Respondent's general counsel, chief compliance officer, or audit committee for further action +unless at the Monitor's discretion he or she believes disclosure to Respondent would be +inappropriate under the circumstances. The Monitor shall address in his or her reports the +appropriateness of Respondent's response to all improper activities, whether previously disclosed +to the Commission staff or not. + +Certification of Completion + + SSS. No later than sixty (60) days from date of the completion of the undertakings with +respect to the Monitorship, Respondent shall certify, in writing, compliance with the +undertakings set forth above. The certification shall identify the undertakings, provide written +evidence of compliance in the form of a narrative, and be supported by exhibits sufficient to +demonstrate compliance. The Commission staff may make reasonable requests for further +evidence of compliance, and Respondent agrees to provide such evidence. + + + + 16 +Extensions of Time + + TTT. Upon request by the Monitor or Respondent, the Commission staff may extend +any procedural time period set forth above for good cause shown. + +Confidentiality of Reports + + UUU. The reports submitted by the Monitor and the periodic reviews and reports +submitted by Respondent will likely include confidential financial, proprietary, competitive +business, or commercial information. Public disclosure of the reports could discourage +cooperation, impede pending or potential government investigations, or undermine the objective +of the reporting requirement. For these reasons the reports and the contents thereof are intended +to remain and shall remain non-public, except (i) pursuant to court order, (ii) as agreed to by the +parties in writing, (iii) to the extent that the Commission determines in its sole discretion that +disclosure would be in furtherance of the Commission's discharge of its duties and +responsibilities, or (iv) as is otherwise required by law. +Address for All Written Communications and Reports + + VVV. All reports or other written communications by the Monitor or Respondent +directed to the Commission staff shall be transmitted to Charles E. Cain, Chief, FCPA Unit, +Division of Enforcement, U.S. Securities and Exchange Commission, 100 F Street, N.E., +Mailstop 5631, Washington, D.C. 20549. A copy of the certification of completion and +supporting materials shall also be transmitted to the Office of Chief Counsel of the Enforcement +Division at the same address. + +IV + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondent cease and desist from committing or causing any violations and any +future violations of Sections 30A, 13(b)(2)(A), and 13(b)(2)(B) of the Securities Exchange Act of +1934 [15 U.S.C. §§ 78dd-1, 78m(b)(2)(A), and 78m(b)(2)(B)]. + + B. Respondent shall, within 14 days of the entry of this Order, pay a civil money +penalty in the amount of $100,000,000 to the Securities and Exchange Commission for transfer +to the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + + C. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + 17 + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + D. Payments by check or money order must be accompanied by a cover letter +identifying MTS as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Charles Cain, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Mailstop 5631, Washington, +DC 20549. + + E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +F. Respondent shall comply with the undertakings enumerated above at Section III, +paragraphs MM through VVV. + + By the Commission. + + + Brent J. Fields + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4029.pdf b/raw/aaer/2019/AAER-4029.pdf new file mode 100644 index 0000000000000000000000000000000000000000..13627cd155a237b3437881129d4cac9b3a4a9047 Binary files /dev/null and b/raw/aaer/2019/AAER-4029.pdf differ diff --git a/raw/aaer/2019/AAER-4029.txt b/raw/aaer/2019/AAER-4029.txt new file mode 100644 index 0000000000000000000000000000000000000000..8443066eda48069e12dc32692a80c1ca076a3c73 --- /dev/null +++ b/raw/aaer/2019/AAER-4029.txt @@ -0,0 +1,108 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85284 / March 11, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4029 / March 11, 2019 + +Admin. Proc. File No. 3-18994 + + +In the Matter of + +JOSEPH S. AMUNDSEN, CPA, +MICHAEL T. REMUS, CPA, AND +MICHAEL REMUS CPA. + + + +ORDER +On February 8, 2019, the Commission issued an order (the “OIP”) instituting +administrative and cease-and-desist proceedings pursuant to Sections 4C(a)(2) and (a)(3) and +21C of the Securities Exchange Act of 1934 and Rule 102(e)(1)(ii) and (iii) of the Commission’s +Rules of Practice against Joseph S. Amundsen, CPA, Michael T. Remus, CPA, and Michael +Remus CPA.1 In compliance with the statutory provision governing cease-and-desist +proceedings, the OIP specified that a “public hearing before the Commission for the purposes of +taking evidence . . . shall be convened not earlier than 30 days and not later than 60 days” from +service of the OIP.2 The statute also provides that “an earlier or later date” for the hearing may +be “set by the Commission with the consent of any respondent so served.”3 +On March 5, 2019, respondents Michael T. Remus, CPA and Michael Remus CPA +(“Remus Respondents”) filed a motion seeking to extend their time for filing an answer to the +OIP to March 20, 2019. The Remus Respondents assert that “they were never properly served +with” the OIP and that they should not be required to file an answer “in the midst of a genuine +dispute over service.” They represent that the Division of Enforcement and the other respondent, +Joseph S. Amundsen, CPA, “agree[] to an extension of time for the Remus Respondents to file +their Answer but have not agreed as to the timing of the Hearing in this matter.” The Remus +Respondents “contend that the Hearing should be held no later than sixty (60) days after the +responsive pleadings are served and filed” but, according to them, the Division does not agree. +The motion does not state Amundsen’s position on the timing of the hearing. + +1 Exchange Act Release No. 85081, 2019 WL 497277 (Feb. 8, 2019). +2 Id. at *8. +3 15 U.S.C. § 78u-3(b). +2 + +On March 7, 2019, the Division filed a response to the motion for an extension. The +Division confirms that it “does not object” to the requested extension of time for the Remus +Respondents to file their answer. The Division does, however, object to scheduling a date for the +hearing until the respondents have filed answers and a prehearing conference has been +conducted. Finally, the Division represents that Amundsen “has separately communicated . . . +his consent that the hearing in this matter be held after the 60-day statutory deadline.” +Rule of Practice 161(a) authorizes the Commission to extend time limits upon a showing +of good cause.4 In evaluating a request for an extension, Rule of Practice 161(b) provides that +the Commission should consider the length of the proceeding to date, the number of extensions +already granted, the stage of the proceedings, the impact of an adjournment on the ability to +complete the proceeding in a timely fashion, and other such matters as justice may require.5 +The Remus Respondents state that extending the time to file their answer “will not have a +material impact on the ability to complete the proceeding in a timely fashion.” Based on the +representations in the Remus Respondents’ motion and the Division’s response, it appears that +although the parties have not agreed on the timing of the hearing and the Remus Respondents +have not agreed to hold the hearing more than 60 days after the filing of respondents’ answers all +respondents consent to the hearing being held after the 60-day statutory deadline from service of +the OIP. As such, extending the Remus Respondents’ time to file their answer will not have a +material impact on the ability to complete the proceeding in a timely fashion. +Accordingly, it is ORDERED that the motion is CONDITIONALLY GRANTED, and +that the Remus Respondents’ time for filing an answer to the OIP is extended to March 20, 2019, +unless Amundsen disputes the Remus Respondents’ representation regarding his agreement to an +extension of time for answering the OIP or the Division’s representation regarding his consent to +a later hearing date, and files an objection by March 18, 2019. +To date, Amundsen has not filed an answer to the OIP or sought an extension for doing +so. According to the Division, Amundsen has “advised” that his answer is a “Claim for +Disparagement” filed in the U.S. Court of Appeals for the Ninth Circuit on February 19, 2019. +The document in question is not directed to the Commission and does not comply with Rule of +Practice 220; among other things, it does not “specifically admit, deny, or state that the party +does not have, and is unable to obtain, sufficient information to admit or deny each allegation” in +the OIP.6 It generally asserts that there “have been no securities violations of any kind by +Amundsen” and that it is “not a securities violation for someone who has accepted a settlement +to have a family.” It is ORDERED that Amundsen file an answer in compliance with Rule of +Practice 220 by March 18, 2019. If Amundsen fails to do so, he will be deemed to have filed an +answer denying all of the allegations in the OIP. + +4 17 C.F.R. § 201.161(a). +5 17 C.F.R. § 201.161(b). +6 17 C.F.R. § 201.220(c). +3 + +It is FURTHER ORDERED that the parties shall conduct a prehearing conference +pursuant to Rule of Practice 221 by April 3, 2019. The parties may meet in person or participate +by telephone or other remote means. By April 5, 2019, they shall promptly file a statement +reporting the parties’ positions with respect to the matters listed in Rule of Practice 221(c) and +advising the Commission of any agreements reached at said conference.7 The Commission will +specify further procedures by subsequent order. +It is FURTHER ORDERED that the Commission’s March 1, 2019 order is hereby +vacated.8 +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + + Vanessa A. Countryman + Acting Secretary + +7 17 C.F.R. § 201.221(c). +8 Joseph S. Amundsen, CPA, Exchange Act Release No. 85237, 2019 WL 995509 (Mar. 1, +2019). \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4030.pdf b/raw/aaer/2019/AAER-4030.pdf new file mode 100644 index 0000000000000000000000000000000000000000..334943e1445585d36b42d26f8ea9c4b8473d48bc Binary files /dev/null and b/raw/aaer/2019/AAER-4030.pdf differ diff --git a/raw/aaer/2019/AAER-4031.txt b/raw/aaer/2019/AAER-4031.txt new file mode 100644 index 0000000000000000000000000000000000000000..73a2d6e2cd150e08704a5c13e0dadc65d70dd8d2 --- /dev/null +++ b/raw/aaer/2019/AAER-4031.txt @@ -0,0 +1,159 @@ +UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85398 / March 22, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4031 / March 22, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19115 +In the Matter of + +JUDSON F. “RICK” +HOOVER, CPA, +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Judson +F. “Rick” Hoover (“Respondent” or “Hoover”) pursuant to Rule 102(e)(3)(i) of the Commission’s +Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.3 below, which are admitted, Respondent + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, may, by order, . . . +suspend from appearing or practicing before it any . . . accountant . . . who has been by name . . . permanently +enjoined by any court of competent jurisdiction, by reason of his or her misconduct in an action brought by the +Commission, from violating or aiding and abetting the violation of any provision of the Federal securities laws or of +the rules and regulations thereunder. +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Hoover, age 60, is and has been a certified public accountant licensed to +practice in the state of Colorado. He served as Chief Financial Officer of Breitling Energy +Corporation (“BECC”) from February 2014 until his termination in February 2015. Prior to +February 2014, he served as a consultant to BECC and Breitling Oil & Gas Corporation (“BOG”). + +2. BECC was, at all relevant times, a Nevada corporation with its principal +place of business in Dallas, Texas. At all relevant times, BECC purported to be in the business of +acquiring and developing oil-and-gas prospects in Texas, Oklahoma and North Dakota. At all +relevant times, BECC’s stock was registered with the Commission pursuant to 12(g) of the +Securities Exchange Act of 1934 (“Exchange Act”) and was quoted on OTC Link operated by +OTC Markets Group, Inc. (“OTC Link”). + +3. On June 24, 2016, the Commission filed a complaint, and on August 11, +2016, an amended complaint, against Hoover and others in SEC v. Christopher A. Faulkner, et al. +(Civil Action No. 3:16-1735-D (N.D. Tex.). On December 19, 2018, the court entered an order +permanently enjoining Hoover, by consent, from violating Sections 10(b) of Exchange Act and +Exchange Act Rules 10b-5, 13a-14, 13b2-1, and 13b2-2, and from aiding and abetting violations of +Exchange Act Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) and Exchange Act Rules 13a-1, 13a-11, +13a-13, and 12b-20. Hoover was also ordered to pay a civil penalty of $160,000. + +4. The Commission’s complaint, as amended, alleged that between December +2013 and February 2015, Hoover participated with others in a scheme that served to defraud +investors who purchased oil-and-gas securities in transactions with four companies: BECC, BOG, +Crude Energy, LLC (“Crude”), and Patriot Energy, Inc. Hoover signed several of BECC’s public +reports filed with the Commission that contained materially false and misleading representations +about, among other things, BECC’s relationship with Crude, BECC’s business model and results +and operation, and BECC’s internal controls. Hoover also made similar false and misleading +statements to the company’s auditors. Moreover, Hoover also approved the reimbursement of +personal expenses charged by BECC’s CEO, Christopher A. Faulkner as if they were legitimate +business expenses, without any regard for BECC’s reimbursement policy. Furthermore, Hoover +also aided-and-abetted BECC’s failure to keep and maintain accurate books and records. + +IV. + +In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Hoover’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Hoover is suspended from appearing or practicing before the Commission as an +accountant for five years from the date of this Order. + +B. After five years from the date of this Order, Hoover may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission (other than as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities +Exchange Act of 1934). Such an application must satisfy the Commission that Hoover’s work in +his practice before the Commission as an accountant will be reviewed either by the independent +audit committee of the public company for which he works or in some other acceptable manner, as +long as he practices before the Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the Commission as a member of an +audit committee, as that term is defined in Section 3(a)(58) of the Securities Act of 1934. Such an +application will be considered on a facts and circumstances basis with respect to such membership, +and the applicant’s burden of demonstrating good cause for reinstatement will be particularly high +given the role of the audit committee in financial and accounting matters; and/or + +3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Hoover, or the public accounting firm with which he is associated, is +registered with the Public Company Accounting Oversight Board (“Board”) in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Hoover, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did not identify any criticisms of or +potential defects in the Hoover’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + + (c) Hoover has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Hoover acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to comply with all requirements of +the Commission and the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control standards. + +C. The Commission will consider an application by Hoover to resume appearing or +practicing before the Commission provided that his state CPA license is current and he has resolved +all other disciplinary issues with the applicable state boards of accountancy. However, if state +licensure is dependent on reinstatement by the Commission, the Commission will consider an +application on its other merits. The Commission’s review may include consideration of, in addition +to the matters referenced above, any other matters relating to Hoover’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission as an +accountant. Whether an application demonstrates good cause will be considered on a facts and +circumstances basis with due regard for protecting the integrity of the Commission’s processes. + + By the Commission. + + + + Vanessa A. Countryman + Acting Secretary + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4032.txt b/raw/aaer/2019/AAER-4032.txt new file mode 100644 index 0000000000000000000000000000000000000000..70282034b74849258f39f5d44c4dcdc04a4a2616 --- /dev/null +++ b/raw/aaer/2019/AAER-4032.txt @@ -0,0 +1,98 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85423 / March 26, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4032 / March 26, 2019 + +Admin. Proc. File No. 3-18994 + + +In the Matter of + +JOSEPH S. AMUNDSEN, CPA, +MICHAEL T. REMUS, CPA, AND +MICHAEL REMUS CPA. + + + +NOTICE REGARDING CORRESPONDENCE +The Commission has received seven items of correspondence from respondent Joseph S. +Amundsen. This notice addresses those seven items. +The first item, dated March 6, 2019 and titled “Response to SEC Order - Rule of Practice +161,” asserts that the Commission “agreed to have these matters presented to the SF District +Court on March 20, 2019,” but is now “trying to suspend” the court date. It also asserts that the +Commission has “informally agreed to stay” these “administrative charges” until April 20, 2019. +Amundsen continues to conflate this administrative proceeding with the entirely separate civil +injunctive action in the U.S. District Court for the Northern District of California. To be clear, +none of the orders issued by the Commission in this proceeding purports to suspend any court +date—nor could it—including the hearing before the district court that is currently set for March +28, 2019.1 As to this proceeding, the Commission has neither been presented with nor approved +any stipulation among the parties to continue the matter until April 20, 2019. The Commission +reminds the parties that they must conduct a prehearing conference pursuant to Rule of Practice +221 by April 3, 2019, and that they shall file a statement by April 5, 2019 reporting the parties’ +positions with respect to the matters listed in Rule of Practice 221(c) and advising the +Commission of any agreements reached at said conference.2 +The second item, dated March 8, 2019, purports to be an answer to the order instituting +proceedings. It “requests that this Administrative Proceeding[] be summarily dismissed” and + +1 See DE 124, Case No. 3:83-cv-00711-WHA (N.D. Cal. Mar. 25, 2019); DE 112, Case +No. 3:83-cv-00711-WHA (N.D. Cal. Feb. 11, 2019). +2 Joseph S. Amundsen, CPA, Exchange Act Release No. 85284, 2019 WL 1116195, at *2 +(Mar. 11, 2019). +2 + +asserts “[t]here is no violation.”3 This document does not comply with Rule of Practice 220, +governing the content of answers, because it does not “specifically admit, deny, or state that the +party does not have, and is unable to obtain, sufficient information to admit or deny each +allegation” in the OIP.4 Because Amundsen has not “file[d] an answer in compliance with Rule +of Practice 220 by March 18, 2019,” as required by the Commission’s March 11, 2019 order, he +is “deemed to have filed an answer denying all of the allegations in the OIP.”5 +The third item, dated March 16, 2019 and titled “Response to letter March 13, 2019,” +argues that the Commission has “no authority” to institute administrative proceedings because, +Amundsen asserts, a 1983 settlement extinguished “all charges against [him].” Amundsen, so +long as he complies with the applicable deadlines and other procedural rules governing the +timely and proper presentation of issues,6 will have the opportunity to develop and press this +argument. But at this very early stage of the proceedings, and without the benefit of adversarial +briefing, it is not yet ripe for disposition. +The remaining four items—a “Request for Reconsideration” dated February 27, 2019; +two additional such requests dated March 6, 2019 and March 8, 2019; and a “Petition to Vacate +and Answer to Contempt Charge” dated March 9, 2019—are directed to either the U.S. Court of +Appeals for the Ninth Circuit or the U.S. District Court for the Northern District of California. +As made clear above and in two prior notices, this administrative proceeding is set before the +Securities and Exchange Commission, and is separate from the cases or appeals in other fora in +which Amundsen may also be a party.7 It is neither necessary nor appropriate for Amundsen to +transmit copies of his filings in other cases or appeals to the Office of the Secretary. No further + +3 The letter also contends that the Division of Enforcement “has offered legal advice to +Amundsen, without notification to the other” respondents. This claim appears to be premised on +a March 7, 2019 email from a Division attorney informing Amundsen that although he is “free to +submit materials to the Office of the Secretary in this matter, [the Division] will not undertake to +do so on [his] behalf.” This is not legal advice—it is an accurate, factual statement about the +Commission’s filing process, Rule of Practice 151, 17 C.F.R. § 201.151—and, insofar as it is a +communication entirely between two parties, is not subject to the prohibition against ex parte +communications with the decisionmaker. Cf. Rule of Practice 120, 17 C.F.R. § 201.120. +4 Rule of Practice 220, 17 C.F.R. § 201.220. +5 Joseph S. Amundsen, CPA, 2019 WL 1116195, at *2. +6 See, e.g., McBarron Capital LLC, Exchange Act Release No. 81789, 2017 WL 4350655, +at *5 (Sep. 29, 2017); see also Bennett Group Fin. Servs., LLC, Exchange Act Release No. +80347, 2017 WL 1176053, at *2 (Mar. 30, 2017) (holding that the Commission has no obligation +to “independently . . . identify and develop arguments that a party fails to advance with clarity”). +7 Joseph S. Amundsen, CPA, Exchange Act Release No. 85310, 2019 WL 1167740, at *1 +(Mar. 13, 2019); Joseph S. Amundsen, CPA, Exchange Act Release No. 85250, 2019 WL +1036154, at *1 (Mar. 5, 2019). +3 + +action will be taken regarding these filings, or any future ones that are not directed to the +Commission or that seek relief that is not available from the Commission in this proceeding. +For the Commission, by the Office of the General Counsel, pursuant to delegated +authority. + + + + Vanessa A. Countryman + Acting Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4033.txt b/raw/aaer/2019/AAER-4033.txt new file mode 100644 index 0000000000000000000000000000000000000000..0531648f77f4d296d168ab005cc9b0d5aa36a6ef --- /dev/null +++ b/raw/aaer/2019/AAER-4033.txt @@ -0,0 +1,1064 @@ + + +1 + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85468 / March 29, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4033 / March 29, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19126 + + +In the Matter of + +Fresenius Medical Care AG +& Co. KGaA + +Respondent. + + + + +CORRECTED ORDER INSTITUTING +CEASE-AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Fresenius Medical Care AG & Co. KGaA +(“FMC” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over it and the subject matter of these proceedings, and consents to the entry of this +Order Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities + + 2 +Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as +set forth below. +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + Summary +1. This matter concerns violations of the anti-bribery, books and records and internal +accounting controls provisions of the Foreign Corrupt Practices Act of 1977 (the “FCPA”) [15 +U.S.C. 78dd] by FMC, a world-wide provider of products and services for individuals with chronic +kidney failure headquartered in Bad Homburg, Germany. From at least 2009 through 2016, +millions of dollars in bribes were paid to procure business throughout its operations, including in +Saudi Arabia, Angola, and eight countries in the West African region. Further, in FMC’s +operations in those countries, as well as Turkey, Spain, China, Serbia, Bosnia, and Mexico, +payments were not accurately reflected in FMC’s books and records. FMC also failed to have +sufficient internal accounting controls in place, which contributed to the misconduct continuing for +many years across multiple continents. In connection with the misconduct described in Saudi +Arabia, West Africa, and Angola, FMC employees and agents utilized the means and +instrumentalities of U.S. interstate commerce, including the use of internet-based email accounts +hosted by numerous service providers located in the United States. The company benefitted by +over $135 million as a result of the improper payments. +Respondent + + +2. FMC is a provider of products and services for individuals with chronic kidney +failure. FMC, operating in over 150 countries, is incorporated under the federal laws of Germany +and is headquartered in Bad Homburg. Since 1996, FMC’s American Depositary Shares traded on +the New York Stock Exchange under the ticker “FMS” and are registered with the Commission +pursuant to Section 12(b). The company files periodic reports, including Form 20-F, with the +Commission pursuant to Section 13(a) of the Exchange Act. + +Relevant Entities + +3. The misconduct took place in FMC subsidiaries in Morocco, Portugal, Angola, +Turkey, Spain, China, Serbia, Bosnia, and Mexico. During the relevant time period FMC’s West +Africa business was managed and operated from Fresenius Medical Care Deutschland GmbH, a +limited liability company organized under the federal laws of Germany, and was later operated +from FMC Morocco. The financials for each subsidiary were consolidated with those of FMC. + +4. Saudi Advanced Renal Services Ltd. (“SRS”) is a wholly consolidated distributor +that promotes and sells FMC’s products in the Kingdom of Saudi Arabia pursuant to a +Management Assistance Agreement and an Agency and Distributorship Agreement with FMC. +SRS’s financial statements are consolidated with those of FMC. + + 3 + +FACTS +Background + +5. FMC failed to promptly address numerous red flags of corruption in its operations +that were known since the early 2000s. This includes employees making improper payments +through a variety of schemes, including using sham consulting contracts, falsifying documents, and +funneling bribes through a system of third party intermediaries. FMC failed to properly assess and +manage its worldwide risks, and devoted insufficient resources to compliance. In many instances, +senior management actively thwarted compliance efforts, personally engaging in corruption +schemes and directing employees to destroy records of the misconduct. The improper conduct +continued for years in Saudi Arabia, Morocco, eight countries in the West African region, Angola, +Turkey, Spain, China, Serbia, Bosnia, and Mexico. + +Conduct Relevant to Saudi Arabia + +6. From 2007 to 2012, FMC’s wholly consolidated distributor Saudi Advanced Renal +Services (“SRS”) paid over $4.9 million in improper payments to publicly-employed doctors +(“HCPs”), government officials and others in Saudi Arabia to retain or obtain business. FMC +knew of the high risks in the business, but failed to ensure that sufficient internal accounting +controls were in place. FMC also failed to assign a compliance officer to the region. In 2009 and +early 2011, senior officials at FMC’s German headquarters received reports from a senior SRS +finance officer that the SRS General Manager (“GM”) submitted false invoices and that there was +a practice of making improper marketing and travel expenditures without proper documentation. +The conduct continued and by December 2011, the SRS finance officer elevated his complaints to +the FMC controller and the head of Internal Audit. The conduct continued until late 2012 when +remedial action was first initiated and the GM was terminated in 2013. Overall, FMC benefitted +by over $40 million as a result of the corruption schemes in Saudi Arabia. + + 7. Payments were made to private and public HCPs, other government officials, and +high ranking officials at a Saudi Technical Organization that was acting in an official capacity +for or on behalf of the Kingdom of Saudi Arabia when it reviewed and approved dialysis +products for use in tenders. Between 2007 and 2012, SRS generated approximately $1.77 +million through a check writing scheme. Checks were written to SRS employees who cashed the +checks and handed the cash to the SRS GM. SRS employees sometimes stored bags of cash in a +safe without proper documentation. The transactions were falsely recorded as project marketing +expenses and collection commissions in SRS’ books and records, which FMC consolidated. In +addition to false descriptions, the transactions lacked appropriate support for the accounting +entries. + +8. Through another scheme, SRS entered into a purported collection commission +agreement with the relative of a MOH employee in connection with bidding on MOH dialysis +machine tenders. While SRS had salaried employees that collected overdue receivables from FMC + + 4 +customers, the MOH relative was paid over $200,000 for work already performed by these +employees – which was more than the combined total salary paid to these same employees. As a +result, FMC won the tender. + +9. A variety of other questionable business schemes included: i) sham consulting +agreements with doctors for services never performed, ii) payments to third party agents in which +doctors had beneficial interest, and iii) improper travel, entertainment, and gifts to doctors. FMC +failed to conduct due diligence on the doctors and agents, or take steps to ensure that agreed upon +services were provided. + +10. Some specific examples of the methods used by FMC to make illicit payments to +doctors in Saudi Arabia are as follows: + + Improper payments to Doctor A, a high-ranking official at Saudi Technical Organization , who according to +one email, played a critical role in FMC’s factory avoiding an inspection that “could have shut down the +factory or made it ineligible for tenders.” FMC payments to Doctor A were made through commission +agreements with no evidence of services provided. On at least one occasion, it was communicated to SRS +and FMC that Doctor A would not sign necessary papers for FMC products because he had not been paid. +Doctor A received over $220,000. FMC also employed two of Doctor A’s family members despite +knowledge that they were low performers in order to keep the doctor happy. + + Doctor B, another high-ranking official of Saudi Technical Organization and who served as a board +member of a prominent charity founded by the Saudi government as well as a director of a company that +provided FMC dialyzers to KSA hospitals, received payments pursuant to contracts with entities owned by +the doctor or consulting contracts in which there was no evidence that services were performed. Once the +contracts expired in 2008, SRS continued to make payments through late 2011 despite the lack of services +rendered. Doctor B was paid over $190,000. + + Payments were also made to Doctor C, the CEO of a charity established by a senior Saudi Official and an +organization very influential in determining MOH tender award recipients. In one email, the GM stated +that Doctor C had informed SRS that those who “will support the charity will get the [MOH] orders as +simple as that.” Doctor C and his family were also provided with travel that had no business purpose. In +addition on March 15, 2012, Doctor C, using an internet-based email account, emailed SRS GM a draft +commission contract for his assistance in securing contracts on behalf of FMC. Doctor C received over +$93,000. + + Head Nurse D, for a military hospital, also received cash payments over $213,000 through both the check - +to-cash scheme and payments as a purported consultant with no proof of services rendered. S RS made +product sales valued at approximately $1.467 million and won three MOH tenders for the military hospital . + + Improper gifts valued over $330,000 were provided to doctors and customers without adequate supporting +documentation with the more expensive gifts given to the more influential customers. +11. SRS also made at least $31,000 in improper payments to Saudi customs officials +through a third-party agent to avoid or reduce penalties and fees. Invoices from the customs agent +mischaracterized the payments as handling charges or miscellaneous expenses. SRS accounting + + 5 +records show that $1.76 million of additional payments to the customs agent lacked supporting +documentation of services it rendered. + +12. Numerous documents were altered, destroyed and falsified in the company’s +accounting records to conceal the bribes. The falsification and destruction of records intensified +once the company’s internal investigation began. For example, employees created fake accounting +records to support a $100,000 check-to-cash transaction related to a bid for a multi-billion dollar +MOH tender. The discovery of the $100,000 payment led FMC to withdraw from the tender. + +Conduct Relevant to Morocco + +13. From 2006 to 2010, an FMC Senior Officer and FMC Sales Manager in Germany +engaged in a scheme to pay bribes to a Moroccan Official, the chief nephrologist at two state +owned military hospitals, to obtain contracts. They entered into a sham marketing agreement with +Moroccan Official to pay him a 10% commission on a contract with Agadir Military Hospital with +half to be paid in 2007 and afterwards 12.5% annually. They also agreed to pay him bribes on +future projects in Morocco including Rabat Military Hospital. + +14. In order to get $123,000 in cash for the Moroccan Official, they devised a scheme +in which they paid a fake bonus to a West Africa manager who had a German bank account. The +senior FMC Germany managers assisted in backdating the fake bonus payment and amending +West Africa manager’s employment contract. West Africa manager then traveled to Germany with +the brother of Morocco Official to retrieve the cash from his German bank, which he then gave to +the brother for the Moroccan Official. Numerous red flags were overlooked in connection with the +bonus payment, including that the bonus payment order and contract amendment were clearly +backdated and didn’t have any relevance to the Moroccan business. + +15. Less than one month later, in February 2007, FMC Morocco and the Agadir +Military Hospital entered into a contract to build and provide products for a dialysis center. From +2008 through March 2012, FMC paid the Moroccan Official an additional $111,000 that was also +funneled through fake bonus payments to another FMC manager. All the bribe payments were +falsely recorded as commission payments. FMC earned over $2.3 million in revenue from the +Agadir hospital project as a result of its bribery scheme. + +16. FMC also paid bribes to the Moroccan Official to obtain a 2009 contract at the +Rabat Military Hospital, this time using a sham consultant contract with a Moroccan agent +associated with Moroccan Official. FMC failed to identify numerous red flags of the corruption, +including the fact that the contract was backdated and the purported invoices and endorsed checks +from the Moroccan agent were signed by Moroccan Official’s brother, who was also a FMC +Morocco manager. Between 2009 and 2010, FMC paid the agent approximately $221,000 +intended for Moroccan Official and falsely recorded as marketing expenses. + +17. In April 2012, FMC received a whistleblower email raising various allegations +about payments to government officials in Morocco. In May 2013, FMC received an anonymous + + 6 +complaint about improper payments related to military hospitals located in Agadir and Rabat. +Despite the 2012 allegations, and a subsequent email received in July 2013, FMC did not initiate +an investigation until January 2014, almost eight months later. After receiving preservation notices +in January 2014, some FMC managers destroyed records and deleted files from computers. +Overall, FMC benefited by over $3 million as a result of the corruption schemes in Morocco. + +Conduct Relevant to Eight West African Countries + +18. From 2007 to at least 2016, the same FMC Senior Officer and FMC Sales Manager +who orchestrated the bribe schemes in Morocco also engaged in schemes to bribe publicly- +employed hospital doctors and administrators in eight West African countries to win FMC +business. The countries include Gabon, Cameroon, Benin, Burkina Faso, Chad, Ivory Coast, +Niger, and Senegal. + +19. In Gabon for example, from October 2007 to 2009, FMC entered into sham +consultant agreements with three government hospital executives in return for their assistance in +obtaining business and timely payments from product sales to Centre Hospitalier de Libreville +(“CHL”), a public hospital. FMC agreed to pay the executives a kickback from each dialysis kit +sold to the hospital, paying the executives over $420,000. The bribe payments were falsely +recorded as “export commissions.” + +20. Beginning in 2009, a third party agent (“West African Supplier”) was used as a +conduit for the payments. FMC paid sham “service fees” to West African Supplier, who passed +the funds to public HCPs and hospital administrators who had previously been paid through fake +consultancy agreements. In May 2010, FMC backdated a service agreement with West African +Supplier to January 1, 2009 to better conceal the scheme. From 2009 to 2012, FMC paid West +African Supplier over $807,000 intended for the three Gabonese hospital executives, and over $2.1 +million intended for doctors in other West African countries. + +21. In 2013, West African Supplier’s relationship with FMC was changed from a third +party agent to a purported distributor. Rather than pay West African Supplier a service fee, it was +provided with a significant margin on sales to the Ministry of Health, CHL, and other West +African hospitals to fund the payments to HCPs. Numerous red flags were present that West +African Supplier was not a true distributor, including the facts that FMC continued to pay for the +delivery of its products to customers and that products were sold to West African Supplier at a +greatly reduced price. + +22. A FMC Sales Manager raised concerns about FMC’s loss of revenue using West +African Supplier as a distributor since they were receiving almost 50% less than what had been +invoiced to the hospitals under the prior scheme. The FMC finance director for West Africa +explained the loss of revenue was justified since West African Supplier was absorbing the costs of +making the phony commission payments to the doctors. With the costs shifted to West African +Supplier, FMC books showed expenses were significantly lower, which enabled FMC executives +to conceal the bribe payments to the hospital officials. From 2007 to 2016, FMC made improper + + 7 +payments in Gabon of approximately $2.3 million either directly to hospital executives or through +West African Supplier. + +23. FMC also used West African Supplier as a distributor to funnel improper +commission payments to doctors in return for product sales with public hospitals in Benin, Burkina +Faso, Ivory Coast, Niger, and Senegal. The conduct started in 2007 and continued through at least +2016 when FMC finally terminated the relationship. Throughout the schemes, an FMC West +Africa manager used his personal internet-based email accounts to send spreadsheets of bribe +payments to hospital employees to FMC Germany supervisors, who ensured that the improper +payments were made. + + 24. From 2007 through 2012, FMC engaged in a similar bribery scheme in Cameroon, +but used a different distributor. For example, FMC gave one hospital official 15% of all hospital +sales and gave another doctor five euros per dialysis kit sold. From 2007 to 2016, approximately +$1.7 million in improper payments to publicly-employed doctors were made from Cameroon +Distributor’s margin on the resale of the FMC products. + + 25. Despite the ongoing investigations of known corruption in multiple nearby +countries, FMC failed to implement a sufficient system of internal accounting controls. The +bribery schemes in West Africa continued by many of the same FMC managers involved in +schemes in other countries. The books and records often lacked adequate documentary support +and records were falsified. At the direction of more senior FMC managers, employees altered and +destroyed documents and deleted files from computers. Efforts were made to align fictitious +stories about the misuse of company funds and lower-level employees were berated if they didn’t +destroy their laptops or delete emails. Despite multiple red flags of bribery, FMC’s legal, +compliance, and internal audit functions failed to detect and prevent the bribery. Employees were +inadequately trained on the company’s anti-corruption policies, and due diligence on third parties +was minimal. Overall, FMC benefited by over $40 million as a result of the corruption schemes in +West African countries. + +Conduct Relevant to Angola + + 26. In 2004, FMC South Africa explored entering the Angolan dialysis market and +generated a report, which was circulated to several FMC employees, including FMC EMEA +Executive Vice President, that raised red flags about corruption, most notably that Angola’s +Director of Military Services (“Military Official”) received a 20% commission on all dialysis kits +sold to military hospitals and that Angolan Reseller was partially owned by government officials. +An August 7, 2007 email also warned of “concerns about this direct market entry . . . . [that] will +require some extra precaution, documentation, and management attention.” + + + 8 +27. In 2008, FMC Portugal began selling products into Angola through Angolan +Reseller, which was partly owned by Military Official. Further, FMC did not adequately train its +FMC Portugal employees about their dealings with government officials until late 2012. As a +result, from 2008 to 2010, bribes were paid in the form of 20% commissions to Military Official +through Angolan Reseller. + +28. In 2008, FMC created FMC Angola, a separate legal entity intended to make sales +into Angola with FMC Portugal retaining management. By 2010, FMC’s relationship with its +reseller became fractured. In June 2010, FMC Portugal orchestrated a scheme by which it +provided a 35% stake in FMC Angola to prominent Angolan nephrologists, including Military +Official, as well as to Angolan Doctor A, a key nephrologist at several Angolan public hospitals +that were state-owned entities. In April 2011, FMC granted a power of attorney to execute the +share transfer, signed by FMC’s senior legal and compliance officer and an FMC Board of +Management member. In January 2012, the shares were transferred to the Angolan officials +without their having paid anything in exchange and without any due diligence conducted on the +transaction. + +29. FMC Angola also entered into a business relationship with Angolan Distributor, +owned equally by the sons of Military Officer. First, FMC Angola paid Angolan Distributor +$559,972 for “temporary storage” services without a contract or actual services performed. FMC +Angola also entered into a contract with Angolan Distributor for “the Provision of Logistics +Services” whereby Angolan Distributor was to provide warehousing storage for $77,300 per +month, which it received despite never providing the warehousing. FMC Angola in fact already +had a lease agreement with another warehouse for the same services at a cost three times less than +the costs charged by Angolan Distributor. + +30. In June 2012, a draft internal audit report identified that in Angola “overall controls +are not functioning as intended” and flagged the Angolan Distributor temporary storage +arrangement as a problem since (1) the owner of the company was a shareholder of FMC Angola +and (2) there was a total lack of written documentation relating to the services. FMC Legal and +Compliance issued a directive in October 2012 freezing all payments to Angolan Distributor. +Despite the directive, FMC Angola continued to accrue an additional $878,900 on its books for +storage services never rendered, but ultimately was prevented from making the payment. + +31. During the freeze period, in addition to the temporary storage contract with +Angolan Distributor, FMC made Angolan Distributor its exclusive distributor in Angola of certain +products and gave Angolan Distributor one of FMC’s largest clients as a customer. The distributor +arrangement thereby created a significant margin, approximately 60% of sales, that was provided +to the government officials on over $433,000 in sales. + +32. FMC’s senior managers both in Portugal and at the parent level failed to take any +timely steps to put a stop to the numerous conflicts raised by the Angolan Distributor relationship. +FMC Portugal misled FMC’s internal audit team when they tried to determine if additional +relationships with the Angolan Distributor existed. Only upon being instructed in July 2013 to + + 9 +“Please freeze the contract” did a senior FMC Portugal manager report that Angolan Distributor +had been made a distributor for certain sales without any written contract. + +33. Despite this new information, it took until November 2013 for an FMC Legal and +Compliance team to review the relationship with Military Officer and the other minority +shareholders, including examining “the applicability and justification of dividends for shareholders +who have not paid for their interest in the company yet.” FMC Legal and Compliance ultimately +concluded in December 2013 that these facts raised “a serious issue under our company’s +government procedures and a problematic behavior . . . . it cannot be questioned that a clear +management board directive” was not followed. + + 34. During the entire time, FMC Angola also made payments to the other minority +shareholders, Angolan Doctor A and Angolan Doctor B, both government officials, by entering +into consulting contracts with each doctor. Per contracts, Angolan Doctor A was paid $7,500 per +month while Angolan Doctor B was paid $3,140 monthly. Angolan Doctor A discussed his +consultancy payments with FMC using his personal internet-based email account. Pursuant to +these contracts and other salary payments, the doctors received a total of approximately $400,000 +from FMC. There was no review of the contracts, no apparent due diligence for conflicts of +interest, and no documentation of services. Overall, FMC benefited by over $10 million as a result +of the corruption schemes in Angola. + +Conduct Relevant to Turkey + +35. Between 2005 and 2014, FMC Turkey entered into four separate joint ventures with +publicly employed doctors in exchange for those doctors directing business from their public +employer to FMC clinics. The doctors did not provide any capital in exchange for their shares. In +some cases, doctors’ shares were held in the names of other individuals. + +36. In a 2007 internal presentation by a FMC Turkey Vice-President, FMC Turkey set +forth a strategy to “select and find ways to work with nephrologists who refer the patients from the +important state hospitals.” The presentation included a proposal to pay salaries and bonuses to +doctors and provide them with 20-30% shares in joint ventures in exchange for the doctors +directing patients to FMC Turkey clinics. + +37. In one joint venture involving a prominent doctor at a public hospital in Diyarbakir, +a senior manager at FMC Germany wrote: “The professor who is our shareholder has very strong +relations with all state authorities including the university and other state hospitals. He is in a way +protector of our interests, benefits and operation in the city…. It is very hard to compete and +operate in this city if a powerful local is not backing you…. He should stay as our doctor for the +health and wellbeing of our system in this city.” + +38. After recapitalizing the JV, FMC paid that same doctor over $350,000 for his +unpaid interest in the JV, a payment that was based in part on patient enrollment. Then in 2013, +FMC Turkey sold the clinic’s assets to the doctor for $830,000. The FMC AG Board of + + 10 +Management approved the sale to the doctor in June 2013. As early as at least 2008, FMC senior +management were aware that the doctor did not pay for his initial 35% stake in the clinic, and that +his shares were being held in someone else’s name. + +39. In Erzurum, FMC gave shares to a professor with ties to the Turkish Minister of +Health, for referring patients from the university’s clinics. The professor didn’t make any capital +contributions for his shares. Ultimately, the professor was paid $323,000 for his 40% stake despite +having an outstanding $1,553,000 receivable. FMC Turkey managers discussed the need to make +the payment to the professor despite the outstanding receivable. In one exchange among FMC +managers, they noted that if they pushed for payment the “[Professor] would immediately turn his +back to us and fight with us. Knowing his before mentioned local and country level power, … he +would ask the doctors to refer back their patients to state hospital clinic and would also ask the +doctors to change to [a FMC competitor] all our PD patients.” + +40. In one JV that should have raised significant red flags, the approval request to the +FMC Board of Management stated that three doctors “currently working in the dialysis unit of the +State Hospital will participate in the startup both as shareholders and employees. It is expected that +on opening 60 patients will be referred from the State Hospital to the new clinic.” An email among +FMC Turkey senior management noted “Our expectations regarding [Yalova] are high as we have +very powerful doctors as partners in these startups. So after a year’s time we expect high patient +numbers and at least breakeven results in two years and a profitable operation after then.” None of +the doctors contributed capital for their shares. + +41. In another example, in Kayseri, FMC Turkey entered into a joint venture with a +nephrologist at the state hospital, noting “After 2 years, when the patient number increases preset +levels, [the doctor] will sell their shares at preset amounts and their debt to the company will be +deducted from this amount and the rest will be paid to them.” In August 2012, FMC Turkey +entered into a share purchase agreement to purchase the doctor’s 20% interest, which provided for +a purchase price predicated on the number of patients at the clinic. Between 2012 and 2013, the +doctor received $63,000. In 2014, he received $451,000 in cash and debt reductions, including +debts unrelated to the transaction, for his 20% stake. The payment was based principally on the +number of patients enrolled at the clinic at the time of the sale. Overall, FMC benefited by over $1 +million as a result of the improper conduct in Turkey. + +Conduct Relevant to Spain + +42. In certain public tenders between 2007 and 2014, FMC Spain received advance +information about tender specifications from publicly employed doctors or administrators. Some +of those doctors received improper payments from FMC Spain, including pursuant to consulting +agreements, or other benefits such as travel to medical congresses, trips to the United States, +donations to fund projects for the doctors, and gifts. In some of these tenders, FMC Spain sought +to have the doctors modify aspects of the tenders before the tenders were publicly announced or to +direct hospital sales to FMC. + + + 11 +43. FMC Spain entered into numerous consulting agreements with publicly employed +doctors with limited or no due diligence or compliance review. FMC Spain failed to adequately +document services performed by doctors who also assisted in obtaining or retaining business. Per +the agreements, fixed amounts to be paid to the doctors as “consultants” ranged from $16,000 to +approximately $187,000 per year. Sometimes payments were made without a written agreement. + +44. For example, in connection with a 2011 tender held by a Valencia state-owned +hospital, FMC Spain provided Spain Doctor A with draft tender technical specifications and +improvements, a draft scoring methodology, and proposed scores to win the tender. The doctor +used his personal email account to agree to some of the proposals with FMC winning the $2 +million tender. FMC Spain paid Spain Doctor A over $114,000 between 2008 and 2011. A +donation of over $40,000 was made to the hospital’s foundation for the doctor’s training programs, +and additional payments were made to the doctor between 2012 and 2014 of $51,600, along travel +sponsorships and gifts. + +45. According to a December 2014 email between senior FMC managers discussing +influencing a 2015 tender at a state-owned hospital in Torrecardenas, the company “got [Spain +Doctor B] to decide to support [FMC Spain] to obtain 60% of the adjudication.” Afterward, FMC +won 60% of the tender, valued at approximately $3 million. Spain Doctor B received payments +from FMC, as well as travel sponsorships and gifts. + +46. In some instances, FMC Spain made improper payments to doctors to refer patients +to FMC clinics or to use more expensive FMC products. Payments were sometimes made to the +doctors indirectly through consortiums owned by the doctors, or by FMC acquiring businesses +from the doctors and, thereafter, paying for the use of the buildings in which the businesses were +located. + +47. For example, FMC Spain made improper payments and provided benefits to six +publicly-employed doctors at a Spanish state-owned hospital. FMC Spain acquired a clinic owned +by the doctors and then paid them 5% of all subsequent sales, and then later leased space from the +doctors. FMC Spain provided additional compensation to the six doctors by entering into a +consulting agreement with various forms of businesses owned by the doctors. In total, FMC paid +the doctors over $3 million. + +48. In 2010, FMC’s Internal Audit team found FMC Spain failed to comply with the +company’s policy concerning dealings with foreign officials. In 2014, another Internal Audit +report, sent to the same recipients as the 2010 report and the entire FMC Management Board, +raised significant red flags about FMC Spain’s payments to public officials, including a lack of +documentation for payments related to gifts, donations, sponsorships, commissions, and +consultancy payments. The payments to doctors continued until 2015. Many of these payments +were improperly recorded as consulting expenses in the books and records of FMC and FMC +Spain. Overall, FMC benefited by over $20 million as a result of the improper conduct. + + + 12 +Conduct Relevant to China + +49. From 2007 to 2014, FMC China’s clinic business, Nephrocare, planned and +implemented incentive programs in which bonus payments were provided to publicly-employed +HCPs with which FMC China had supply agreements. The amounts of the payments were based +in part on the number of treatments provided and/or the number of new patients treated, and were +taken into consideration in the clinics’ financial models. Certain emails between FMC China +personnel suggest that the purpose of the bonus payments was to influence clinic procurement +decisions. + +50. During this time period, approximately $6.4 million in expense accrual entries were +related to such bonuses. However, only $1.7 million of the $6.4 million were reconciled to specific +payments. Of the remaining $4.7 million in accruals, the FMC China accounting records failed to +adequately tie the accruals and payments. They were recorded either in the year-end bonus or +other promotional expenses general ledger accounts, and were generally described in underlying +accounting records as “center marketing fees.” The inaccurate record-keeping can be attributed to +a senior FMC China manager, who cautioned a fellow employee in 2011 to avoid the use of the +term bonus due to “internal legal compliance” concerns when describing these payments. + +51. As a general practice, these bonuses would be paid once FMC China received +payments it was owed from hospitals for equipment purchases. Payments were made directly to +the doctors and nurses responsible for managing the clinics and in positions to influence clinic +procurement decisions. Some payments were made in cash, while others were made by wire +transfer, and later by a third party agent. FMC China stopped using the third party agent in 2014 +after an internal audit report raised concerns that the agent was being paid without corresponding +reports showing proof of services rendered. Overall, FMC benefited by over $10 million as a +result of the improper conduct. + +Conduct Relevant to the Balkan Region (Serbia and Bosnia) + +52. From 2007 to 2014, four doctors were paid over $329,000 by FMC while serving +on the Serbian Health Fund (“RFZO”) commission or other public tender commission while FMC +sought business from those same public commissions. FMC also paid for side trips and extra day +accommodations for publicly-employed doctors in connection with travel to medical conferences. +For example in 2008, FMC paid $393,000 for travel and accommodations for those same four +dual-employed doctors and their spouses to attend a conference in Philadelphia, PA, which +included non-business side trips to New York City and Cancun, Mexico. Doctors were also +provided laptops and GPS devices. + +53. FMC paid dual-employed doctors through a Serbian Agent. In 2010, FMC +compliance issued a directive prohibiting the use of Serbian Agent and requiring that service +contracts have more specificity to support payments. The directive was circumvented when an +FMC Serbia executive approved payments through a third-party transport vendor, who then paid +over $170,000 to the dual-employed doctors. FMC also made over $1 million in payments to + + 13 +“speed up” the clinic privatization process for four clinics. The consultant’s quarterly reports used +to support the payments were drafted by FMC senior managers. In another instance, FMC senior +managers gave a distributor, operated by a Serbian doctor, cash payments of over $62,000 plus 10 +dialysis machines free of charge, which he resold to FMC for $139,500 to prolong a tender silently +and avoid import taxes. + +54. In Bosnia, FMC also made improper payments to a prominent Bosnian government +doctor to support FMC’s bid to win a government tender to establish and operate clinics in the +regions of Srpska and Brcko. In November 2008, the doctor was elected to the Brcko Assembly. +A 2008 fourth quarter activity report from the doctor to FMC listed as an achievement for the +quarter “removing all problems regarding the tender in Brcko.” FMC initially failed to investigate +the meaning of that entry and instead paid the doctor $80,850 in December 2008. In February +2009, the doctor was elected the mayor of Brcko and thereafter the consultant agreement was +placed in the name of the doctor’s wife. By 2009, FMC paid the doctor over $1.3 million to +successfully win the bid. FMC also made over $957,000 in payments to a Bosnian healthcare +executive to assist FMC’s establishment of clinics in Brcko and Hercegovina, without any +evidence of services performed. Overall, FMC benefited by over $10 million as a result of the +improper conduct in Serbia and Bosnia. + +Conduct Relevant to Mexico + + 55. In 2010, FMC Mexico engaged in a scheme to increase the price per dialysis kit for +a tender with one of its largest customers in Mexico, Instituto Mexicano del Seguro Social +(“IMSS”), Mexico’s state-run social insurance agency. FMC Mexico employed the services of a +third party agent, Mexican Distributor, to pay kickbacks to IMSS officials relating to the tender +bid. Among other products, Mexican Distributor sold medical kits used in hemodialysis +treatments. + + 56. In January 2010, FMC Mexico was awarded a portion of an IMSS subrogation +tender, at an agreed reimbursement price of $92 per treatment, which reflected a price increase that +Mexican Distributor supposedly negotiated for its kits. On December 8, 2010, almost a full year +after the IMSS tender award, FMC Mexico’s General Director and Chief Financial Officer +executed a contract with Mexican Distributor, agreeing to pay Mexican Distributor a commission +of $0.40 per treatment performed on IMSS patients in 2010 and $0.20 per treatment in 2011. The +retroactive contract improperly identified the commissions as being for “advice.” + +57. An FMC internal audit report found several problems with this arrangement, +including insufficient evidence that Mexican Distributor rendered services that contributed to the +increase in price, the contract was signed a year after services were supposedly rendered, and +monetary payments were made retroactively. The audit identified $213,500 in improper +commissions paid to Mexican Distributor intended in part for IMSS officials in 2010 and 2011. +Overall, FMC benefited by over $2 million as a result of the improper conduct. + + + 14 +Legal Standards and Violations +58. Under Section 21C of the Exchange Act, the Commission may impose a cease-and- +desist order upon any person who is violating, has violated, or is about to violate any provision of +the Exchange Act or any rule or regulation thereunder, and upon any other person that is, was, or +would be a cause of the violation, due to an act or omission the person knew or should have known +would contribute to such violation. +59. As a result of conduct described above in Saudi Arabia, Angola and West Africa, +FMC violated Section 30A of the Exchange Act, which in relevant part makes it unlawful for an +issuer with securities registered under Section 12 of the Exchange Act or which is required to file +reports under Section 15(d) of the Exchange Act, or any employee or agent acting on its behalf, to +make use of the mails or any means or instrumentality of interstate commerce corruptly in +furtherance of an effort to pay or offer to pay anything of value to foreign officials for the purpose +of influencing their official decision-making, in order to assist in obtaining or retaining business. +Finally, each FMC subsidiary and entity was also an “agent” of FMC within the meaning of the +Foreign Corrupt Practices Act. + +60. Further, as a result of the conduct described in each of the countries above, FMC +violated Section 13(b)(2)(A) of the Exchange Act, which requires issuers to make and keep books, +records, and accounts which, in reasonable detail, accurately and fairly reflect their transactions +and dispositions of the assets of the issuer. + 61. In addition, as a result of the conduct described in each of the countries above, +FMC violated Section 13(b)(2)(B) of the Exchange Act, which requires issuers to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +(i) transactions are executed in accordance with management’s general or specific authorization; (ii) +transactions are recorded as necessary (I) to permit preparation of financial statements in conformity +with generally accepted accounting principles or any other criteria applicable to such statements, +and (II) to maintain accountability for assets; (iii) access to assets is permitted only in accordance +with management’s general or specific authorization; and (iv) the recorded accountability for assets +is compared with the existing assets at reasonable intervals and appropriate action is taken with +respect to any differences. + +FMC’s Self-Disclosure, Cooperation, and Remedial Efforts + +62. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. FMC self- +reported certain misconduct and voluntarily provided facts developed during its internal +investigation. FMC’s cooperation with the Commission’s investigation varied at times. FMC +produced documents, including key document binders and translations as needed, and made +current or former employees available to the Commission staff, including those who needed to +travel to the United States. + + + 15 +63. FMC’s remediation included the termination of employees and third parties +responsible for the misconduct and enhancements to its internal accounting controls. FMC +strengthened its global compliance organization; enhanced its policies and procedures regarding +the due diligence process and the use of third parties; created positions to address potential risks; +and increased training of employees on anti-bribery issues. + +Undertakings + + 64. Respondent undertakes to engage an Independent Compliance Monitor and report +to the Commission staff periodically pursuant to the provisions set forth in Attachment A of the +Order. + + 65. Respondent undertakes to require the Independent Compliance Monitor to enter +into an agreement that provides that for the period of engagement and for a period of two years +from completion of the engagement, the Independent Compliance Monitor shall not enter into any +employment, consultant, attorney-client, auditing or other professional relationship with +Respondent, or any of its present or former affiliates, directors, officers, employees, or agents +acting in their capacity. The agreement will also provide that the Independent Compliance +Monitor will require that any firm with which he/she is affiliated or of which he/she is a member, +and any person engaged to assist the Independent Compliance Monitor in performance of his/her +duties under this Order shall not, without prior written consent of the Division of Enforcement, +enter into any employment, consultant, attorney-client, auditing or other professional relationship +with Respondent, or any of its present or former affiliates, directors, officers, employees, or agents +acting in their capacity as such for the period of the engagement and for a period of two years after +the engagement. + + 66. Certify, in writing, compliance with the undertaking(s) set forth above. The +certification shall identify the undertaking(s), provide written evidence of compliance in the form +of a narrative, and be supported by exhibits sufficient to demonstrate compliance. The +Commission staff may make reasonable requests for further evidence of compliance, and +Respondent agrees to provide such evidence. The certification and supporting material shall be +submitted to Tracy L. Price, Deputy Chief, FCPA Unit, Division of Enforcement, U.S. Securities +and Exchange Commission, 100 F Street, N.E., Mail Stop 5631, Washington, D.C. 20549, with a +copy to the Office of Chief Counsel of the Enforcement Division, no later than sixty (60) days +from the date of the completion of the undertakings. + + 67. Respondent undertakes to do the following: in connection with this action and any +related judicial or administrative proceeding or investigation commenced by the Commission or to +which the Commission is a party, Respondent (i) agrees to appear and be interviewed by +Commission staff at such times and places as the staff requests upon reasonable notice; (ii) will +accept service by mail or facsimile transmission of notices or subpoenas issued by the Commission +for documents or testimony at depositions, hearings, or trials, or in connection with any related +investigation by Commission staff; (iii) appoints Respondent's undersigned attorney as agent to +receive service of such notices and subpoenas; (iv) with respect to such notices and subpoenas, + + 16 +waives the territorial limits on service contained in Rule 45 of the Federal Rules of Civil Procedure +and any applicable local rules, provided that the party requesting the testimony reimburses +Respondent's travel, lodging, and subsistence expenses at the then-prevailing U.S. Government per +diem rates; and (v) consents to personal jurisdiction over Respondent in any United States District +Court for purposes of enforcing any such subpoena. + +Non-Prosecution Agreement + + 68. FMC has entered into a three-year non-prosecution agreement with the United +States Department of Justice that acknowledges responsibility for criminal conduct relating to +certain findings in the Order. + +Non-Imposition of a Civil Penalty + +69. FMC acknowledges that the Commission is not imposing a civil penalty based +upon the imposition of an $84.7 million criminal fine as part of its resolution with the Department +of Justice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent FMC’s Offer. + + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + + A. Respondent FMC cease-and-desist from committing or causing any violations and +any future violations of Sections 30A, 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act [15 U.S.C. +§§ 78m(b)(2)(A), 78m(b)(2)(B), and 78dd-1]. + + B. Respondent shall comply with its Undertakings as enumerated in paragraphs 64 to +67 above. + + C. Respondent shall, within fourteen days of the entry of this Order, pay disgorgement +of $135 million and prejudgment interest of $12 million, for total payment of $147 million to the +Securities and Exchange Commission for transfer to the general fund of the United States Treasury, +subject to Exchange Act Section 21F(g)(3). If payment of disgorgement and prejudgment interest is +not made by the date the payment is required by this Order, additional interest shall accrue pursuant +to SEC Rule of Practice 600. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + + + 17 +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + Payments by check or money order must be accompanied by a cover letter identifying +FMC as a Respondent in these proceedings, and the file number of these proceedings; a copy of the +cover letter and check or money order must be sent to Tracy L. Price, Deputy Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549-5631. + +D. Respondent acknowledges that the Commission is not imposing a civil penalty +based in part upon its cooperation in a Commission investigation and related enforcement action. +If at any time following the entry of the Order, the Division of Enforcement (“Division”) obtains +information indicating that Respondent knowingly provided materially false or misleading +information or materials to the Commission, or in a related proceeding, the Division may, at its +sole discretion and with prior notice to the Respondent, petition the Commission to reopen this +matter and seek an order directing that the Respondent pay an additional civil penalty. +Respondent may contest by way of defense in any resulting administrative proceeding whether it +knowingly provided materially false or misleading information, but may not: (1) contest the +findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited +to, any statute of limitations defense. + + By the Commission. + + + + Vanessa A. Countryman + Acting Secretary + + + + + + + + + 18 +Attachment A +Independent Compliance Monitor +Retention of Monitor and Term of Engagement + 1. Fresenius Medical Care AG & Co. KGaA (“Company”) shall engage an +independent compliance monitor (the “Monitor”) not unacceptable to the staff of the Commission +within sixty (60) calendar days of the issuance of the Order. The Monitor shall have, at a +minimum, the following qualifications: (i) demonstrated expertise with respect to the FCPA and +other applicable anti-corruption laws, including experience counseling on FCPA issues; (ii) +experience designing or reviewing corporate compliance policies, procedures, and internal +accounting controls, including FCPA and anti-corruption policies and procedures; (iii) the ability +to access and deploy resources as necessary to discharge the Monitor’s duties; and (iv) sufficient +independence from the Company to ensure effective and impartial performance of the Monitor’s +duties. The Commission staff may extend the Company’s time period to retain the Monitor, in its +sole discretion. If the Monitor resigns or is otherwise unable to fulfill the obligations herein, the +Company shall within thirty (30) days retain a successor Monitor that has the same minimum +qualifications as the original monitor and that is not unacceptable to the Commission staff. + 2. The Company shall retain the Monitor for a period of not less than twenty-four +(24) months from the date the Monitor is retained (the “Term of the Monitorship”), unless the +Commission staff finds, in its sole discretion, that there exists a change in circumstances +sufficient to terminate the Monitorship early or extend the Monitorship as set forth in paragraphs +24-25 (Termination or Extension of Monitorship). + + 19 +Company’s Obligations + 3. The Company shall cooperate fully with the Monitor and provide the Monitor with +access to all non-privileged information, documents, books, records, facilities, and personnel as +reasonably requested by the Monitor, which fall within the Monitor’s mandate; such access shall +be provided consistent with the Company’s and the Monitor’s obligations under applicable local +laws and regulations, including but not limited to, applicable data privacy and national security +laws and regulations. The Company shall use its best efforts, to the extent reasonably requested, to +provide the Monitor with access to the Company’s former employees, third party vendors, agents, +and consultants. The Company does not intend to waive the protection of the attorney work +product doctrine, attorney-client privilege, or any other privilege applicable as to third parties. + 4. The parties agree that no attorney-client relationship shall be formed between the +Company and the Monitor. In the event that the Company seeks to withhold from the Monitor +access to information, documents, books, records, facilities, current or former personnel of the +Company, its third-party vendors, agents, or consultants that may be subject to a claim of attorney- +client privilege or to the attorney work-product doctrine, or where the Company reasonably +believes production would otherwise be inconsistent with the applicable law, the Company shall +work cooperatively with the Monitor to resolve the matter to the satisfaction of the Monitor. If, +during the Term of the Monitorship, the Monitor believes that the Company is unreasonably +withholding access on the basis of a claim of attorney-client privilege, attorney work-product +doctrine, or other asserted applicable law, and cannot resolve the matter cooperatively with the +Company, the Monitor shall notify the Commission staff. + + 20 + 5. Upon entry of this Order and during the Term of the Monitorship, should the +Company learn of credible evidence or allegations of corrupt payments, false books, records, or +accounts, or the failure to implement adequate internal accounting controls, the Company shall +promptly report such credible evidence or allegations to the Commission staff. Any disclosure by +the Company to the Monitor concerning credible evidence of corrupt payments, false books and +records, or internal accounting control issues shall not relieve the Company of any otherwise +applicable obligation to truthfully disclose such matters to the Commission staff. +Monitor’s Mandate + 6. The Monitor shall review and evaluate the effectiveness of the Company’s policies, +procedures, practices, internal accounting controls, recordkeeping, SOX controls, and financial +reporting processes (collectively, “Policies and Procedures”), as they relate to the Company’s +current and ongoing compliance with the anti-bribery, books and records, and internal accounting +controls provisions of the FCPA and other applicable anti-corruption laws (collectively, “Anti- +corruption Laws”), and make recommendations reasonably designed to improve the effectiveness +of the Company’s Policies and Procedures and FCPA corporate compliance program (the +“Mandate”). This Mandate shall include an assessment of the Management and Supervisory +Boards and senior management’s commitment to, and effective implementation of, the Policies and +Procedures and FCPA corporate compliance program. In carrying out the Mandate, to the extent +appropriate under the circumstances, the Monitor may coordinate with the Company personnel, +including in-house counsel or through designated outside counsel, compliance personnel, and +internal auditors. To the extent the Monitor deems appropriate, it may rely on the Company’s +processes, and on sampling and testing methodologies. The Monitor is not expected to conduct a + + 21 +comprehensive review of all business lines, all business activities, and all markets. This Mandate +shall not apply to Fresenius Medical Care Holdings, Inc. and its subsidiaries, to the extent that +those entities and/or their employees and agents operate exclusively within the United States. +Nonetheless, the Monitor may seek a briefing on the regulatory environment and the structure of +the compliance program in the United States. If requested by the Monitor, the Company shall +provide such a briefing, with reasonable consideration of the scope of the Mandate. Any disputes +between the Company and the Monitor with respect to the Work Plan shall be decided by the +Commission staff in its sole discretion. + 7. During the Term of the Monitorship, the Monitor shall conduct an initial review +and two follow-up reviews and prepare an initial report and a first and second follow-up report, +and issue a Certification Report if appropriate, as described below. +Initial Review and Report + 8. Promptly upon being retained, the Monitor shall prepare a written Work Plan, +which shall be submitted to the Company and the Commission staff for comment no later than +thirty (30) days after being retained. +9. In order to conduct an effective Initial Review and to understand fully any existing +deficiencies in the Company’s Policies and Procedures and FCPA corporate compliance program, +the Monitor’s Work Plan shall include such steps as are reasonably necessary to understand the +Company’s business and its global anti -corruption risks. The steps shall include: +(a) inspection of relevant documents, including the internal accounting +controls, recordkeeping, and financial reporting policies and procedures as +they relate to the Company’s compliance with the books and records, + + 22 +internal accounting controls, and anti-bribery provisions of the FCPA and +other applicable anti-corruption laws; +(b) onsite observation of selected systems and procedures comprising the +Company’s Policies and Procedures and FCPA corporate compliance +program, including anti-corruption compliance procedures, internal +accounting controls, recordkeeping, due diligence, and internal audit +procedures, including at sample sites; +(c) meetings with, and int erviews o f, as relevant, the Company employees, +officers, di rectors, and, where appropriate and feasible, its thi rd-party +vendors, agents, or consultants and other persons at mutually convenient +times and places; and +(d) risk-based analyses, studies, and testing of the Company’s FCPA +corporate compliance program. +10. The Monitor may take steps as reasonably necessary to develop an understanding +of the facts and circumstances surrounding prior FCPA violations that gave rise to this action +or violations of other applicable Anti-corruption Laws, but shall not conduct his or her own +inquiry into those historical events. +11. After receiving the Initial Review Work Plan, the Company and Commission staff +shall provide any comments concerning the Initial Review Work Plan within fifteen (15) days to +the Monitor. Any disputes between the Company and the Monitor with respect to the Initial +Review Work Plan shall be decided by the Commission staff in its sole discretion. Following + + 23 +comments by the Company and Commission staff, the Monitor will have ten (10) days to submit a +Final Initial Review Work Plan. +12. The Initial Review shall commence no later than sixty (60) days from the date of +the engagement of the Monitor (unless otherwise agreed by the Company, the Monitor, and the +Commission staff). The Monitor shall issue a written report within one hundred twenty (120) days +of commencing the Initial Review, setting forth the Monitor’s assessment and, if necessary, +making recommendations reasonably designed to improve the effectiveness of the Company’s +Policies and Procedures and FCPA corporate compliance program as they relate to the Company’s +compliance with the FCPA and other applicable Anti-corruption Laws. The Monitor should +consult with the Company concerning his or her findings and recommendations on an ongoing +basis and should consider the Company’s comments and input to the extent the Monitor deems +appropriate. The Monitor may also choose to share a draft of his or her report with the Company +and Commission staff prior to finalizing it. The Monitor shall provide the report to the +Management Board of the Company and contemporaneously transmit a copy to Commission staff. +13. Within ninety (90) days after receiving the Monitor’s Initial Review Report, the +Company shall adopt and implement all recommendations in the report, provided, however, that as +to any recommendation that the Company considers unduly burdensome, impractical, costly, or +inconsistent with applicable law or regulation, the Company need not adopt that recommendation +at that time, but may submit in writing to the Monitor and the Commission staff within fifteen (15) +days of receiving the report, an alternative policy, procedure, or system designed to achieve the +same objective or purpose. + + 24 +14. In the event the Company and the Monitor are unable to agree on an acceptable +alternative proposal, the Company shall promptly consult with the Commission staff. Any +disputes between the Company and the Monitor with respect to the recommendations shall be +decided by the Commission staff in its sole discretion. The Commission staff shall consider the +Monitor’s recommendation and the Company’s reasons for not adopting the recommendation in +determining whether the Company has fully complied with its obligations. Pending such +determination, the Company shall not be required to implement any contested recommendation(s). +15. With respect to any recommendation that the Monitor determines cannot +reasonably be implemented within ninety (90) days after receiving the report, the Monitor may +extend the time period for implementation with prior written approval of the Commission staff. +Follow Up Reviews +16. The Monitor shall conduct a minimum of two Follow-Up Reviews. The Monitor +shall submit a written work plan for each follow-up review to the Company and Commission +staff within sixty (60) calendar days after the issuance of either the initial report, or the +applicable follow-up report. The Company and Commission staff shall provide any comments +concerning the work plan within fifteen (15) calendar days in writing to the Monitor. Any +disputes between the Company and the Monitor with respect to the written work plan shall be +decided by the Commission staff in its sole discretion. Following comments by the Company +and Commission staff, the Monitor will have ten (10) calendar days to make revisions to the +follow-up work plan. +17. The Monitor shall commence the follow-up review pursuant to the work plan no +later than ninety (90) calendar days after the issuance of the initial report, or applicable follow-up + + 25 +report, (unless otherwise agreed by the Company, the Monitor and the Commission staff). The +Monitor shall issue its written follow-up report within one hundred-twenty (120) calendar days +of commencing the follow-up review. The follow-up report shall set forth the Monitor’s +assessment of, and any additional recommendations regarding, the Policies and Procedures as +they relate to the Company’s compliance with the Anti-corruption Laws; the Monitor’s +assessment of the implementation by the Company of any recommendations made in the initial +report, or follow-up report if applicable; and the Monitor’s assessment of the commitment of the +Company’s Supervisory and Management Boards and senior management to compliance with +the FCPA. +18. Within ninety (90) days after receiving the Monitor’s follow up report, the +Company shall adopt and implement all recommendations in the report, provided, however, that as +to any recommendation that the Company considers unduly burdensome, impractical, costly, or +inconsistent with applicable law or regulation, the Company need not adopt that recommendation +at that time, but may submit in writing to the Monitor and the Commission staff within fifteen (15) +days of receiving the report, an alternative policy, procedure, or system designed to achieve the +same objective or purpose. +19. In the event the Company and the Monitor are unable to agree on an acceptable +alternative proposal within fifteen (15) days, the Company shall promptly consult with the +Commission staff. Any disputes between the Company and the Monitor with respect to the +recommendations shall be decided by the Commission staff in its sole discretion. The +Commission staff shall consider the Monitor’s recommendation and the Company’s reasons for +not adopting the recommendation in determining whether the Company has fully complied with + + 26 +its obligations. Pending such determination, the Company shall not be required to implement any +contested recommendation(s). The Monitor shall repeat the process of Follow-Up Reviews +until the terms in paragraph 21 (Certification of Compliance) or paragraphs 24-25 (Termination + +or Extension of Monitorship) are met. + +20. Throughout the Term of the Monitorship, the Monitor shall disclose to the +Commission staff any credible evidence that corrupt or otherwise suspicious transactions +occurred, or payments of things of value were offered, promised, made or authorized by any +entity or person within the Company, or any entity or person working directly or indirectly for or +on behalf of the Company, or that related false books and records may have been maintained by +or on behalf of the Company. The Monitor shall contemporaneously notify the Company’s +Global General Counsel, Chief Compliance Officer, or Audit Committee for further action unless +at the Monitor’s discretion he or she believes disclosure to the Company would be inappropriate +under the circumstances. The Monitor shall address in his or her reports the appropriateness of +the Company’s response to all improper activities, whether previously disclosed to the +Commission staff or not. +Certification of Compliance + +21. At the conclusion of the ninety (90) calendar day period following the issuance of +the second follow-up report, or later follow-up report if applicable, if the Monitor believes that +the Company’s Policies and Procedures and FCPA compliance program are reasonably designed +and implemented to detect and prevent violations of the Anti-corruption Laws and are +functioning effectively, the Monitor shall certify the Company’s compliance with its compliance +obligations under the Order. The Monitor shall then submit to the Commission staff a written + + 27 +report (“Certification Report”) within forty (40) calendar days. The Certification Report shall set +forth an overview of the Company’s remediation efforts to date, including the implementation +status of the Monitor’s recommendations, and an assessment of the sustainability of the +Company’s remediation efforts. The Certification Report should also recommend the scope of +the Company’s future self-reporting. Also at the conclusion of the ninety (90) calendar day +period following the issuance of the second follow-up report, the Company shall certify in +writing to the Commission staff, with a copy to the Monitor, that the Company has adopted and +implemented all of the Monitor’s recommendations in the initial and follow-up report(s), or the +agreed-upon alternatives. The Monitor or the Company may extend the time period for issuance +of the Certification Report or the Company’s certification, respectively, with prior written +approval of the Commission staff. +Self-Reporting Period + +22. At such time as the Commission staff approves the Certification Report and the +Company’s certification, the monitorship shall be terminated, and the Company will be permitted +to self-report to the Commission staff on its enhanced compliance obligations for the remainder +of the term of the Order. The Commission staff, however, reserves the right to terminate the +monitorship absent certification by the Monitor, upon a showing by the Company that +termination is, nevertheless, in the interests of justice. +23. If permitted to self-report to the Commission staff, the Company shall thereafter +submit to the Commission staff a written Initial Self-Report and Follow Up Self-Report at six (6) +month intervals, setting forth a complete description of its remediation efforts to date, its +proposals to improve the Company’s Policies and Procedures and FCPA compliance program for + + 28 +ensuring compliance with the Anti-corruption Laws, and the proposed scope of the subsequent +reviews. The Company shall disclose any credible evidence that corrupt or otherwise suspicious +transactions occurred, or payments of things of value were offered, promised, or provided to +foreign officials, that it learns of that occurred after the date of this Consent. The Company may +extend the time period for issuance of the self-report with prior written approval of the +Commission staff. +Termination or Extension of the Monitorship + +24. If at the conclusion of the ninety (90) calendar-day period following the issuance +of the second follow-up report, or later follow-up report if applicable, the Commission staff +concludes in its sole discretion that the Company has not by that time successfully satisfied its +compliance obligations under the Order, the Term of the Monitorship shall be extended for +twelve (12) months. Under such circumstances, the Monitor shall commence additional Follow- +Up Reviews in accordance with Paragraphs 16-19. +25. If at the conclusion of the thirty-six (36) month period the Commission staff +concludes the Company has not met its obligations under the Order, the Commission staff in its +sole discretion may extend the Monitorship or Self-Reporting requirements up to forty-eight (48) + +months from the issuance of the Order, and require reporting as set forth for Follow-Up Reviews +or Self-Reporting. +Extensions of Time + +26. Upon request by the Monitor or the Company, the Commission staff may extend +any procedural time period set forth above for good cause shown. + + 29 +Confidentiality of Reports +27. The reports submitted by the Monitor and the periodic reviews and reports +submitted by the Company will likely include confidential financial, proprietary, competitive +business, or commercial information. Public disclosure of the reports could discourage +cooperation, impede pending or potential government investigations, or undermine the objective +of the reporting requirement. For these reasons, among others, the reports and the contents +thereof are intended to remain and shall remain non-public, except (i) pursuant to court order, (ii) +as agreed to by the parties in writing, (iii) to the extent that the Commission determines in its +sole discretion that disclosure would be in furtherance of the Commission’s discharge of its +duties and responsibilities, or (iv) as is otherwise required by law. +Address for All Written Communications and Reports + + 28. All reports or other written communications by the Monitor or the Company +directed to the Commission staff shall be transmitted to Tracy L. Price, FCPA Unit, Deputy Chief, +Division of Enforcement, U.S. Securities and Exchange Commission, 100 F Street NE, +Washington D.C. 20549. + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4034.txt b/raw/aaer/2019/AAER-4034.txt new file mode 100644 index 0000000000000000000000000000000000000000..f310af279662d26c1624d0699b9f72bb72cdf2a3 --- /dev/null +++ b/raw/aaer/2019/AAER-4034.txt @@ -0,0 +1,151 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85478 / April 1, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4034 / April 1, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-18769 + + +In the Matter of + + JENNIFER F. WOLF, CPA, + +Respondent. + + +ORDER IMPOSING REMEDIAL +SANCTIONS PURSUANT TO RULE +102(e) OF THE COMMISSION’S RULES +OF PRACTICE + + I. + + The Securities and Exchange Commission (“Commission”) instituted these public +proceedings against Jennifer F. Wolf (“Respondent” or “Doe”) pursuant to Rule 102(e)(3)(i) of +the Commission’s Rules of Practice.1 + + II. + + Respondent has submitted an Offer of Settlement (the “Offer”) which the Commission +has determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over her and +the subject matter of these proceedings, and the findings contained in Section III. below, which +are admitted, Respondent consents to the entry of this Order Imposing Remedial Sanctions +(“Order”), as set forth below. + + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Respondent Jennifer F. Wolf, 54, is and, at all relevant times, was a certified +public accountant in the State of California, and is the former Acting Controller of Logitech +International, S.A. (“Logitech”). + +2. On April 18, 2016, the Commission filed a complaint against Wolf in the United +States District Court for the Northern District of California, entitled Securities and Exchange v. +Commission v. Bardman, et al., No. 15-cv-02023-JST (N.D. Cal.) (the “District Court Action”). +The complaint alleged, among other things, that Wolf’s conduct resulted in Logitech’s filing a +false and misleading Form 10-K for the fiscal year ended March 31, 2011 based on Logitech’s +failure to record an inventory reserve for its Revue product. + +3. On September 6, 2018, the Court entered a consent final judgment against Wolf +(the “Final Judgment”) that, inter alia, permanently enjoined her from future violations of +Section 17(a)(3) of the Securities Act of 1933 and Rule 13b2-1 of the Securities and Exchange +Act of 1934. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest +to impose the sanction agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent is suspended from appearing or practicing before the Commission as an +accountant. + + B. After one year from the date of this order, Respondent may request that the +Commission consider her reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934). Such an application must satisfy the Commission that +Respondent’s work in her practice before the Commission as an accountant will be reviewed +either by the independent audit committee of the public company for which she works or in some +other acceptable manner, as long as she practices before the Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act +of 1934. Such an application will be considered on a facts and circumstances basis with + + + 3 +respect to such membership, and the applicant’s burden of demonstrating good cause for +reinstatement will be particularly high given the role of the audit committee in financial and +accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + +(a) Respondent, or the public accounting firm with which she is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + +(b) Respondent, or the registered public accounting firm with which +she is associated, has been inspected by the Board and that inspection did not identify any +criticisms of or potential defects in the Respondent’s or the firm’s quality control system that +would indicate that the respondent will not receive appropriate supervision; +(c) Respondent has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + +(d) Respondent acknowledges her responsibility, as long as she +appears or practices before the Commission as an independent accountant, to comply with all +requirements of the Commission and the Board, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews, and quality control standards. + + C. The Commission will consider an application by Respondent to resume appearing +or practicing before the Commission provided that her state CPA license is current and she has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause will be +considered on a facts and circumstances basis with due regard for protecting the integrity of the +Commission’s processes. + +By the Commission. + + + + Vanessa A. Countryman + Acting Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4035.txt b/raw/aaer/2019/AAER-4035.txt new file mode 100644 index 0000000000000000000000000000000000000000..83296bc0e45134091800dbd76879e2548c768122 --- /dev/null +++ b/raw/aaer/2019/AAER-4035.txt @@ -0,0 +1,109 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85483 / April 2, 2019 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4035 / April 2, 2019 +ADMINISTRATIVE PROCEEDING +File No. 3-13447 + +In the Matter of +Kevin E. Brooks, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On April 17, 2009, Kevin E. Brooks, CPA (“Brooks”) was suspended from appearing or +practicing before the Commission as an accountant as a result of settled public administrative +proceedings instituted by the Commission against him pursuant to Rule 102(e)(3) of the +Commission’s Rules of Practice.1 This order is issued in response to Brooks’ application for +reinstatement to appear and practice before the Commission as an accountant responsible for the +preparation or review of financial statements required to be filed with the Commission. +The Commission found that Brooks had been permanently enjoined by a United States +District Court from future violations of Section 17(a)(2) and (3) of the Securities Act of 1933 and +Sections 13(b)(5) and 16(a) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rules +13b2-1, 13b2-2, and 16a-3 thereunder, and aiding and abetting violations of Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, and 13a-13 +thereunder in an action brought by the Commission. In its complaint in the injunctive action, the +Commission alleged that that Quest Software, Inc. (“Quest”), in part through the misconduct of +Brooks, misstated its financial statements by failing to report compensation expense associated +with stock options granted in-the-money through undisclosed backdating of grant dates from +1999 through 2001. The complaint also alleged that Brooks failed to ensure that the stock option +grants at Quest were properly accounted for and disclosed. The complaint further alleged that +Brooks caused misrepresentations to be made to Quest’s auditors by stating in management + +1 See Accounting and Auditing Enforcement Release No. 2964 dated April 17, 2009. Brooks was permitted, +pursuant to the order, to apply for reinstatement after five years upon making certain showings. + + 2 +representation letters that all stock options were made with an exercise price equal to the fair +market value of Quest stock on the date of grant. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Brooks +attests that he will undertake to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Brooks is not, at this time, seeking to appear +or practice before the Commission as an independent accountant. If he should wish to resume +appearing and practicing before the Commission as an independent accountant, he will be +required to submit an application to the Commission showing that he has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Brooks’ +suspension from practice before the Commission as an independent accountant continues in +effect until the Commission determines that a sufficient showing has been made in this regard in +accordance with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Brooks, it appears that he has complied with the terms of the April 17, 2009 order suspending +him from appearing or practicing before the Commission as an accountant, that no information +has come to the attention of the Commission relating to his character, integrity, professional +conduct or qualifications to practice before the Commission that would be a basis for adverse +action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, and that +Brooks, by undertaking to have his work reviewed by the independent audit committee of any +company for which he works, or in some other manner acceptable to the Commission, in his +practice before the Commission as a preparer or reviewer of financial statements required to be +filed with the Commission, has shown good cause for reinstatement. Therefore, it is accordingly, + + + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Kevin E. Brooks, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Vanessa A. Countryman +Acting Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4036.txt b/raw/aaer/2019/AAER-4036.txt new file mode 100644 index 0000000000000000000000000000000000000000..92b782b7b7dad7ebe7065cb340e46f9dc51bc439 --- /dev/null +++ b/raw/aaer/2019/AAER-4036.txt @@ -0,0 +1,79 @@ + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85496 / April 3, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4036 / April 3, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19130 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +EVAN R. KITA, CPA, : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Evan R. Kita (“Kita”) pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice [17 C.F.R. § 201.102(e)(2)].1 + + II. + +The Commission finds that: + +1. Kita is a certified public accountant in Pennsylvania. + +2. On September 6, 2018, a judgment of conviction was entered against Kita in +United States v. Evan Kita, 3:17-cr-00347-MAS in the United States District Court for the +District of New Jersey, finding him guilty of conspiracy to commit securities fraud, in violation +of 18 U.S.C. § 371, and securities fraud, in violation of 15 U.S.C. §§ 78j(b) and 78ff and 17 +C.F.R. §§ 240.10b-5 and 240.10b5-2. + + +1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + + + +2 + + +3. As a result of this conviction, Kita was sentenced to 6 months imprisonment in a +federal penitentiary, and two years of supervised release with six months of location monitoring. +In addition, Kita was ordered to forfeit $8,920 and pay a fine of $5,000. + + +III. + +In view of the foregoing, the Commission finds that Kita has been convicted of a felony +within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + +Accordingly, it is ORDERED, that Evan R. Kita is forthwith suspended from appearing +or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice. + +By the Commission. + + + +Vanessa A. Countryman +Acting Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4037.txt b/raw/aaer/2019/AAER-4037.txt new file mode 100644 index 0000000000000000000000000000000000000000..c7f8be6315b1b7627057dede9534aeacdc77fb51 --- /dev/null +++ b/raw/aaer/2019/AAER-4037.txt @@ -0,0 +1,747 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85518 / April 5, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4037 / April 5, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19132 + + + + + +In the Matter of + +KLJ & Associates, LLP, Kent +L. Jensen, CPA, and Ronald A. +Burgmeier, CPA + +Respondents. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO SECTION 4C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative proceedings be, and hereby are, instituted against KLJ & Associates, LLP (“KLJ”), +Kent L. Jensen, CPA (“Jensen”), and Ronald A. Burgmeier, CPA (“Burgmeier”) (collectively, +“Respondents”) pursuant to Section 4C1 of the Securities Exchange Act of 1934 (“Exchange Act”) + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + + +2 + +and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 +II. + + In anticipation of the institution of these proceedings, each Respondent has submitted an +Offer of Settlement (the “Offers”) which the Commission has determined to accept. Solely for +the purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting +Administrative Proceedings Pursuant to Section 4C of the Securities Exchange Act of 1934 and +Rule 102(e) of the Commission’s Rules of Practice, Making Findings and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds that: + +Summary + +1. This matter concerns Respondents’ multiple failures to comply with Public Company +Accounting Oversight Board (“PCAOB”) standards in connection with ten audits and 11 interim +reviews – for the years ended June 30, 2012 through December 31, 2015 and for the periods +ended September 30, 2014 through March 31, 2016, respectively, (collectively, the “relevant +period”) – for five issuer clients.3 + +2. Specifically, in connection with their work on audits and interim reviews referenced +herein during the relevant period, KLJ and Jensen failed to: (i) obtain sufficient appropriate +evidence to provide a reasonable basis for KLJ’s audit reports, properly evaluate management’s +accounting estimates, and adequately document the audit procedures performed; (ii) document +required communications with the issuers’ audit committees; (iii) document analytical +procedures for reviews of interim financial information; (iv) obtain written representations from +management; (v) prepare engagement completion documents; and (vi) exercise due professional +care and professional skepticism. Moreover, Burgmeier failed to (i) comply with the + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or improper +professional conduct. + +3 References to PCAOB auditing standards refer to the standards in effect at the time of the conduct +described herein. + + +3 + +requirements for engagement quality reviews (“EQR”) and (ii) exercise due professional care +and professional skepticism. + +3. By failing to conduct audits and interim reviews in accordance with PCAOB standards, +Respondents engaged in improper professional conduct. + +Respondents + +4. KLJ & Associates, LLP is a Minnesota limited liability partnership with two CPA +partners and locations in Edina, Minnesota and West Chicago, Illinois. KLJ was registered with +the PCAOB until December 2017, when it voluntarily withdrew its registration. +5. Kent L. Jensen, age 47, holds a CPA license in Illinois and was licensed as a CPA in +Minnesota until December 31, 2017. He is the managing partner and 60% owner of KLJ and was +the leader of the firm’s SEC audit practice until late 2017. Jensen was the Engagement Partner on +all of the audits and interim reviews, and the primary preparer of the audit work papers, referenced +herein. + +6. Ronald A. Burgmeier, age 58, holds a Minnesota CPA license. He joined KLJ in 2013 +and is the firm’s minority partner, owning a 40% share of the partnership. Burgmeier served as the +EQR partner for all of the audits and reviews referenced herein. + +Other Relevant Entities + +7. Issuer A is a Nevada corporation with its principal place of business in Washington +State. Issuer A’s business includes the sale of lingerie and sexual health and wellness products. +From May 14, 2014 through December 31, 2014, Issuer A had a reporting obligation under +Section 15(d) of the Exchange Act. Issuer A was quoted on the Over the Counter market +(“OTC”) until November 2017. Relevant to this Order, KLJ audited Issuer A’s financial +statements and notes to the financial statements (collectively, “financial statements”) for the +years ended December 31, 2014 and 2015, which were included in Issuer A’s Form 10-K for the +year ended December 31, 2015. KLJ also performed reviews of interim financial information for +the periods ended March 31, 2015, June 30, 2015, September 30, 2015, and March 31, 2016, +included in Forms 10-Q.4 + +8. Issuer B is a Nevada corporation with its principal place of business in Ontario, +Canada. Issuer B’s business includes the sale of pharmaceutical and natural health products. +Issuer B has never had a reporting obligation. Issuer B was quoted on the OTC until June 2017. +Relevant to this Order, KLJ audited Issuer B’s financial statements for the years ended + +4 “Periods ended” represents the three months and year-to-date periods that end on the respective financial +statement date. For example, the period ended June 30, 2015 would represent the financial results for the three +months and six months ended on June 30, 2015. + +4 + +December 31, 2013 and 2014, and performed a review of interim financial information for the +three and six months ended June 30, 2015. The annual financial statements and interim financial +information KLJ audited and reviewed were included in Forms S-1 and S-1/A, filed with the +Commission, which never became effective. + +9. Issuer C is a Texas corporation with its principal place of business in Texas. Issuer C’s +business includes the sale of investment research. Issuer C had a reporting obligation under +Section 15(d) of the Exchange Act starting on June 17, 2015. Relevant to this Order, KLJ +audited Issuer C’s financial statements for the years ended December 31, 2013 and 2014, and +performed the reviews of interim financial information for the three and nine months ended +September 30, 2014. These annual financial statements and interim financial information were +included in Forms S-1, which became effective June 17, 2015. + +10. Issuer D is a Delaware corporation with its principal place of business in Nebraska. +Issuer D’s business includes the retail sale of cellular and consumer finance services. Issuer D’s +stock was registered with the Commission pursuant to Section 12(g) of the Exchange Act and it +has a reporting obligation pursuant to Section 13(a) of the Exchange Act. It is quoted on the +OTC. Relevant to this Order, KLJ performed reviews of Issuer D’s interim financial information +that was included in the Forms 10-Q for the periods ended June 30, 2014, September 30, 2014, +March 31, 2015, June 30, 2015, and September 30, 2015. + +11. Issuer E is a Nevada corporation with its principal place of business in Nevada. Issuer +E is a development stage company with no operations that purportedly intends to acquire assets +or shares of other entities. Issuer E had a reporting obligation under Section 15(d) of the +Exchange Act from August 12, 2010 through June 30, 2011. Relevant to this Order, KLJ audited +Issuer E’s financial statements for the years ended June 30, 2012 and 2013, which were included +in Forms 10-K for those years. +Facts + +A. Failure to Obtain Sufficient Appropriate Audit Evidence to Support the Audit +Opinion, Properly Evaluate the Accounting Estimates Made by Management, +Properly Audit Fair Value Measurements, and Adequately Document the Audit +Procedures Performed (AS No. 15, AU § 342, AU § 328 and AS No. 3) +12. PCAOB Auditing Standard No. 15, Audit Evidence (“AS No. 15”), requires that the +auditor plan and perform audit procedures to obtain sufficient appropriate audit evidence to +provide a reasonable basis for his or her opinion. When using the information provided by an +issuer as audit evidence, the auditor should evaluate the evidence by testing its accuracy and + +5 + +completeness and evaluating whether it is sufficiently precise and detailed for the purposes of the +audit.5 +13. Pursuant to PCAOB Auditing Standard AU § 342.07, Auditing Accounting Estimates, +the auditor’s objective when evaluating accounting estimates is to obtain sufficient appropriate +evidential matter to provide reasonable assurance that all accounting estimates that could be +material to the financial statements have been developed, those accounting estimates are +reasonable under the circumstances, the accounting estimates are presented in conformity with +applicable accounting principles, and are properly disclosed. +14. PCAOB Auditing Standard AU § 328, Auditing Fair Value Measurements and +Disclosures, states that an auditor should obtain sufficient appropriate audit evidence to provide +reasonable assurance that fair value measurements and disclosures are in conformity with +GAAP. The auditor should test the data used to develop the fair value measurements and +disclosures and evaluate whether the fair value measurements have been properly determined +from such data and management’s assumptions. Specifically, the auditor evaluates whether the +data on which the fair value measurements are based, including the data used in the work of a +specialist, is accurate, complete, and relevant; and whether fair value measurements have been +properly determined using such data and management’s assumptions.6 +15. PCAOB Auditing Standard No. 3, Audit Documentation (“AS No. 3”), requires an +auditor to prepare and retain documentation that provides a written record of the basis for the +auditors’ conclusions. Audit documentation must clearly demonstrate that the work was in fact +performed. Among other items, the audit documentation must contain sufficient information to +enable an experienced auditor, having no previous connection with the engagement, to +understand the nature, timing, extent, and results of the procedures performed, evidence +obtained, and conclusions reached. Audit documentation must also contain sufficient +information to enable an experienced auditor, having no previous connection with the +engagement, to determine, among other things, the person who reviewed the work and the date +of such review.7 The following examples demonstrate Respondents’ violations of these auditing +standards. +16. Jensen was KLJ’s Engagement Partner for each audit referenced herein, and in many +instances performed the audit work himself. The PCAOB defines the engagement partner as the +member of the engagement team with primary responsibility for the audit.8 Accordingly, the +engagement partner is responsible for, among other things, compliance with PCAOB standards +in connection with the audit. + +5 AS No. 15 at .4 and .10. +6 AU § 328 at .03, and .39. +7 AS No. 3 at .1, .5, and .6. +8 AS No. 10. + +6 + +i. Issuer A Audit for the Year Ended December 31, 2014 +17. As reflected in the audit work papers for the audit of Issuer A’s 2014 financial +statements included in its Form 10-K for the year ended December 31, 2015, Jensen and KLJ did +not obtain sufficient appropriate audit evidence or document procedures performed for cost of +goods sold totaling approximately $13.7 million or for selling, general and administrative +expenses totaling approximately $21 million. These expenses comprised approximately 94% of +the company’s expenses included in the “Income (loss) from operations” line in the Consolidated +Statement of Operations. Although the work papers included an audit program with suggested +auditing procedures for these expenses, it was not completed. In fact, for the majority of the +procedures listed in the audit program, there is no evidence in the work papers that such audit +work was performed. +ii. Issuer A Audit for the Year Ended December 31, 2015 +18. Similarly, Jensen and KLJ’s audit work papers for the audit of Issuer A’s 2015 +financial statements (included in its Form 10-K for the year ended December 31, 2015) also +failed to include any evidence or documentation of the auditing procedures performed +concerning cost of goods sold totaling approximately $14.8 million and selling, general and +administrative expenses totaling approximately $21 million. As with the prior year’s audit, the +work papers included an audit program with suggested auditing procedures for these expenses, +but the program was not completed and there is no other evidence that such audit work was +performed. In addition, the financial statement included approximately $4.3 million in +depreciation and amortization. Together, these expenses comprised approximately 50% of the +company’s expenses included in the “Income (Loss) from operations” line in the Consolidated +Statement of Operations. Yet, the auditing procedures concerning these expenses consisted +solely of obtaining a supporting schedule from Issuer A and agreeing it to Issuer A’s accounting +records. Jensen and KLJ failed to obtain sufficient appropriate audit evidence to validate these +expenses. +19. During 2015, Issuer A also recorded a goodwill impairment of approximately $40.6 +million, which reduced the goodwill by 100%. Prior to the impairment, goodwill represented +approximately 83% of Issuer A’s assets. The work papers, however, included an analysis +prepared by a third party valuation specialist and a memorandum prepared by Jensen, which both +concluded that no goodwill impairment was necessary. Jensen documented his preparation of +these work papers and, therefore, was aware of the evidence that undermined the validity of the +goodwill impairment. Yet, the work papers did not include any documentation demonstrating +that Jensen performed any auditing procedures concerning Issuer A’s decision to impair +goodwill. +iii. Issuer B Audit for the Year Ended December 31, 2013 +20. As reflected in the audit work papers for the audit of Issuer B’s 2013 financial +statements, Jensen and KLJ did not obtain sufficient appropriate audit evidence or document + +7 + +auditing procedures concerning two approximately $3.2 million expenses; one related to the +“Excess purchase price over fair value of assets acquired” (“Excess Loss”) and another related to +the extinguishment of debt. Together, these expenses comprised approximately 91% of the +company’s net loss presented in the 2013 financial statements. +21. The Excess Loss related to an asset purchase agreement whereby Issuer B transferred +cash and stock valued at approximately $3.2 million to a third party and received inventory and +intangible assets valued at approximately $60,000 in return. Issuer B recorded an expense for +the value of the cash and stock that exceeded the value of the assets received. Despite the +significance of the loss, Jensen performed no auditing procedures in connection with this +expense. +22. With respect to the extinguishment of debt, Issuer B issued stock valued at $3.2 million +to a debt holder to extinguish a $4,000 debt, which resulted in an expense of approximately $3.2 +million. As with the Excess Loss, Jensen performed no auditing procedures in connection with +this expense. +iv. Issuer C Audit for the Year Ended December 31, 2013 and Subsequent +Restatement Audit +23. In 2013, Issuer C issued shares – valued at approximately $20.5 million – in exchange +for “advisory services.” The company valued the shares issued based on the proposed public +stock offering price of $0.25 per share, and the audit documentation described the services as, +among other things, “marketing, business development and consulting.” +24. At the time the stock was issued, however, Issuer C had total assets of $1,523 and total +revenues of $29 for the year ended December 31, 2013, while a $0.25 share price would have +valued Issuer C at approximately $400 million. +25. In an equity transaction with nonemployees, however, Generally Accepted Accounting +Principles (“GAAP”) require that the transaction be measured at the fair value of the +consideration received or the fair value of the equity instrument issued, whichever value is more +readily determinable.9 In turn, PCAOB auditing standards require the auditor to obtain sufficient +appropriate audit evidence to provide reasonable assurance that fair value measurements and +disclosures were in conformity with GAAP. +26. Despite the large disparity between Issuer C’s book value and the $400 million value +indicated by a $0.25 share price, Jensen performed no audit procedures to test the data used to +develop the $0.25 share price. On the contrary, information in the work papers, which were +prepared by Jensen and reviewed by Burgmeier, called into question the reliability of using the +proposed stock offering price as the fair value, stating that a “readily determinable market price + +9 ASC 505 Equity at 505-50-30. + +8 + +cannot be determined.” Accordingly, there was not sufficient evidence in the work papers to +support Jensen’s conclusions regarding the valuation. +27. Ultimately, Issuer C restated its financial statements after receiving multiple comments +from the SEC’s Division of Corporation Finance and determining that use of the proposed share +price for the transaction as the fair value was incorrect. Specifically, after estimating the value of +the services provided, Issuer C reduced the value attributed to the shares issued by $20.3 million, +or 99% of its original value. +28. Despite the fact that Issuer C restated its financial statements for the reasons discussed +above, when Jensen and KLJ audited the restated financial statements, they failed to comply with +PCAOB standards because they did not document the audit procedures performed in connection +with the restatement. +B. Failure to Document Communications With the Audit Committees (AS No. 16) +29. PCAOB Auditing Standard No. 16, Communications with Audit Committees (“AS No. +16”), requires the auditor to communicate with an engagement client’s audit committee, or if no +such committee exists, the entire board of directors of the company, to obtain information +relevant to the audit and to provide certain information regarding the conduct of an audit. The +auditor must document these communications with the audit committee in the work papers and +describe whether they were oral or in writing.10 +30. Jensen and KLJ did not document in the work papers the requisite communications with +the boards of directors for the following audits: Issuer A, for the years ended December 31, +2014 and 2015; Issuer B, for the years ended December 31, 2013 and 2014; Issuer C, for the +years ended December 31, 2013 and 2014; and Issuer E, for the years ended June 30, 2012 and +2013.11 Jensen completed audit checklists, which Burgmeier reviewed, indicating that KLJ +communicated with the audit committees for Issuers A, B, and E, and incorrectly stated that the +communications and the method of communication had been documented in the work papers. +C. Failure to Document Analytical Procedures for Reviews of Interim Financial +Information (AU § 722) +31. PCAOB Auditing Standard AU § 722, Interim Financial Information, states that an +auditor should apply analytical procedures during a review of interim financial information to +identify, and provide a basis for inquiry about, items that appear to be unusual and may indicate + +10 AS No. 16 at .01 and .25. +11 The applicable PCAOB standard for KLJ’s audit of Issuer E was AU 380 because AS No. 16 was effective +for audits of fiscal years beginning on or after Dec. 15, 2012. AU 380.03 stated that audit committee +communications may be oral or written, but required the auditor to document the communication in the work pape rs +if the communication was oral. + +9 + +a material misstatement. These analytical procedures should include “comparing the quarterly +interim financial information with comparable information for the immediately preceding interim +period and the quarterly and year-to-date interim financial information with the corresponding +period(s) in the previous year, giving consideration to knowledge about changes in the entity’s +business and specific transactions.”12 Further an accountant should prepare documentation in +connection with a review of interim financial information, the form and content of which should +be designed to meet the circumstances of the particular engagement.13 +32. Jensen and KLJ did not document the analytical procedures performed for: Issuer A, +for the periods ended March 31, 2015, June 30, 2015, September 30, 2015, and March 31, 2016; +Issuer D, for the periods ended June 30, 2014, September 30, 2014, June 30, 2015, and +September 30, 2015. Although Jensen and KLJ’s work papers contained completed checklists +for these interim reviews, that documentation was insufficient to “enable members of the +engagement team with supervision and review responsibilities to understand the nature, timing, +extent and results of the review procedures performed.”14 Issuer A’s and Issuer D’s interim +review work papers, for example, only contained an interim review checklist, initialed and dated +by Jensen, indicating that the analytical procedures had been performed and documented. +D. Failure to Obtain Written Representations from Management (AU § 333 and AU § +722) +33. PCAOB Standard AU § 333, Management Representations, requires an auditor to +obtain written representations from management for all financial statements and periods covered +by the auditor’s report.15 The representations should address, among other things: financial +statements; completeness of the information; recognition, measurement and disclosure; and +subsequent events.16 Similarly, AU § 722, Interim Financial Information, requires auditors to +obtain written representations from management for all interim financial information presented +and for all periods covered by the auditor’s review.17 +34. Jensen and KLJ’s work papers for the audit of Issuer C’s year ended December 31, +2013, and the subsequent restatement of that year, however, did not include a management +representation letter. +35. Jensen and KLJ’s work papers for the interim review of Issuer C’s three and nine +months ended September 30, 2014, were similarly deficient. Despite the fact that no + +12 AU § 722 at .16. +13 AU § 722 at .51. +14 AU § 722 at .52. +15 AU § 333 at .05. +16 AU § 333 at .06. +17 AU § 722 at .24. + +10 + +management representation letter was included in the work papers for this interim review, Jensen +completed, and Burgmeier reviewed, a checklist indicating that Jensen had obtained and +reviewed the management representation letter. +E. Failure to Exercise Due Professional Care and Properly Respond to the Risks of +Material Misstatement (AU § 230 and AS No. 13) +36. PCAOB standards require auditors to exercise due professional care in the planning and +performance of audits and interim reviews.18 Due professional care requires the auditor to +exercise professional skepticism, which is an attitude that includes a questioning mind and a +critical assessment of audit evidence.19 Additionally, in performing audits the auditor’s +responses to the assessed risks of material misstatement, particularly fraud risks, should involve +the application of professional skepticism in gathering and evaluating audit evidence. Examples +of the application of professional skepticism in response to the assessed fraud risks include +“obtaining sufficient appropriate evidence to corroborate management’s explanations or +representations concerning important matters, such as through third-party confirmation, use of a +specialist engaged or employed by the auditor, or examination of documentation from +independent sources.”20 +37. In connection with the audits and interim reviews described in this Order, and as +evidenced by the repeated audit deficiencies noted above, Jensen and KLJ failed to exercise due +professional care. They also failed to perform critical assessments of audit and interim review +evidence. In particular, for multiple audits and interim reviews, Jensen and KLJ failed to: (i) +obtain sufficient appropriate evidence to support the conclusions reached by Jensen and his +engagement teams; (ii) obtain sufficient appropriate audit evidence for significant financial +statement balances and transactions; (iii) document that KLJ engaged in the requisite +communications with certain issuers’ audit committees; (iv) document the analytical procedures +Jensen used for an interim review; (v) obtain written representations from management; or (vi) +prepare engagement completion documents. +F. Failure to Prepare Engagement Completion Documents (AS No. 3) +38. For each engagement, PCAOB auditing standard AS No. 3 (“AS No. 3”) requires an +auditor to prepare an engagement completion document that identifies all the significant findings +or issues from the engagement.21 AS No. 3 defines “significant findings or issues” as substantive + +18 AU § 230.01, AU § 722.01. +19 AU § 230.07. +20 AS No. 13 at .7. +21 AS No. 3 at .13. + +11 + +matters that are important to the procedures performed, evidence obtained, or conclusions +reached during an engagement.22 +39. Jensen and KLJ’s work papers indicate that Jensen identified significant risks while +performing the following audits: Issuer A, for the years ended December 31, 2014 and 2015; +and Issuer B, for the year ended December 31, 2013. In particular, the work papers for the Issuer +A audits reflect that revenue recognition and lack of segregation of duties represented significant +risks, while the work papers for the Issuer B audit reflect a significant risk relating to +management’s ability to override controls. Despite identifying these audit risks, Jensen did not +prepare engagement completion documents which would have enabled a reviewer to understand +the significant risks associated with these audits and the results of the auditing procedures +performed in response to those risks. +G. Failure to Comply with Engagement Quality Review Requirements (AS No. 7) +40. PCAOB Auditing Standard No. 7, Engagement Quality Review (“AS 7”), requires an +engagement quality review and concurring approval of issuance for each annual audit and +interim review. The engagement quality reviewer should, among other things, evaluate the +significant judgments made by the engagement team and the related conclusions it reached in +forming the overall conclusion on the engagement. To the extent necessary to properly evaluate +these judgments and conclusions, the engagement quality reviewer should hold discussions with +the engagement partner and review documentation. The engagement quality reviewer should +also review the engagement completion document. The engagement quality review +documentation should contain sufficient information to enable an experienced auditor, having no +previous connection with the engagement, to understand the procedures performed by the +engagement quality reviewer and include information that identifies: (i) the engagement quality +reviewer; (ii) the documents reviewed by the engagement quality reviewer; and (iii) the date the +engagement quality reviewer provided concurring approval of issuance. Documentation of the +engagement quality review should be included in the engagement documentation.23 +41. Moreover, AS No. 7 provides that the engagement quality reviewer may provide +concurring approval of issuance only if, after performing the engagement quality review with +due professional care, he or she is not aware of a significant engagement deficiency.24 In +addition to the factors identified in paragraph 36 above, due professional care entails possessing +the degree of skill commonly possessed by other auditors and exercising it with reasonable care +and diligence.25 + +22 AS No. 3 at .12. +23 AS No. 7 at .01, .9, 10e, and .19-.20. +24 AS No. 7 at .12. +25 AU § 230 Due Professional Care in the Performance of Work at .03-.05. + +12 + +42. As noted, Burgmeier served as the engagement quality reviewer for all of the audits and +interim reviews described above and had access to all of the documents in the associated work +papers. +43. Burgmeier did not perform an engagement quality review as required by AS 7 for the +following engagements: Issuer B annual audit for the year ended December 31, 2013, and Issuer +B restatement audit for the year ended December 31, 2013; four interim reviews for periods +ended in 2015 and 2016 for Issuer A; and Issuer D interim review for the period ended March +31, 2015.26 +44. In particular, Burgmeier did not evaluate the significant judgments made by Jensen and +his engagement teams and the related conclusions they reached in forming the overall +conclusions regarding the engagements. Additionally, there is no evidence in the work papers +that Burgmeier discussed the engagements with Jensen or reviewed audit or interim review +documentation for those engagements. +45. In connection with two other annual audits,27 although there is some limited evidence +that Burgmeier conducted engagement quality reviews, the audit work papers did not indicate the +inquiries he made of Jensen and his engagement teams, the procedures he performed, or whether +he held discussions with the engagement teams to evaluate the significant judgments they made +related to engagement planning and their assessment of, and audit responses to, significant risks. +46. First, in connection with his review of the audits and interim reviews described above in +Section III.B., Burgmeier completed engagement quality review checklists indicating that he +evaluated whether Jensen had communicated appropriate information to the issuers’ audit +committees on a timely basis. But, Burgmeier did not perform this procedure because the work +papers he reviewed for those engagements contained no evidence that any such communications +had been made and no other evidence indicates he performed such review. +47. In addition, on the audits and interim reviews described above in Section III.E., +Burgmeier provided his concurring approval of issuance after indicating that he had reviewed +Jensen’s engagement completion documents for certain audits. But, the work papers for those +engagements contained no such documents and no other evidence indicates he performed such +review. +48. Finally, the work papers for the audits and interim reviews described above also +demonstrate that Burgmeier, like Jensen, failed to exercise due professional care in conducting +his engagement quality reviews. In particular, in the above noted engagements, Burgmeier +indicated that he reviewed documents that were not part of the work paper file and no other + +26 This auditing standards violation existed for the Issuer D interim review for the period ended March 31, +2015, which was not discussed above. +27 The annual audits for Issuer A for the year ended December 31, 2015, and for Issuer C for the year ended +December 31, 2013. + +13 + +evidence indicates he performed such review in the following areas: (i) documentation that KLJ +engaged in the requisite communications with certain issuers’ audit committees; (ii) +documentation that analytical procedures had been completed for the interim reviews; (iii) +written representations from management; and (iv) engagement completion documents. + +Violations +49. Based on the foregoing, Respondents engaged in improper professional conduct within +the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) provide, in pertinent +part, that the Commission may censure or deny, temporarily or permanently, the privilege of +appearing or practicing before the Commission to any person who is found by the Commission to +have engaged in improper professional conduct. Section 4C(b) and Rule 102(e)(1)(iv) define +improper professional conduct with respect to persons licensed to practice as accountants. +50. Under Section 4C(b) and Rule 102(e)(1)(iv)(B), the term “improper professional +conduct” means negligent conduct in the form of: +(1) A single instance of highly unreasonable conduct that results in a violation of +applicable professional standards in circumstances in which an accountant, a +registered public accounting firm, or associated person knows, or should know, +that heightened scrutiny is warranted. +(2) Repeated instances of unreasonable conduct, each resulting in a violation of +applicable professional standards, that indicate a lack of competence to practice +before the Commission. +51. Respondents’ failures to abide by PCAOB standards in the audits and reviews described +above constitute repeated instances of unreasonable conduct. +Findings +52. Based on the foregoing, the Commission finds that Respondents engaged in improper +professional conduct within the meaning of Section 4C of the Exchange Act and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + Accordingly, it is hereby ORDERED, effective immediately, that: + +14 + +A. Jensen and Burgmeier are denied the privilege of appearing or practicing before the +Commission as accountants. + +i. After five years from the date of this order, Jensen may request that the Commission +consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or review, of any +public company’s financial statements that are filed with the Commission (other than as +a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934). Such an application must satisfy the Commission +that Jensen’s work in his practice before the Commission as an accountant will be +reviewed either by the independent audit committee of the public company for which +he works or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or review, of +any public company’s financial statements that are filed with the Commission as +a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934. Such an application will be considered on a +facts and circumstances basis with respect to such membership, and the +applicant’s burden of demonstrating good cause for reinstatement will be +particularly high given the role of the audit committee in financial and accounting +matters; and/or +3. an independent accountant. + +(a) Such an application must satisfy the Commission that: + +i. Jensen, or the public accounting firm with which he is associated, is +registered with the Public Company Accounting Oversight Board +(“Board”) in accordance with the Sarbanes-Oxley Act of 2002, and such +registration continues to be effective; + +ii. Jensen, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did not +identify any criticisms of or potential defects in the respondent’s or the +firm’s quality control system that would indicate that Jensen will not +receive appropriate supervision; + +iii. Jensen has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed by the +Board (other than reinstatement by the Commission); and + + +15 + +iv. Jensen acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to registration, +inspections, concurring partner reviews and quality control standards. + +4. The Commission will consider an application by Jensen to resume appearing or +practicing before the Commission provided that his state CPA license is current +and he has resolved all other disciplinary issues with the applicable state boards +of accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. +The Commission’s review may include consideration of, in addition to the +matters referenced above, any other matters relating to Jensen’s character, +integrity professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause +will be considered on a facts and circumstances basis with due regard for +protecting the integrity of the Commission’s processes. + +ii. After five years from the date of this order, Burgmeier may request that the Commission +consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or review, of any +public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) +of the Securities Exchange Act of 1934). Such an application must satisfy the +Commission that Burgmeier’s work in his practice before the Commission as an +accountant will be reviewed either by the independent audit committee of the public +company for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or review, of any +public company’s financial statements that are filed with the Commission as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934. Such an application will be considered on a facts +and circumstances basis with respect to such membership, and the applicant’s +burden of demonstrating good cause for reinstatement will be particularly high given +the role of the audit committee in financial and accounting matters; and/or + +3. an independent accountant. + +(a) Such an application must satisfy the Commission that: + +16 + +i. Burgmeier, or the public accounting firm with which he is associated, +is registered with the Public Company Accounting Oversight Board +(“Board”) in accordance with the Sarbanes-Oxley Act of 2002, and +such registration continues to be effective; +ii. Burgmeier, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did not +identify any criticisms of or potential defects in the respondent’s or the +firm’s quality control system that would indicate that Burgmeier will +not receive appropriate supervision; +iii. Burgmeier has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed by +the Board (other than reinstatement by the Commission); and +iv. Burgmeier acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to registration, +inspections, concurring partner reviews and quality control standards. + +4. The Commission will consider an application by Burgmeier to resume appearing +or practicing before the Commission provided that his state CPA license is current +and he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. +The Commission’s review may include consideration of, in addition to the matters +referenced above, any other matters relating to Burgmeier’s character, integrity +professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause +will be considered on a facts and circumstances basis with due regard for +protecting the integrity of the Commission’s processes. + +B. KLJ is denied the privilege of appearing or practicing before the Commission as an +accountant. + +i. After five years from the date of this order, KLJ may request that the Commission consider +its reinstatement by submitting an application (attention: Office of the Chief Accountant) to +resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or review, of any +public company’s financial statements that are filed with the Commission (other than as +a member of an audit committee, as that term is defined in Section 3(a)(58) of the + +17 + +Securities Exchange Act of 1934). Such an application must satisfy the Commission +that KLJ’s work in its practice before the Commission as an accountant will be reviewed +either by the independent audit committee of the public company for which it works or +in some other acceptable manner, as long as it practices before the Commission in this +capacity; and/or + +2. an independent accountant. + +(a) Such an application must satisfy the Commission that: + +i. KLJ is registered with the PCAOB in accordance with the Sarbanes- +Oxley Act of 2002, and such registration continues to be effective. +However, if registration with the PCAOB is dependent upon +reinstatement by the Commission, the Commission will consider the +application on its other merits; + +ii. KLJ has hired an independent CPA consultant (“consultant”), who is +not unacceptable to staff of the Commission and is affiliated with a +public accounting firm registered with the Board, that has conducted a +review of KLJ’s quality control system and submitted to the staff of the +Commission a report that describes the review conducted and +procedures performed, and represents that the review did not identify +any criticisms of or potential defects in the firm’s quality control system +that would indicate that any of KLJ’s employees will not receive +appropriate supervision. KLJ agrees to require the consultant, if and +when retained, to enter into an agreement that provides that for the +period of review and for a period of two years from the completion of +the review, the consultant shall not enter into any employment, +consultant, attorney-client, auditing or other professional relationship +with KLJ, or any of its present or former affiliates, directors, officers, +employees or agents acting in their capacity. The agreement will also +provide that the consultant will require that any firm with which he/she +is affiliated or of which he/she is a member shall not, without prior +written consent of the staff, enter into any employment, consultant, +attorney-client, auditing or other professional relationship with KLJ, or +any of its present or former affiliates, directors, employees, or agents +acting in their capacity as such for a period of two years after the +review; + +iii. KLJ has resolved all disciplinary issues with the PCAOB, and has +complied with all terms and conditions of any sanctions imposed by the +PCAOB (other than reinstatement by the Commission); and + + +18 + +iv. KLJ acknowledges its responsibility, as long as it appears or practices +before the Commission as an independent accountant, to comply with +all requirements of the Commission and the PCAOB, including, but not +limited to, all requirements relating to registration, inspections, +engagement quality reviews and quality control standards. + +3. The Commission will consider an application by KLJ to resume appearing or practicing +before the Commission provided that its state CPA license is current and it has resolved +any disciplinary issues with the applicable state boards of accountancy. However, if state +licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include +consideration of, in addition to the matters referenced above, any other matter relating to +KLJ’s character, integrity, professional conduct, or qualifications to appear before the +Commission as an accountant. Whether an application demonstrates good cause will be +considered on a facts and circumstances basis with due regard for protecting the +integrity of the Commission’s processes. + + + By the Commission. + + Vanessa A. Countryman + Acting Secretary + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4038.txt b/raw/aaer/2019/AAER-4038.txt new file mode 100644 index 0000000000000000000000000000000000000000..72dcbc893dd09e1daf1df3ebc6c0584c2948eafc --- /dev/null +++ b/raw/aaer/2019/AAER-4038.txt @@ -0,0 +1,1388 @@ + + + + + + + + + + + + + + + + SEC.gov | Evan R. Kita, et al. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/522701","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Kita, et al. + + + + + + + + + + + + Evan R. Kita, et al. + + + + + + + + + + + + + + + + + + + + + --> + + SEC Settles Insider Trading Charges Against Pharma Company Accountant, Three Others + + Litigation Release No. 24441 / April 4, 2019 + + Accounting and Auditing Enforcement Release No. 4038 / April 4, 2019 + + Securities and Exchange Commission v. Evan R. Kita, et al. , Civil Action No. 17-06603 (D. NJ., filed August 31, 2017) + + + + + + + + + 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. + + 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. + + 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. + + 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. + + 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. + + + + + + + + + SEC Complaint + + +--> + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2019/AAER-4039.txt b/raw/aaer/2019/AAER-4039.txt new file mode 100644 index 0000000000000000000000000000000000000000..857f4197d780a63b4c4653da3886b6d9e72dd043 --- /dev/null +++ b/raw/aaer/2019/AAER-4039.txt @@ -0,0 +1,116 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10627 / April 10, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85582 / April 10, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4039 / April 10, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19137 + + +In the Matter of + +ADAM C. DERBYSHIRE, + +Respondent. +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Adam +C. Derbyshire (“Respondent”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on be half of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III. 3 below, which are admitted, Respondent + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + +The Commission, with due regard to the public interest and without preliminary hearing, may, by order, +temporarily suspend from appearing or practicing before it any attorney, accountant, engineer, or other +professional or expert who has been by name . . . [p]ermanently enjoined by any court of competent +jurisdiction, by reason of his or her misconduct in an action brought by the Commission, from violating or +aiding and abetting the violation of any provision of the Federal securities laws or of the rules and +regulations thereunder. + 2 +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. +III. + On the basis of this Order and Respondent’s Offer, the Commission finds that: +1. Derbyshire, age 53, of Raleigh, North Carolina, was the Chief Financial Officer and +Executive Vice President for Finance and Administration of Salix Pharmaceuticals, Ltd. (“Salix”) +from the time he joined the company in 2000 until his resignation in 2014. Derbyshire obtained a +Bachelor’s degree in marketing from the University of North Carolina, Wilmington in 1988 and a +Master of Business Administrati on from the University of North Carolina, Charlotte in 1990. +Derbyshire is not and has not been licensed as a certified public accountant. He resigned from Salix +on November 5, 2014, and is currently unemployed. +2. Salix is a Delaware that specializes in licensing, developing, and marketing +pharmaceutical products for the treatment of gastrointestinal diseases. From 2001 to 2015, Salix +was headquartered in Raleigh, North Carolina. Prior to being headquartered in Raleigh, it was +headquartered in Palo Alto, California. During the relevant time period, Salix’s common stock +was registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of +1934 (“Exchange Act”) and traded on the NASDAQ Stock Market, LLC under the symbol +“SLXP.” On April 1, 2015, Valeant Pharmaceuticals International, Inc. (n/k/a Bausch Health +Companies Inc.) acquired Salix. + +3. On April 4, 2019 , the U.S. District Court for the Southern District of New York +entered a Final Judgment by consent against Derbyshire, p ermanently enjoining him from +violations of Section 17(a)(2) of the Securities Act of 1933, Section 10(b) of the Exchange Act , +and Rule 10b -5(b) thereunder, and from aiding and abetting violations of S ection 13(a) of the +Exchange Act and Exchange Act Rule 13a-13. Securities and Exchange Commission v. Adam C. +Derbyshire, Civil Action Number 1:17-cv-08891-ALC, in the United States District Court for the +Southern District of New York. Derbyshire was ordered to pay $494,836.13 in disgorgement of +ill-gotten gains, plus $63,698.25 in prejudgment interest thereon, and a civil penalty in the amount +of $494,836.13. He was also barred from serving as an officer or director of a public company for +a period of five years from entry of the Final Judgment. +4. Among other things, the Commission’s Complaint alleged that, from May 2013 +through August 2014, Derbyshire knowingly or recklessly made material misrepresentations, +concerning the amount of Salix products held in inventory by Salix’s wholesaler customers, during +Salix’s quarterly earnings calls. The Complaint further alleged that Derbyshire knowingly or +recklessly omitted material information from Salix’s quarterly Reports on Form 10-Q for the first +and second quarters of 2014. The Complaint also alleges that Derbyshire knowingly or recklessly +provided substantial assistance to Salix in its failure to file truthful and correct quarterly reports for +the first and second quarters of 2014 with the Commission. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Derbyshire’s Offer. + 3 + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Derbyshire is suspended from appearing or practicing before the Commission as an +accountant. + + B. After five (5) years from the date of this order, Derbyshire may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as an accountant. + + By the Commission. + + + Vanessa Countryman + Acting Secretary + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4040.txt b/raw/aaer/2019/AAER-4040.txt new file mode 100644 index 0000000000000000000000000000000000000000..a54260e572683419d72a9ba01868740ad07185e6 --- /dev/null +++ b/raw/aaer/2019/AAER-4040.txt @@ -0,0 +1,183 @@ +UNITED STATES OF AMERICA +before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85630 / April 11, 2019 + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5222 / April 11, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4040 / April 11, 2019 + +Admin. Proc. File Nos. 3-18789, 3-18790 + + +In the Matters of +KAREN BRUTON and +HOPE ADVISORS, LLC + + + + + + +ORDER REGARDING FURTHER PROCEEDINGS +On September 19, 2018, in a proceeding under our Rule of Practice 102(e)(3) (“Bruton +I”), we issued an order temporarily suspending Karen Bruton from appearing or practicing before +the Commission.1 That suspension was based on a final judgment entered against Bruton in +federal district court permanently enjoining her from violating Sections 206(1), (2), and (4) of +the Investment Advisers Act of 1940 and Rule 206(4)-8 thereunder.2 Bruton filed a petition to +lift her temporary suspension under Rule of Practice 102(e)(3)(ii);3 we denied that petition and +set the matter down for a hearing in accordance with Rule of Practice 102(e)(3)(iii).4 + +1 Karen Bruton, CPA, Exchange Act Release No. 84198, 2018 WL 4488869 (Sept. 19, +2018); see 17 C.F.R. § 201.102(e)(3)(i)(A) (authorizing us to temporarily suspend an accountant +subject to such an injunction from appearing or practicing before the Commission). +2 Bruton, 2018 WL 4488869, at *1; see SEC v. Hope Advisors, LLC, et al., No. 1:16-cv- +1752-LMM (N.D. Ga. Sept. 13, 2018), ECF No. 132. +3 17 C.F.R. § 201.102(e)(3)(ii). +4 Karen Bruton, Exchange Act Release No. 84627, 2018 WL 6061351 (Nov. 19, 2018); see +17 C.F.R. § 201.102(e)(3)(iii). + 2 +On September 19, 2018, we separately issued an order instituting proceedings under +Advisers Act Section 203(e) and (f) against Bruton and Hope Advisors, LLC (“Hope”).5 In that +“follow-on” proceeding (“Bruton II”), we ordered a hearing to determine what, if any remedial +action was appropriate against Bruton and Hope given that the Division of Enforcement alleged a +federal court had permanently enjoined them from violating the federal securities laws.6 +In Bruton I and Bruton II, we directed that each proceeding be set down for a hearing +before the Commission and specified procedures for the conduct of that hearing. We directed the +parties to “conduct a prehearing conference” and to “file a statement with the Office of the +Secretary advising the Commission of any agreements reached at said conference.” +On January 31, 2019, the parties submitted their joint statement about their prehearing +conference. The parties stated that they had agreed: (1) that we should consolidate the +proceedings in Bruton I and Bruton II “for purposes of dispositive motions and any hearings that +may be required”; (2) that these cases should “be assigned to an administrative law judge” +(“ALJ”), subject to the respondents’ waiver of defenses “based on any alleged or actual defect in +the appointment or removal protections of any [ALJ] assigned to this matter”;7 (3) that “an +evidentiary hearing is unnecessary” and that these proceedings should “be decided by way of +dispositive motions” and any additional supporting “documentary evidence and declarations”; +and (4) that we or the ALJ should issue a specific briefing schedule for dispositive motions. +We begin with the parties’ request that we consolidate these proceedings. Our Rule of +Practice 201(a) provides that we may consolidate “proceedings involving a common question of +law or fact . . . for hearing of any or all the matters at issue in such proceedings.”8 Both +proceedings involve common questions of law and fact arising from the effect, if any, of a +permanent injunction entered against Bruton and Hope. While not bound by the parties’ +agreement,9 we agree that litigating the two proceedings together on a consolidated basis would +promote efficiency. We conclude it is appropriate to consolidate these proceedings for purposes +of any dispositive motions and any hearings that may be required in this case. +We turn next to the parties’ request that these proceedings be decided by way of +dispositive motions because “an evidentiary hearing is unnecessary.” We agree that these cases + +5 Karen Bruton, CPA and Hope Advisors, LLC, Advisers Act Release No. 5038, 2018 WL +4488879 (Sept. 19, 2018). +6 Id. at *1. +7 Cf. Lucia v. SEC, 138 S. Ct. 2044, 2049-50 & n.1 (2018) (holding that the Commission’s +ALJs are inferior officers for purposes of the Appointments Clause of Article II of the +Constitution, and declining to reach “whether the statutory restrictions on removing the +Commission’s ALJs are constitutional”). +8 17 C.F.R. § 201.201(a). +9 See, e.g., Sanford’s Estate v. CIR, 308 U.S. 39, 51 (1939); NLRB Union, Local 6 v. +FLRA, 842 F.2d 483, 485 n.6 (D.C. Cir. 1988); see ABN AMRO Clearing Chicago LLC, +Exchange Act Release No. 83849, 2018 WL 3869452, at *2 (Aug. 15, 2018) (Commission is +“not bound by the parties’ stipulation as to a deferential standard of review”). + 3 +may be appropriate for summary disposition.10 The parties shall have an opportunity to submit +motions for summary disposition along with supporting declarations and documentary +evidence.11 Although the parties also agree that, in their view, “an evidentiary hearing is +unnecessary” and that the ALJ “and ultimately the Commission” may “resolve any apparent +conflicts in the evidence without an evidentiary hearing,” that determination is best made after +summary disposition briefing. The parties may well be correct that an evidentiary hearing is +unnecessary, but it would be premature to make that determination at this time. +Finally, we turn to the parties’ request that we set this matter down before an +Administrative Law Judge. Bruton and Hall state that they make their request: +“while knowingly and voluntarily agreeing that they will not +initiate or raise a defense to the [proceedings] or orders that may be +issued during or at the conclusion of the [proceedings] based on +any alleged or actual defect in the appointment or removal +protections of any Administrative Law Judge assigned to this +matter.” +Bruton and Hall also specify that their waiver of these defenses “applies in any forum, including +proceedings before the Administrative Law Judge, the Commission, or any court.” Under the +circumstances, we grant the parties’ request to set this matter down for a hearing before an ALJ. +We also find under Rule of Practice 100(c) that it would serve the interests of justice and +not result in prejudice to any party to specify further procedures before an ALJ in this matter.12 +Accordingly, IT IS ORDERED that these proceedings are consolidated under the caption +above for purposes of any motions for summary disposition and hearings that may be required. +IT IS FURTHER ORDERED that this consolidated proceeding be presided over by a +hearing officer who shall be an Administrative Law Judge in accordance with Rule of Practice +110.13 The Chief Administrative Law Judge shall by rotation to the extent practicable designate +an ALJ to be the presiding hearing officer.14 The assigned ALJ shall hold a prehearing + +10 See, e.g., Amendments to the Commission’s Rules of Practice, Exchange Act Release No. +78319, 2016 WL 3853756, at *22 (July 13, 2016) (explaining that “summary disposition is +typically appropriate” in follow-on proceedings “because the issues to be decided are narrowly +focused and the facts not genuinely in dispute”); cf. Michael Pattison, CPA, Exchange Act +Release No. 67900, 2012 WL 4320146, at *7 (Sept. 20, 2012) (reasoning that proceedings under +Rule 102(e)(3)(1)(A) based on a predicate injunction are analogous to follow-on proceedings). +11 17 C.F.R. § 201.250(b) (discussing motions for summary disposition). +12 Rule of Practice 100(c), 17 C.F.R. § 201.100(c). To the extent they are conflicting, the +procedures specified in this order supersede those specified in the Bruton I order denying the +petition to lift the suspension or in the Bruton II order instituting proceedings. +13 17 C.F.R. § 201.110. +14 17 C.F.R. § 200.30-10(a)(2). + 4 +conference under Rule of Practice 221 to address the parties’ request for a briefing schedule on +any summary disposition motions, in addition to any other matters appropriate for consideration +and action under that Rule.15 The assigned ALJ shall exercise the full powers conferred by the +Commission’s Rules of Practice and the Administrative Procedure Act.16 +Attention is called to Rule of Practice 151(b) and (c), providing that when, as here, the +Commission has assigned a case to a hearing officer, all papers shall be filed with the Office of +the Secretary (with a copy provided to the hearing officer) and that all motions, objections, or +applications shall be directed to and decided by the presiding hearing officer.17 This includes, +without limitation, filings under Rules of Practice 210, 221, 222, 230, 231, 232, 233, and 250.18 +IT IS FURTHER ORDERED that the ALJ shall issue an initial decision no later than 75 +days from the occurrence of one of the following events: (A) the completion of briefing on a +motion pursuant to Rule of Practice 250;19 (B) the completion of post-hearing briefing should the +ALJ determine after review of the motions pursuant to Rule 250 that a public evidentiary hearing +is necessary;20 or (C) the determination by the hearing officer that a party is deemed to be in +default under Rule of Practice 155 and no public hearing is necessary.21 This proceeding shall be +deemed to be one under the 75-day timeframe specified in Rule of Practice 360(a)(2)(i) for the +purposes of applying Rules of Practice 233 and 250.22 +IT IS FURTHER ORDERED that the initial decision be issued on the basis of the record +before the hearing officer, as defined by Rule of Practice 350,23 and that the record index shall be +prepared and certified in accordance with Rule of Practice 351.24 + +15 17 C.F.R. § 201.221. The parties’ January 31 joint statement proposed a briefing +schedule for motions for summary disposition. The parties may renew their request for a +briefing schedule on summary disposition before the ALJ. +16 See, e.g., Rule of Practice 111, 17 C.F.R. § 201.111; 5 U.S.C. § 556. +17 17 C.F.R. § 201.151(b)-(c). +18 17 C.F.R. §§ 201.210, 221, 222, 230, 231, 232, 233, 250. +19 17 C.F.R. § 201.250. +20 Because Bruton I and Bruton II were both set down for a hearing before the Commission, +Rule of Practice 360(a)(2)(ii)’s requirement to issue an order scheduling a hearing within a +specified time from service of the OIP did not apply. In the event that the hearing officer +determines after reviewing the summary disposition motions that an evidentiary hearing is +necessary, (A) that Rule will apply with a trigger date of the completion of briefing rather than +service of the OIP, and (B) the hearing officer will have authority to consider and take action +upon an agreement of the parties to a hearing date after the time period specified in the rule. +21 17 C.F.R. § 201.155. +22 17 C.F.R. §§ 201.233, .250, .360(a)(2)(i). +23 17 C.F.R. § 201.350. +24 17 C.F.R. § 201.351. + 5 +IT IS FURTHER ORDERED that, notwithstanding the last sentence of Rule +102(e)(3)(iii), upon issuance of an initial decision Rules of Practice 360(d), 410, and 411 shall +govern further Commission consideration of this matter.25 +By the Commission. + + + +Vanessa A. Countryman +Acting Secretary + + +25 17 C.F.R. §§ 201.360(d), 410, 411. Given the parties’ request that we consolidate these +two proceedings, we find under Rule of Practice 100(c) that it would serve the interests of justice +and not result in prejudice to any party to specify that the final sentence of Rule 102(e)(3)(iii)— +which provides that the time limits set forth in Rule 540 will govern review of the hearing +officer’s initial decision in a Rule 102(e) case in which a temporary suspension has not been +lifted—shall not apply to this consolidated proceeding. \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4041.txt b/raw/aaer/2019/AAER-4041.txt new file mode 100644 index 0000000000000000000000000000000000000000..e1cc63b023e8139b908a9eacaa887bba7c10c5eb --- /dev/null +++ b/raw/aaer/2019/AAER-4041.txt @@ -0,0 +1,760 @@ + + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10632 / April 22, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85702 / April 22, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4041 / April 22, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19150 + + + + +In the Matter of + + DOV ZAIDMAN, CPA, + AND + ZBS GROUP LLP + +Respondents. + + + + ORDER INSTITUTING PUBLIC + ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT +TO SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Dov +Zaidman, CPA (“Zaidman”) and ZBS Group LLP (“ZBS Group” or “the Firm”) (collectively +“Respondents”) pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), Sections +4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and +102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that + +2 + + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondents consent +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities +Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, +and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offer, the Commission finds3 that: + +A. SUMMARY + + These proceedings arise out of the role of Zaidman and his audit firm ZBS Group in a shell +factory scheme orchestrated by an undisclosed team of “Control Persons.” The shell companies +were undisclosed “blank check” companies (“Blank Check Companies”) and were created and + +person is found . . . (1) not to possess the requisite qualifications to represent others; (2) +to be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations issued +thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or +willfully aided and abetted the violation of any provision of the Federal securities laws or +the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondents’ Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + +3 + +designed to avoid the corresponding registration and reporting requirements applicable to blank +check companies. The Control Persons’ scheme was to create and sell the Blank Check Companies +as public companies with operations, and register offerings of their securities, without disclosing to +the public or the Commission the true purpose or control of the companies. ZBS Group performed +the audits of the financial statements of eight of the Blank Check Companies and Zaidman +authorized the issuance of the audit reports included in the corresponding Form S-1 registration +statements and periodic reports. + + Each Blank Check Company followed the same path to sale. The Control Persons +incorporated the Blank Check Companies and recruited a sole officer, director, employee, and +majority shareholder (the “sole officer”) to act in name only. The Control Persons exclusively +retained and maintained all communications with a small group of outside professionals including +Zaidman and ZBS Group. The Blank Check Companies had no operations and no value other than +(i) their registration status with the Commission, and (ii) a particular capital structure – for example, +a control block of shares and float of purportedly free-trading shares solely for purposes of merger +or acquisition. The Forms S-1 and subsequent Commission filings falsely depicted the Blank Check +Companies as actively pursuing business plans, when the only plan from the onset was to be sold as +public vehicles. In participating in the audits of the financial statements of four Blank Check +Companies at issue, Zaidman and ZBS Group failed to obtain an understanding of the business of +the issuer and the role of the Control Persons. + + During the course of ZBS Group’s audits of four of the Blank Check Companies, Zaidman +and ZBS Group engaged in improper professional conduct pursuant to Section 4C of the Exchange +Act and Rules 102(e)(1) of the Commission’s Rules of Practice. Specifically, during the course of +the four engagements for the audits of the financial statements of FanSport, Inc. (“FanSport”), Big +Clix Corp. (“Big Clix”), Mobile Vault, Inc. (“Mobile Vault”), and ShopEye, Inc. (“ShopEye”) +(collectively, the “Issuers”), Zaidman ignored numerous red flags. Among other things, Zaidman +failed to inquire regarding facts that contradicted each issuer’s presentation as an operating +company owned and controlled by its sole officer. + + ZBS Group issued and Zaidman authorized the issuance of the audit reports containing +unqualified opinions for use in Commission filings by the Issuers, but the underlying audits failed to +comply with the auditing standards of the Public Company Accounting Oversight Board +(“PCAOB” or “Board”). Specifically, Zaidman and ZBS Group failed to comply with PCAOB +requirements relating to: (1) client acceptance and continuance; (2) obtaining a sufficient +understanding of the issuer; (3) performing sufficient procedures to identify the existence of related +party transactions that should have been disclosed in the financial statements; and (4) maintaining +sufficient audit documentation. Furthermore, ZBS Group, at the direction of Zaidman, issued audit +reports for Big Clix without obtaining an engagement quality review and concurring approval of +issuance. These audit reports allowed the Issuers to file numerous registrations statements and +periodic reports with the Commission that were materially false and misleading. + + +4 + +B. RESPONDENTS + +1. Zaidman, age 61, of Plainview, New York, holds an active CPA license in New +York. Zaidman is a partner at ZBS Group. At all relevant times, Zaidman was the managing +partner of ZBS Group, served as the engagement partner with ultimate authority to issue the audit +reports on behalf of ZBS Group, and authorized the issuance of the audit reports for the Issuers. + +2. ZBS Group is a New York limited liability partnership located in Plainview, New +York. ZBS Group has been registered with the PCAOB since 2011. During all relevant times, +ZBS Group issued the audit reports included in the registration statements and certain periodic +reports filed with the Commission for the Issuers. ZBS Group currently has two partners with +Zaidman serving as the managing partner and the partner with ultimate authority to issue audit +reports on behalf of ZBS Group. + + Relevant Entities + +3. FanSport, now known as Jade Global Holdings, Inc., was at the relevant time, a +Florida corporation with its principal place of business in Placerville, California. On April 27, +2011, FanSport filed a Form S-1 registration statement (“Form S-1”) with the Commission which +became effective on August 12, 2011.4 During the relevant period, FanSport’s common stock was +registered with the Commission pursuant to Section 12(g) of the Exchange Act and was quoted on +the OTCBB (ticker: FPNC). ZBS Group served as FanSport’s auditor for the fiscal year ended on +March 31, 2013, and Zaidman was the engagement partner for the audit. + +4. Big Clix, now known as HydroPhi Technologies Group, Inc., was at the relevant +time, a Florida corporation with its principal place of business in Fairfax, California. On July 29, +2010, Big Clix filed a Form S-1 with the Commission which became effective on December 7, +2010. During the relevant period, Big Clix’s common stock was registered with the Commission +pursuant to 12(g) of the Exchange Act and was quoted on the OTC Link (f/k/a Pink Sheets) (ticker: +BLES). ZBS Group served as Big Clix’s auditor for the fiscal years ended on June 30, 2012, and +June 30, 2013, and Zaidman was the engagement partner for the audits. + + +4 Each Form S-1 described herein sought to register the offer and sale of 3,000,000 common shares +in a $30,000 public offering. + +5 + +5. Mobile Vault, was at the relevant time, a Florida corporation with its principal +place of business in Cameron Park, California. On June 27, 2011, Mobile Vault filed a Form S-1 +registration statement with the Commission which became effective on January 25, 2012. Mobile +Vault subsequently deregistered those shares. On July 3, 2013, Mobile Vault filed a new Form S-1 +which did not become effective because on April 22, 2014, the Commission issued a stop order +suspending the effectiveness of Mobile Vault’s Form S-1 pursuant to Section 8(d) of the Securities +Act. In re the Registration Statement of Mobile Vault, Inc., Securities Act Rel. No. 9576 (Apr. 22, +2014) (Settled Order). ZBS Group served as Mobile Vault’s auditor for the fiscal years ended on +May 31, 2012, and May 31, 2013, and Zaidman was the engagement partner for the audits. + +6. ShopEye, was at the relevant time a Florida corporation with its principal place of +business in Foster City, California. On August 5, 2011, ShopEye filed a Form S-1 which became +effective on November 1, 2011. ShopEye subsequently deregistered those shares. On June 20, +2013, ShopEye filed a new Form S-1 which became effective on September 26, 2013. On July 28, +2014, the Commission, by delegated authority, issued a stop order suspending the effectiveness of +ShopEye’s Form S-1 pursuant to Section 8(d) of the Securities Act. In re the Registration +Statement of ShopEye, Inc., Initial Decision Rel. No. 615 (June 16, 2014), final as of July 28, +2014, Securities Act Rel. No. 9624 (July 28, 2014). ZBS Group served as ShopEye’s auditor for +the year ended on May 31, 2013, and Zaidman was the engagement partner for the audit. + +C. FACTS + +(1) Background + +7. From January 2011 to October 2013, ZBS Group audited the financial statements +the Control Persons used in the Forms S-1 and periodic reports filed with the Commission for at +least eight of the Blank Check Companies, four of which were the Issuers. Zaidman served as the +engagement partner for the Firm’s audits of the eight Blank Check Companies, including the +Issuers. + +8. The Control Persons were the exclusive contacts between ZBS Group and the +Issuers. Zaidman knew that the Control Persons created the Issuers’ financial statements, provided +ZBS Group with the supporting evidence for the audits, and responded to ZBS Group’s questions +about the Issuers. Furthermore, the Control Persons were the sole points of contact for Zaidman +and ZBS Group obtaining engagement letters, management representations letters, and payment +for audit invoices. + +9. Zaidman failed meaningfully to understand the business of the Issuers and the role +of the Control Persons and the sole officers. In obtaining an understanding of the Issuers, Zaidman +did not question: (1) the dominant roles by the Control Persons with respect to the Issuers and +relied solely on the Control Persons’ oral representations that they were authorized to act on behalf +of the Issuers; (2) why the Issuers’ Forms S-1 or periodic reports were so similar as to appear +template driven even though the companies were portrayed as operating companies pursuing + +6 + +different business plans; and (3) why none of the Issuers made any significant progress toward +advancing their purported business plan since its incorporation, notwithstanding that the +Commission filings represented that the respective sole officer spent 25-35 hours per week +pursuing it. In failing sufficiently to understand the Issuers’ business, Zaidman failed to: (1) +identify factors that contradicted each company’s presentation as an operating company owned and +controlled by its sole officer; (2) identify risks of material misstatement related to the integrity of +the individuals involved and the company being an undisclosed blank check company; and (3) +sufficiently identify related party transactions and relevant disclosures. + +10. ZBS Group performed the Issuers’ audits described above and Zaidman authorized +the issuance of and consented to the incorporation of these audit reports in each of the Issuers’ +Forms S-1 and Forms 10-K filed with the Commission. The Issuers’ audit reports stated that the +audits had been conducted “in accordance with the standards of the Public Company Accounting +Oversight Board” and that the financial statements were presented fairly, in all material respects +“in conformity with accounting principles generally accepted in the United States of America.” As +described below, however, the Issuers’ audits were not conducted in accordance with PCAOB +standards and were so deficient that they amounted to no audits at all. + +(2) ZBS Group Performed Deficient Audits for the 2013 Year-End FanSport Audit, +the 2012 and 2013 Year-End Big Clix Audits, the 2012 and 2013 Year-End +Mobile Vault Audits, and the 2013 Year-End ShopEye Audit + +(a) Zaidman and ZBS Group Failed to Evaluate Information Obtained +During the Client Acceptance and Retention Process that was Relevant to +Identifying Risks of Material Misstatement (AS No. 12, AS No. 13, and +AU 230) + +11. PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of Material +Misstatement, (“AS No. 12”) requires that the auditor evaluate whether information obtained +from the client acceptance and retention evaluation process or audit planning activities is +relevant to identifying risks of material misstatement.5 Risks of material misstatement identified +during those activities should be assessed in accordance with AS No. 12. (AS No. 12 at ¶ 41). + +12. PCAOB Auditing Standard No. 13, The Auditor’s Responses to the Risks of +Material Misstatement, (“AS No. 13”) requires the auditor when responding to the assessed risks +of material misstatement, particularly fraud risks, to apply professional skepticism in gathering and +evaluating audit evidence. Examples include: (a) modifying the planned audit procedures to +obtain more reliable evidence regarding relevant assertions, and (b) obtaining sufficient appropriate +evidence to corroborate management’s explanations or representations concerning important +matters. (AS No. 13 at ¶ 7). + + +5 References to PCAOB auditing standards refer to the standards in effect at the relevant time. + +7 + +13. PCAOB Auditing Standard AU Section 230, Due Professional Care in the +Performance of Work, (“AU 230”) states that due professional care requires the auditor to exercise +professional skepticism. Professional skepticism is an attitude that includes a questioning mind +and a critical assessment of audit evidence. AU 230 requires that the auditor neither assumes that +management is dishonest nor assumes unquestioned honesty. In exercising professional +skepticism, the auditor should not be satisfied with less than persuasive evidence because of a +belief that management is honest. The engagement partner should be knowledgeable about the +client. (AU 230 at ¶¶ .06, .07, .09). This standard is also applicable in Sections C.(2)(b) and +C.(2)(c) below. + +14. ZBS Group’s client acceptance and continuance policies at the time of the Issuers’ +audits required: (1) completing an engagement acceptance form for prospective clients; (2) annual +reviews by the managing partner to reevaluate the acceptability of each client and engagement; and +(3) at least annually, a review of the Firm’s acceptance and continuance policies by the managing +partner to determine if they were appropriate and operating effectively. ZBS Group’s procedures +involved speaking to referral sources about the integrity of the client, conducting internet searches +for public information, and speaking to the chief executive officer (“CEO”) of the company. For +the Issuers’ audits, however, Zaidman did not speak to the companies’ CEOs even though +statements in Commission filings indicated that the sole officer was the only employee and that he +or she dedicated 25 to 35 hours per week to the business. + +15. As part of ZBS Group’s annual reviews to reevaluate the acceptability of the +Issuers, Zaidman disregarded various circumstances concerning management’s integrity that +Zaidman should have considered and followed-up on as part of the audits. For example, the sole +officer and founder of ShopEye resigned about one year after the incorporation of the company and +was replaced within a very short time period and without any compensation for the sale of his +shares. Further, there were numerous similarities between the Issuers, including that all were +startup companies with minimal resources, where the Control Persons were the only contacts for +day-to-day audit interaction but were not mentioned in any Commission filings and were not +receiving any observable compensation. Although presented with these circumstances for the +Issuers, Zaidman and ZBS Group did not consider whether there were risks of material +misstatement related to management’s integrity and subsequently did not determine an appropriate +audit response. + +16. For the above reasons, Zaidman and ZBS Group failed to exercise due care and +professional skepticism when evaluating information obtained during the client acceptance and +retention process that was relevant to identifying risks of material misstatement and thus, failed to +comply with AS No. 12, AS No. 13, and AU 230. + +(b) Zaidman and ZBS Group Failed to Obtain a Sufficient Understanding of +the Company (AS No. 12 and AU 230) + + +8 + +17. AS No. 12 requires that the auditor obtain an understanding of the company and its +environment. This should include, among other things, obtaining an understanding of the +company’s organizational structure, management personnel, the sources of funding of the +company’s operations, and the company’s operating characteristics. In addition, the auditor is +required to make certain inquiries regarding fraud risks to personnel within the company and when +necessary, corroborate responses or address inconsistencies. (AS No. 12 at ¶¶ 7, 10, 56, 58). + +18. Zaidman and ZBS Group failed to comply with AS No. 12 and AU 230 as they +failed to obtain a sufficient understanding of the Issuers and failed to exercise professional +skepticism. In obtaining an understanding of the Issuers, Zaidman and ZBS Group failed to +identify and/or address various red flags that arose during the course of the audits. For example: + +a. Zaidman and ZBS Group failed to obtain an understanding of the compensation +arrangement with the Control Persons, which could have revealed that the company +was not an operating company owned and controlled by the sole officer as +presented and instead was an undisclosed blank check company owned and +controlled by the Control Persons; + +b. Zaidman and ZBS Group never communicated directly with the sole officers or +confirmed with them that the Control Persons were authorized to represent the +Issuers on their behalf. Zaidman’s communications throughout the audits were +with one or more of the Control Persons; and, + +c. Zaidman and ZBS Group failed to question why there were numerous similarities +between the Issuers, including that all were startup companies with minimal +resources, where the Control Persons were the only contacts for day-to-day audit +interaction but were not mentioned in any Commission filings and were not +receiving any observable compensation. Further, all four Issuers also had notes +payable with one of the Control Persons. + +19. Zaidman and ZBS Group also failed to perform sufficient inquiries as part of risk +assessment by not speaking with the sole officers or obtaining an understanding as to the lack of +any expenses to advance the stated business plan. + +(c) Zaidman and ZBS Group Failed to Perform Sufficient Procedures over +Related Parties and Failed to Include Procedures Designed to Identify +Related-Party Transactions (AU 334 and AU 230) + +20. PCAOB Auditing Standard AU Section 334, Related Parties, (“AU 334”) provides +auditor requirements for identifying and testing related party transactions. AU 334 states that +certain transactions may be indicative of the existence of related parties, including: (a) borrowing +or lending on an interest-free basis or at a rate of interest significantly above or below market rates +prevailing at the time of the transaction, (b) making loans with no scheduled terms for when or + +9 + +how the funds will be repaid, and (c) transactions that are occurring, but are not being given +accounting recognition, such as receiving or providing accounting, management or other services +at no charge. Sufficient appropriate procedures over related parties should extend beyond inquiry +of management. For each material related party transaction, the auditor should consider whether +he has obtained sufficient appropriate evidential matter to understand the relationship of the parties +and the effects of the transaction on the financial statements. The auditor should then evaluate all +the information available to determine whether it is adequately disclosed in the financial +statements. (AU 334 at ¶¶ .03, .08, .09, .11). + +21. Zaidman and ZBS Group failed to comply with AU 334 as they failed to identify or +evaluate whether material related party transactions were adequately and accurately presented and +disclosed in the Issuers’ financial statements. Zaidman and ZBS Group failed to comply with AU +230 by not exercising due care and professional skepticism when identifying or evaluating related +party transactions. + +22. First, the work papers relating to the ShopEye audits included discussion of a note +for $3,000 with an issue date of November 1, 2012, payable to a Florida limited liability company +(“LLC”) controlled by one of the Control Persons. Zaidman read the note which was signed by the +Control Person and listed the Control Person’s title as “Partner” of the LLC. The note did not +indicate a specific due date, was due on demand, and listed 5% as the annual interest rate. The +note, however was not listed or disclosed in the financial statements included in Commission +filings as a related party transaction. Zaidman should have known that this note should have been +disclosed in the financial statements as a related party transaction as it was entered into with an +entity controlled by one of the Control Persons who also performed services for ShopEye. Similar +notes payable were issued by FanSport, Big Clix, and Mobile Vault to the same LLC but were not +accurately described in the financial statements. These notes payable were disclosed as issued to +one investor even though neither the LLC nor the Control Person was a shareholder of the +respective issuer. Also, the filings with the Commission for all the Issuers contained inaccurate +statements that there were no related party transactions. + +23. Second, documents evidence that the Control Persons provided accounting and +management services for the Issuers. However, there is no supporting documentation to establish +whether these services were paid or unpaid and whether they should have been disclosed as related +party transactions. In addition, these services, whether paid or unpaid, were not given accounting +recognition or disclosure in any of the filings with the Commission. + +24. Zaidman and ZBS Group’s audits lacked adequate procedures to evaluate whether +these related party transactions should have been disclosed by the Issuers in the financial +statements included in Commission filings and failed to appropriately design procedures to identify +the Issuers’ related party transactions. + +(d) Zaidman and ZBS Group Failed to Maintain Sufficient Audit +Documentation (AS No. 3) + +10 + + +25. PCAOB Auditing Standard No. 3, Audit Documentation, (“AS No. 3”) requires +that the auditor prepare audit documentation in connection with each engagement conducted +pursuant to the standards of the PCAOB. Audit documentation must contain sufficient +information to enable an experienced auditor, having no previous connection with the +engagement to: (a) understand the nature, timing, extent, and results of the procedures +performed, evidence obtained, and conclusions reached, and (b) determine who performed the +work and the date such work was completed as well as the person who reviewed the work and +the date of such review. The auditor must retain audit documentation for at least seven years +from the date the auditor grants permission to use the auditor’s report in connection with the +issuance of the company’s financial statements. (AS No. 3 at ¶¶ 4, 6, 14). + +26. Zaidman and ZBS Group failed to comply with AS No. 3 for the Issuers’ audits as +certain audit work papers did not evidence who performed and reviewed the work and the dates +such work was completed and reviewed. Furthermore, for the FanSport, Big Clix, and 2012 +Mobile Vault audits, Zaidman and ZBS Group failed to retain certain audit work papers for at +least seven years, including documentation over obtaining an understanding of the company and +required risk inquiries, and the Supervision, Review and Approval Form. + +(e) ZBS Group Failed to Execute Engagement Quality Reviews (AS No. 7) + +27. PCAOB Auditing Standard No. 7, Engagement Quality Review, (“AS No. 7”) +requires an engagement quality review and concurring approval of issuance for certain +engagements conducted pursuant to the standards of the PCAOB. In an audit, the engagement +quality reviewer may provide concurring approval of issuance only if, after performing with due +professional care the review required by AS No. 7, he or she is not aware of a significant +engagement deficiency. Furthermore, the firm may grant permission to the client to use the +engagement report only after the engagement quality reviewer provides concurring approval of +issuance. (AS No. 7 at ¶¶ 1, 12, 13). + +28. ZBS Group did not obtain engagement quality reviews for the 2012 and 2013 Big +Clix audits (including obtaining concurring approval of issuance). Zaidman was the engagement +partner for these Big Clix audits and authorized the filing of and consented to the incorporation +of these audit reports in Big Clix’s Commission filings. + +D. VIOLATIONS + +29. Section 17(a) of the Securities Act prohibits, in the offer or sale of securities, (1) +employing any device, scheme or artifice to defraud, (2) obtaining money or property by means +of any material misrepresentation or omission, or (3) engaging in any transaction, practice or +course of business that operates or would operate as a fraud or deceit upon the purchaser. +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder prohibit, in connection with the +purchase or sale of securities, (a) employing any device, scheme, or artifice to defraud, (b) + +11 + +making any material misrepresentation or omission, or (c) engaging in any act, practice, or +course of business that operates as a fraud or deceit upon any person. As a result of the actions +described above, Zaidman and ZBS Group willfully violated Section 17(a) of the Securities Act +and Section 10(b) of the Exchange Act and Rule 10b-5 thereunder by performing and authorizing +audit reports filed with the Commission that were so deficient that they amounted to no audits at +all and that falsely stated that such audits were conducted in accordance with PCAOB standards. +30. Rule 2-02(b)(1) of Regulation S-X requires an accountant to state “whether the +audit was made in accordance with generally accepted auditing standards.” As used with respect +to Regulation S-X in relation to audits of issuers, the phrase “generally accepted auditing +standards” means the “the standards of the PCAOB plus any applicable rules of the Commission.” +SEC Release No. 34-49708 (May 14, 2004). As a result of the conduct described above for the +Issuers’ audits, ZBS Group willfully violated Rule 2-02(b)(1) of Regulation S-X and Zaidman +willfully aided and abetted and caused ZBS Group’s violations of Rule 2-02(b)(1) of Regulation +S-X. + +31. Rule 2-06 of Regulation S-X requires accountants to retain for seven years “records +relevant to the audit or review, including work papers and other documents that form the basis of +the audit or review.” As a result of the conduct described above for the FanSport, Big Clix, and +2012 Mobile Vault audits, ZBS Group willfully violated Rule 2-06 of Regulation S-X and +Zaidman willfully aided and abetted and caused ZBS Group’s violations of Rule 2-06 of +Regulation S-X. + +32. Section 10A(a)(2) of the Exchange Act requires each audit of an issuer conducted +by a registered public accounting firm to include “procedures designed to identify related party +transactions that are material to the financial statements or otherwise require disclosure therein.” +As a result of the conduct described above, ZBS Group and Zaidman, as the engagement partner +on each of the Issuer’s audits, willfully violated Section 10A(a)(2) of the Exchange Act. + +E. FINDINGS + +33. Based on the foregoing, the Commission finds that Zaidman willfully violated +Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, +and Section 10A(a)(2) of the Exchange Act, and willfully aided and abetted and caused ZBS +Group’s violations of Rule 2-02(b)(1) and Rule 2-06 of Regulation S-X. + +34. Based on the foregoing, the Commission finds that by willfully violating Section +17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, and +Section 10A(a)(2) of the Exchange Act, and willfully aiding and abetting ZBS Group’s violations +of Rule 2-02(b)(1) and Rule 2-06 of Regulation S-X, Zaidman engaged in conduct subject to +Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. + + +12 + +35. Based on the foregoing, the Commission finds that ZBS Group willfully violated +Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, +Section 10A(a)(2) of the Exchange Act, and Rule 2-02(b)(1) and Rule 2-06 of Regulation S-X. + +36. Based on the foregoing, the Commission finds that by willfully violating Section +17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, Section +10A(a)(2) of the Exchange Act, and Rule 2-02(b)(1) and Rule 2-06 of Regulation S-X, ZBS Group +engaged in conduct subject to Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the +Commission’s Rules of Practice. + +37. Based on the foregoing, the Commission finds that Zaidman and ZBS Group +engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents Zaidman’s and ZBS Group’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Zaidman and ZBS Group shall cease and desist from committing or causing any +violations and any future violations of Section 17(a) of the Securities Act, Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder, Section 10A(a)(2) of the Exchange Act, and Rule 2- +02(b)(1) and Rule 2-06 of Regulation S-X. + + B. Zaidman is denied the privilege of appearing or practicing before the Commission +as an accountant. + + C. After five years from the date of this order, Zaidman may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Zaidman’s work in his +practice before the Commission as an accountant will be reviewed either by +the independent audit committee of the public company for which he works +or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + +13 + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Zaidman, or the public accounting firm with which he is +associated, is registered with the Board in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + + (b) Zaidman, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did +not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that Zaidman will not receive appropriate supervision; + (c) Zaidman has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Zaidman acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, engagement quality reviews and quality +control standards. + +D. The Commission will consider an application by Zaidman to resume appearing or +practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Zaidman’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts + +14 + +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + + E. ZBS Group is denied the privilege of appearing or practicing before the +Commission as an independent accountant. + + F. After five years from the date of this order, ZBS Group may request that the +Commission consider its reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as an +independent account. Such an application must satisfy the Commission that: + + (a) ZBS Group is registered with the Board in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be +effective. However, if registration with the Board is dependent +upon reinstatement by the Commission, the Commission will +consider the application on its other merits; + + (b) ZBS Group hired an independent CPA consultant (“consultant”) +who is not unacceptable to the staff of the Commission and is +affiliated with a public accounting firm registered with the Board, +that has conducted a review of ZBS Group’s quality control system +and submitted to the staff of the Commission a report that +describes the review conducted and procedures performed, and +represents that the review did not identify any criticisms of or +potential defects in the Firm’s quality control system that would +indicate that any of ZBS Group’s employees will not receive +appropriate supervision. ZBS Group agrees to require the +consultant, if and when retained, to enter into an agreement that +provides that for the period of review and for a period of two years +from completion of the review, the consultant shall not enter into +any employment, consultant, attorney-client, auditing or other +professional relationship with ZBS Group, or any of its present or +former affiliates, directors, officers, employees, or agents acting in +their capacity. The agreement will also provide that the consultant +will require that any firm with which he/she is affiliated or of +which he/she is a member, and any person engaged to assist the +consultant in performance of his/her duties under this Order shall +not, without prior consent of the staff, enter into any employment, +consultant, attorney-client, auditing or other professional +relationship with ZBS Group, or any of its present or former +affiliates, directors, officers, employees, or agents acting in their +capacity as such for the period of the review and for a period of +two years after the review; + +15 + + (c) ZBS Group has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) ZBS Group acknowledges its responsibility, as long as it appears +or practices before the Commission as an independent accountant, +to comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, engagement quality reviews and quality +control standards. + +G. The Commission will consider an application by ZBS Group to resume appearing +or practicing before the Commission provided that its state CPA license is current and it has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to ZBS Group’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause will be +considered on a facts and circumstances basis with due regard for protecting the integrity of the +Commission’s processes. + + H. Respondents Zaidman and ZBS Group shall pay, jointly and severally, +disgorgement of $19,500.00, prejudgment interest of $3,961.90 and civil penalties of $25,000.00, +to the Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). Payment shall be made in the following +installments: + +1) $8,076.98 within 10 days of the entry of the Order; +2) $8,076.98 within 45 days of the entry of the Order; +3) $8,076.98 within 80 days of the entry of the Order; +4) $8,076.98 within 115 days of the entry of the Order; +5) $8,076.98 within 150 days of the entry of the Order; +6) $8,077.00 within 180 days of the entry of the Order; + +Payments shall be applied first to post order interest, which accrues pursuant to SEC Rule of +Practice 600 and pursuant to 31 U.S.C. 3717. Prior to making the final payment set forth herein, +Respondents shall contact the staff of the Commission for the amount due. If Respondents fail to +make any payment by the date agreed and/or in the amount agreed according to the schedule set +forth above, all outstanding payments under this Order, including post-order interest, minus any +payments made, shall become due and payable immediately at the discretion of the staff of the +Commission without further application to the Commission. + +16 + + +Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Dov +Zaidman and ZBS Group LLP as Respondents in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Glenn S. Gordon, +Associate Regional Director, Division of Enforcement, Securities and Exchange Commission, 801 +Brickell Avenue, Suite 1800, Miami, FL 33131. + + I. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor +Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondents’ payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against one or both Respondents by or on behalf of one or +more investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +V. + +17 + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent Zaidman, and further, any debt for disgorgement, prejudgment interest, civil penalty or +other amounts due by Respondent Zaidman under this Order or any other judgment, order, consent +order, decree or settlement agreement entered in connection with this proceeding, is a debt for the +violation by Respondent Zaidman of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + + By the Commission. + + + + Vanessa A. Countryman + Acting Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4042.txt b/raw/aaer/2019/AAER-4042.txt new file mode 100644 index 0000000000000000000000000000000000000000..406788b4471d8cc16aaef16e965afd0db894a571 --- /dev/null +++ b/raw/aaer/2019/AAER-4042.txt @@ -0,0 +1,110 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85703 / April 22, 2019 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4042 / April 22, 2019 +ADMINISTRATIVE PROCEEDING +File No. 3-15747 + +In the Matter of +David M. Martin, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On February 11, 2014, David M. Martin, CPA (“Martin”) was suspended from appearing +or practicing before the Commission as an accountant as a result of settled public administrative +proceedings instituted by the Commission against him pursuant to Rule 102(e)(3) of the +Commission’s Rules of Practice.1 This order is issued in response to Martin’s application for +reinstatement to appear and practice before the Commission as an accountant responsible for the +preparation or review of financial statements required to be filed with the Commission. +The Commission found that Martin had been permanently enjoined by a United States +District Court from future violations of Section 13(b)(5) of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rules 13b2-1 and 13b2-2 thereunder, and from aiding and abetting +violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b- +20, 13a-1, and 13a-13 thereunder in an action brought by the Commission. In its complaint in +the injunctive action, the Commission alleged that Martin, while serving as the Chief Financial +Officer of Life Partners Holdings, Inc. (“LPHI”), played a role in LPHI’s misleading of +shareholders by failing to disclose that the company was systematically and materially +underestimating the life expectancy estimates it used to price certain transactions. Life +expectancy estimates were a critical factor impacting the company’s revenues and profit margins +as well as the company’s ability to generate profits for its shareholders. The Commission further +alleged that Martin was involved in disclosure violations and improper accounting that LPHI + +1 See Accounting and Auditing Enforcement Release No. 3534 dated February 11, 2014. Martin was permitted, +pursuant to the order, to apply for reinstatement after three years upon making certain showings. + + 2 +used to overvalue assets held on the company’s books and create the appearance of a steady +stream of earnings from brokering life settlement transactions. + +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Martin +attests that he will undertake to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Martin is not, at this time, seeking to appear +or practice before the Commission as an independent accountant. If he should wish to resume +appearing and practicing before the Commission as an independent accountant, he will be +required to submit an application to the Commission showing that he has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Martin’s +suspension from practice before the Commission as an independent accountant continues in +effect until the Commission determines that a sufficient showing has been made in this regard in +accordance with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Martin, it appears that he has complied with the terms of the February 11, 2014 order +suspending him from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Martin, by undertaking to have his work reviewed by the independent audit committee +of any company for which he works, or in some other manner acceptable to the Commission, in +his practice before the Commission as a preparer or reviewer of financial statements required to +be filed with the Commission, has shown good cause for reinstatement. Therefore, it is +accordingly, + + + + + + + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + + + 3 +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +David M. Martin, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + + Vanessa A. Countryman + Acting Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4043.txt b/raw/aaer/2019/AAER-4043.txt new file mode 100644 index 0000000000000000000000000000000000000000..f149b7f2ade26d91b52cb652732468f0d0b6997d --- /dev/null +++ b/raw/aaer/2019/AAER-4043.txt @@ -0,0 +1,197 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85709 / April 23, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4043 / April 23, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19153 + +In the Matter of + +MICHAEL F. CRONIN, CPA, + +Respondent. + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted pursuant to Sections +4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice, against Michael F. Cronin, CPA (“Respondent”).2 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents + +1 Section 4C provides, in relevant part, that: “The Commission may censure any person, or deny, temporarily or +permanently, to any person the privilege of appearing or practicing before the Commission in any way, if that person +is found . . . to have willfully violated . . . any provision of the securities laws or the rules and regulations +thereunder.” +2 Rule 102(e)(1)(iii) provides, in relevant part, that: “The Commission may . . . deny, temporarily or permanently, +the privilege of appearing or practicing before it . . . to any person who is found . . . to have willfully violated, or +willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and regulations +thereunder. + 2 +to the entry of this Order Instituting Public Administrative and Cease and Desist Proceedings +Pursuant to Section 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +And-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Michael F. Cronin, CPA, age 63, of Winter Springs, FL, is a certified public +accountant with licenses in New York and Florida. Prior to May 2013, Cronin was the sole +proprietor of a registered public accounting firm named Michael F. Cronin, CPA (the “Firm”). + +2. On May 14, 2013, the PCAOB filed a settled action against Cronin and his Firm, +for certain deficiencies in audit work performed between 2007 and 2011 on certain public +company engagements (the “PCAOB Order”). The PCAOB Order, which was and is available on +its website, censured, fined, and revoked the registration of the Firm and barred Cronin from being +an associated person of a registered public accounting firm with the right to file a petition for +Board consent to associate with a registered public accounting firm after three years from the date +of the PCAOB Order. + +3. The PCAOB Order explicitly stated that, pursuant to Section 105(c)(7)(B) of the +Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”), it is “unlawful for any person that is . . . barred +from being associated with a registered public accounting firm . . . willfully to become or remain +associated with any issuer . . . in an accountancy or financial management capacity . . . without the +consent of the [PCAOB] or the Commission.” + +4. From May 2013 through May 2018, after the PCAOB Order (the “Relevant Time +Period”), Cronin continued to perform accountancy or financial management services for eight +issuers including, but not limited to, providing general accounting and bookkeeping services; +preparing financial statements and the notes to the financial statements; preparing the Management +Discussion & Analysis section for a quarterly report that was filed with the Commission; and +serving as the intermediary between issuers and their independent auditors. + + 3 +5. During the Relevant Time Period, Cronin received the following payments for +accountancy or financial management work he performed. + +Entity Name Amount +Company A $1,900.00 +Company B $5,400.00 +Company C $5,000.00 +Company D $40,000.00 +Company E $28,465.00 +Company F $12,715.00 +Company G $650.00 +Company H $1,500.00 +Total $ 95,630.00 + + +6. Cronin never requested or received consent from the PCAOB or the Commission to +become or remain associated with any issuer in an accountancy or financial management capacity. + +7. As a result of the conduct described above, Cronin willfully violated Section +105(c)(7)(B) of Sarbanes-Oxley, which prohibits a person barred from associating with a registered +public accounting firm from willfully becoming or remaining associated with an issuer in an +accountancy or financial management capacity without consent of the PCAOB or the Commission. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Cronin’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondent cease and desist from committing or causing any violations and any +future violations of Section105(c)(7)(B) of Sarbanes-Oxley. + + B. Respondent is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. Respondent shall pay disgorgement of $95,630, prejudgment interest of $12,446 +and civil penalties of $42,918, to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). Payment +shall be made in the following installments: $40,000 within ten days of entry of the Order; $36,998 +ninety days after entry of the Order; $36,998 180 days after entry of the Order; and approximately +$36,998 270 days after entry of the Order. Payments shall be applied first to post order interest, +which accrues pursuant to SEC Rule of Practice 600 and pursuant to 31 U.S.C. 3717. Prior to +making the final payment set forth herein, Respondent shall contact the staff of the Commission for +the amount due. If Respondent fails to make any payment by the date agreed and/or in the amount + 4 +agreed according to the schedule set forth above, all outstanding payments under this Order, +including post-order interest, minus any payments made, shall become due and payable +immediately at the discretion of the staff of the Commission without further application to the +Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Michael F. Cronin as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Melissa Hodgman, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + 5 +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + + Vanessa A. Countryman + Acting Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4044.pdf b/raw/aaer/2019/AAER-4044.pdf new file mode 100644 index 0000000000000000000000000000000000000000..609f8911b36a4d1f5db0597b018ae3835b67d7d6 Binary files /dev/null and b/raw/aaer/2019/AAER-4044.pdf differ diff --git a/raw/aaer/2019/AAER-4045.txt b/raw/aaer/2019/AAER-4045.txt new file mode 100644 index 0000000000000000000000000000000000000000..126b8e17950eb60d99a4b3490991bab87963bc4a --- /dev/null +++ b/raw/aaer/2019/AAER-4045.txt @@ -0,0 +1,499 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10636 / May 3, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85767 / May 3, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4045 / May 3, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19156 + + + +In the Matter of + +GT ADVANCED +TECHNOLOGIES INC., + +Respondent. + + +ORDER INSTITUTING CEASE- +AND-DESIST PROCEEDINGS +PURSUANT TO SECTION 8A +OF THE SECURITIES ACT OF +1933 AND SECTION 21C OF +THE SECURITIES EXCHANGE +ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against GT Advanced Technologies Inc. (“GT” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over Respondent and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of + 2 +the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + +III. + + On the basis of this Order, and Respondent’s Offer, the Commission finds1 that: +Summary + +1. This matter involves accounting misconduct and material misrepresentations by GT +Advanced Technologies Inc. (“GT”) in connection the company’s second quarter Forms 10-Q for +2014 concerning a supply contract and debt agreement that GT entered into with Apple, Inc. +(“Apple”) in October 2013. The supply agreement required GT to manufacture large scale +“sapphire glass” for use by Apple as cover screens for its next generation iPhone in a facility leased +from Apple. The debt agreement required Apple to advance to GT $578 million in four +installments with each installment payment being contingent on GT meeting certain quality and +quantity milestones. Further, GT was to repay the debt to Apple by delivering sapphire glass. The +relationship with Apple was extremely high profile for the company, material to GT’s revenue and +reported liabilities and how its stock was valued, and closely followed by analysts. +2. By April 25, 2014, GT’s CEO, Thomas Gutierrez (“Gutierrez”), and other officials +were aware that GT failed to meet the required quantity, quality, and delivery standards, including +a “fourth milestone” in the debt agreement. GT knew that Apple had withheld its fourth +installment payment of $139 million due to that failure. In connection with quarterly filing for the +first quarter 2014, GT failed to disclose its performance failures under the contracts, resulting in +Apple not making the fourth milestone payment. The company’s failure to meet the fourth +milestone gave Apple the right to call back $306 million in GT’s debt from the prior installments +and, by the second quarter 2014, would have required GT to recognize the debt as current and not +long-term debt. The “current” debt reclassification would have had an immediate, material impact +on GT’s liquidity and status as a going concern. Had GT properly classified the Apple debt as +current, its current liabilities would have increased from $393.5 million to $700.2 million. The +accelerated repayment obligation of $306.7 million would have affected GT’s liquidity and status +as a going concern because GT’s second quarter working capital was only $155.6 million. For the +second quarter, the misclassification of the Apple debt caused GT to overstate working capital by +$306.7 million, or by 200%, and to understate current liabilities by $306.7 million or 43%. +3. In order to avoid recognizing the debt as current, GT, without reasonable basis, +formed a position that Apple was in breach of a lease agreement covering a facility used to produce +sapphire and, as a result of Apple’s purported breach, GT was released from its performance and +milestone obligations to Apple under the debt agreement. In the view of GT, under these + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + + 3 +circumstances, Apple could no longer call back the debt, allowing the company to continue to +classify the debt as long-term. +4. During an August 5, 2014 earnings call in connection with GT’s quarterly financial +reporting for its second quarter, Gutierrez represented on the call that GT expected to hit +performance targets and receive the fourth installment payment from Apple by October 2014. The +statement was misleading and created a false impression regarding the relationship between the +parties and GT’s performance under the contract. Gutierrez failed to disclose to investors or Apple +that GT had taken the internal position that Apple breached the lease and considered itself excused +from performing under the debt agreement. This position severely jeopardized, if not eliminated, +any reasonable expectation by GT that Apple would pay the fourth installment payment. In +addition, prior to the earnings call, neither Gutierrez nor the company disclosed that GT had +missed the fourth milestone in April, and continued in a state of failed performance in the months +that had elapsed. Apple also had not agreed to pay GT the fourth installment payment. +5. In connection with GT’s disclosure of sources of cash, liquidity, backlog, and EPS +projections, GT included unsupported sales projections for sales of sapphire glass furnaces. The +projections assumed future sales despite several indications to GT that these sales were unrealistic, +including that Apple refused to authorize the sales and that GT’s prospective customers were +unable to commit to purchase orders. +6. Within eight weeks of the second quarter filing and earnings calls, GT filed for +bankruptcy under Chapter 11 of the Bankruptcy Code, resulting in significant investor harm. +Respondent +7. GT Advanced Technologies Inc., during the relevant period, was a New +Hampshire-based diversified technology company that provided crystal growth equipment and +services for the global, solar, LED and electronics industries. GT’s common stock was registered +with the Commission pursuant to Section 12(b) of the Exchange Act and its shares were listed on +the NASDAQ until they were removed from listing on December 11, 2014. As of June 28, 2014, +there were approximately 138 million shares of common stock outstanding with a total market +capitalization of approximately $434 million. On October 6, 2014, GT filed for reorganization +under Chapter 11 of the Bankruptcy Code. GT continued its operations during the bankruptcy +proceedings and exited the bankruptcy pursuant to a court-approved plan on March 17, 2016, in +which all equity interests were extinguished. GT Advanced Technologies Inc. is privately-held +with new officers and directors, and is owned by former senior debt holders and new investors. +Currently, the company provides polysilicon and crystal growth technologies, and produces crystal +materials. +Facts +8. On October 31, 2013, GT entered into multiple agreements with Apple and parties +related to Apple, including a Statement of Work (“supply agreement”), Prepayment Agreement +(“debt agreement”), and Lease Agreement (“lease agreement”). Gutierrez, with other GT +executives, negotiated the contracts. + 4 +9. The agreements required GT to operate 2,090 “Advanced Sapphire Furnaces” +(“ASF furnaces”) with capability to produce 262kg sapphire “boules,” or a synthetic cylindrical +mass of sapphire grown in a furnace, to supply a minimum of 56 million millimeters of sapphire in +2014. The contracts with Apple required production of an unprecedented amount of sapphire in +boules that were over twice the size of boules GT had previously produced. Given the magnitude +of the production obligations and high profile counter-party, the Apple contract was a game- +changing event for GT. +10. To accommodate the scale of sapphire manufacturing, Apple leased a facility in +Arizona, known as the “Mesa facility” to GT pursuant to a lease agreement. +11. The parties also signed a supply contract, which specified the amounts of sapphire +GT was to produce, and the price Apple would pay for it. The supply agreement also contained an +exclusivity provision that limited GT’s future ASF furnace sales to customers already in its +backlog or customers that did not produce sapphire glass for consumer devices, which could be +deemed Apple’s competitors. +12. The debt agreement required GT to achieve certain technical quality and quantity +metrics in order to receive each of four prepayments from Apple. Each milestone required GT to +produce 262kg boules that contained increasing percentages of material suitable for use by Apple. +In exchange, Apple agreed to pay GT $578 million in four installments, or “prepayments,” based +upon GT reaching each of the four milestones. The debt agreement also required GT to: repay +prepayments through the delivery of sapphire beginning in 2015; use Apple’s prepayments to +purchase 2,036 ASF furnaces to be used at an Arizona facility; and retrofit 54 ASF furnaces to be +used in a facility that GT already maintained in Massachusetts. +13. Significantly, the debt agreement provided Apple the right to cancel future +milestone prepayments and accelerate GT’s repayment obligations on already-received amounts if +GT failed to meet any technical quality and quantity milestone. +Apple’s Installment Payments to GT +14. On November 15, 2013, Apple made the first milestone payment to GT which was +due fifteen days after contract signing and did not have any associated milestone requirements. +15. By December 2013, just weeks after execution of the debt agreement, GT could not +meet the second milestone requirement, causing Apple to withhold its second prepayment that was +due on December 30, 2013 until January 23, 2014. +16. As of that time, Apple had not completed, by the contractual deadline, the first +phase of construction of the Mesa Arizona manufacturing facility, which impacted GT’s ability to +achieve the second milestone requirements by the original deadline. The parties, however, agreed +to amend the debt agreement to loosen some restrictions and provide GT a better chance of +meeting its future milestone requirements, including by providing GT more time to meet the third +milestone and leniency with regard to producing usable sapphire. GT never disclosed the +amendment to the debt agreement, dated January 23, 2014, in a Form 8-K or in any periodic filing. + 5 +17. The successful growth of a sapphire boule required a constant supply of electrical +power and a carefully regulated flow of cooling water at precise moments in the boule growth +process. A failure in the supply of electrical power or cooling water could destroy some or all of +the sapphire boules then in the growth process. In the first two quarters of 2014, interruptions in +the supply of power and water, referred to as “facilities events,” unexpectedly occurred on some +occasions, which destroyed sapphire boules that were then in the growth process. +18. On April 3, 2014, Apple paid the third installment. As to the fourth installment of +$139 million, GT had a deadline of April 25, 2014 to meet the milestone requirements. +19. As the April 25th deadline approached and then passed, GT failed to meet the fourth +milestone requirements. In connection with its first quarter Form 10-Q filing, GT failed to disclose +its failure to meet the performance requirements by the April 25th deadline and that Apple had not +made the fourth payment as a result. +20. Apple, in fact, never made the $139 million payment or provided GT with a waiver +of the obligation to meet the fourth milestone. Further, although the parties discussed the +possibility of an amendment to the fourth milestone requirement, the terms for an amended +agreement were never agreed upon and the parties never executed a second amendment to the debt +agreement. +GT’s Failure to Meet Obligations Under the Contract + +21. From nearly the start of the contract, GT was unable to meet required delivery and +quality standards under the contract. Among other problems, GT had difficulty scaling the +sapphire “recipe” to produce 262 kg boules, and experienced quality problems, including cracks, +structural, and cosmetic defects that caused the material to fail to comport with Apple’s +specifications. Gutierrez received regular reports concerning the sapphire project and received +board materials detailing GT’s failure to scale the sapphire “recipe” to produce larger boules while +maintaining quality standards suitable for use by Apple. As reflected in a document presented to +GT’s board on January 16, 2014, for example, Apple was “alarmed” that 75% of GT’s boules were +cracked. +22. GT also experienced cooling water and power interruptions at the facility. On +February 23, 2014 and March 8, 2014, process cooling water interruptions took place, damaging +boules that were then in production. Power interruptions occurred on April 22, 2014, and July 22, +2014, which similarly damaged boules that were in production. Gutierrez knew about the power +and water interruptions. +23. In May 2014, an Apple supply executive warned Gutierrez by text that the low +quantity of sapphire produced was a “major problem.” By June, the Apple supply executive +emailed Gutierrez that he had “extremely limited confidence” that GT could produce even 33 +million millimeters of sapphire in 2014 “based on GT’s inability to date to track factory +performance” and that GT’s “de-commitments have to stop.” + 6 +24. Given the production difficulties, throughout 2014, GT continually revised its +sapphire production projections downward. By June 3, 2014, as reflected in an internal supply +review shared with Gutierrez, GT could not meet its contractual obligation to produce 56 million +millimeters of sapphire in 2014. In July, Apple had expressly advised Gutierrez that, due to the +production failures, Apple would not use sapphire glass for its iPhone 6 launch. +25. By July, as reflected in emails, GT’s Chief Technology Officer informed Gutierrez +that it would take at least six months from the summer of 2014 (January 2015 at the earliest) to fix +the known problems and produce over 200kg boules of acceptable quality to meet the fourth +milestone requirements set forth in the January amendment to the debt agreement. As a result, in +the summer of 2014, GT experienced cash flow problems from its inability to achieve the +milestones under the agreement. +26. At the end of July, Gutierrez requested that Apple to make the fourth installment +payment notwithstanding the performance problems, but Apple rejected the request. +27. Failing to meet the fourth milestone provided Apple with the ability to accelerate +the debt repayment requiring GT to pay back to Apple the installment payments. +GT’s Internal Position that Apple was in Breach +28. On August 7, 2014, GT filed its second quarter 2014 form 10-Q. In the filing, GT +did not disclose that it had failed to meet supply and delivery obligations to Apple. +29. The debt agreement clearly stated that “[i]f [GT] has not met the technology +specifications …to this Agreement by the deadlines [set forth in this Agreement] Apple shall be +entitled to cancel any subsequent Milestone Payment and to receive repayment within five (5) +Business Days of all or a portion of all previous Milestone Payments.” +30. Under GAAP, GT treated Apple’s installment payments as debt, including +classifying 87.5% as long-term debt and 12.5% as short term. At the end of the first quarter 2014, +GT classified $16.8 million as current debt and $246.2 million as non-current debt and at the end +of the second quarter 2014, GT classified $43.9 million as current debt and $306.7 million as non- +current debt. +31. By failing to comply with the fourth milestone prepayment metrics before the end +of the second quarter, GT violated the debt agreement. Under FASB Accounting Standards Board +Accounting Standards Codification 470 (“ASC 470”), given GT’s violation of the debt agreement, +GT was required to record the debt as a current liability, unless Apple waived the repayment for +more than a year, or Apple granted a grace period during which GT determined that it was +probable that it would cure the violation. +32. As early as January 2014, GT was on notice that its ASC 470 obligation turned on +whether Apple had the mere “ability” to call the debt, regardless of whether Apple, in fact, +exercised that right. As reflected in a January 18, 2014 email, GT’s CFO at the time expressly +stated “[t]he accounting treatment on debt classification is not dictated by their declaration of +default, its (sic) if we determine they have the ability to issue such a default notice.” (Emphasis in + 7 +the original). GT never sought a waiver from Apple, let alone obtained an actual waiver, and +Apple never modified its right to be repaid. +33. During the second quarter, but prior to the filing of the Form 10-Q, GT’s external +auditor was concerned that GT’s failure to achieve the fourth milestone constituted a violation of +the debt covenant and gave Apple the ability to call back GT’s debt from the prepayments. As a +result, GT’s auditor looked at whether GT’s continued classification of the debt as long term +comported with GAAP. Had GT classified the prior Apple payments as current debt, this would +have had an immediate, material impact on its liquidity and status as a going concern because +Apple would have the right to call back $306 million in debt from the prior payments that GT +owed. In determining whether GT had to classify the debt as current or continue to record it as +long-term, GT’s external auditor discussed GT approaching Apple for a waiver, and discussed the +following language: “Apple waives all its rights under the Prepayment Agreement to require +repayment of Milestone Payments previously paid to GT based on GT not meeting the Milestones +as described in the January 17, 2014 Amendment to the Prepayment Agreement.” Similarly, GT’s +then CFO encouraged Gutierrez to directly approach Apple and seek a waiver. However, in a June +18th email to Gutierrez, GT’s then Chief Operating Officer advised him that “this is an issue of +how we deal with [the external auditor] and [the CFO] learning how to keep him in a box.” +34. As a result of GT’s failure to obtain a waiver, GT’s General Counsel, drafted an +opinion shared with GT’s auditor that reflected that GT’s failure to meet the fourth milestone +prepayment metrics did not cause acceleration of the prepayment debt. Instead, GT formulated an +“approach” that avoided the classification of the debt as current by taking the position that Apple +was in breach of the contract. +35. On July 7, 2014, Gutierrez requested by email that Apple confirm that the parties +were “postponing establishing revised criteria for the 4th milestone until Q4.” Apple responded +the following day, stating: “Correct: we are postponing our discussions with respect to the 4th +prepayment milestone.” GT sent this exchange to its external auditor. Gutierrez, however, did not +send to Apple the language respecting waiver that GT’s CFO had proposed. +36. Without being able to provide evidence of a waiver from Apple, GT formed a +position that Apple was in breach of a lease agreement because, in GT’s view, Apple had not met +certain power and water specifications in the lease, and, as a result, GT was released from its +obligations to meet the performance milestones under the debt agreement and could not be deemed +to have violated the debt covenant. On the basis of this new position, GT continued to record the +debt as long-term. +37. As GT knew or should have known, the letter was not supported by facts known to +the company at the time and, thus, its debt was improperly recorded as long-term debt. +Specifically, the project reports reflected that the parties had resolved the electrical and water +design issues by May 2014, but GT did not disclose this fact to its auditor. Moreover, GT took the +position that Apple was in breach without providing Apple with notice of the breach, which was a +requirement under the lease. + 8 +38. Further, the debt agreement conditioned Apple’s earlier installment payments on +GT’s acknowledgement that Apple was not in breach of the lease. The agreement expressly states +that at the time of each installment payment, the parties agree that “there are no ongoing disputes +under the Facility Lease Agreement which have a material impact on the use of the manufacturing +facility to be located in Mesa, AZ that Apple is purchasing and developing (the “Mesa Facility”) +for its intended purpose.” Thus, GT knew or should have known that its position that Apple was in +breach was inconsistent with the terms upon which GT received three prior installment payments +from Apple. +39. Gutierrez was aware of GT’s position that Apple was in breach of the lease +agreement. Gutierrez was also aware that GT did not disclose this view to GT’s investors. +40. GT failed to devise and maintain a system of internal accounting controls +sufficient to provide reasonable assurance that its debt classification complied with GAAP. +41. Had GT properly classified and recorded the Apple debt as current, its current +liabilities would have increased from $393.5 million to $700.2 million. The accelerated repayment +obligation of $306.7 million would have affected GT’s liquidity and status as a going concern +because GT’s second quarter working capital was only $155.6 million. For the second quarter, the +misclassification of the Apple debt caused GT to overstate working capital by $306.7 million, or +by 200%, and to understate current liabilities by $306.7 million or 43%. +GT’s False and Misleading Second Quarter Earnings Calls and Filing +42. On August 5, Gutierrez as the CEO, held an analyst call, disclosing that GT +expected Apple to pay the fourth installment by October 2014. Specifically, Gutierrez stated on +the call that: “[t]he fourth prepayment from Apple is contingent upon the achievement of certain +operational targets by GT. GT expects to hit these targets and receive the final $139 million +prepayment by the end of October 2014.” On August 13, Gutierrez held another analyst call where +he similarly stated that “[w]e have indicated that we expect our final payment in the October time +frame. I wouldn't say that if I didn't believe it and my conviction in terms of the long-term +importance of the business to GT remains intact.” +43. In the days prior to the second quarter filing, Gutierrez sent Apple a draft of various +proposed second quarter disclosures, including proposed disclosure for GT’s second quarter +earnings release, which stated “[t]he 4th and final prepayment from Apple, which is tied to +achievement of certain operational targets, under GT’s control in Mesa, is now expected to be paid +in the September/October timeframe.” In response, on August 1, 2014, Apple informed Gutierrez +and two other GT officials that the disclosure was “Not ok” and that the disclosure was +“ambiguous about whether it is GT’s or Apple’s expectation to pay it in that time-frame.” Apple +further requested that GT rephrase the disclosure “to something like ‘GT expects to [meet those +targets] [receive the prepayment] in the September/October timeframe’ … not ‘is now expected to +be paid’.” +44. During this email exchange or any subsequent communication, GT and Gutierrez +did not raise with Apple that GT took the position that Apple breached the lease agreement, which + 9 +excused GT from performing under the contracts, including meeting the fourth milestone of the +debt agreement. +45. GT’s disclosure on the earnings call, through its CEO, was misleading and false +given that the public was unaware that GT took the position that Apple was in breach (and thus GT +was released from its obligations) and painted a misleading picture of GT’s relationship with Apple +and GT’s performance under the contract. This position severely jeopardized any reasonable +expectation by GT that Apple would pay the fourth installment payment. In this regard, under the +contract terms, Apple could refuse to pay GT if there were lease disputes. In addition, GT’s +expectation of receiving the fourth payment was undermined by its repeated failure to meet +performance milestones. At a minimum, the breach position called into question whether either +party had any ongoing obligations under the contract. +46. GT disclosed in the Form 10-Q for the second quarter of 2014 that: “We have not +received the fourth prepayment amount under the Prepayment Agreement and there can be no +guarantee that we will satisfy the technical and performance metrics necessary to receive such +prepayment amount in the near future, or at all.” Gutierrez’s statements on the earnings call, +however, were inconsistent with facts known to GT, including that: GT had already missed the +April 25 milestone date and remained in a state of failed performance on production of sapphire +glass for over three months by the time of the call; GT’s failures could not be rectified until +January 2015 at the earliest; and the parties had not determined the terms of a future amendment or +executed an amendment. +47. Apple was concerned that GT’s statement on the earnings call was misleading and +inconsistent with GT’s deficient performance under the contract. For example, in an internal +Apple exchange, the senior-most Apple executive overseeing the GT contract stated to his +colleagues: “I feel like we got sold a bit of a story by Tom [Gutierrez]. It was all doom and gloom +when he talked to us and how he needed our help to stay alive, then he ups his earnings guidance +for the year on the call.” The Apple supply executive responded “I am concerned about his +earnings (the message was too positive).” +48. GT’s statement on the earnings call concerning the fourth installment payment was +material. Several analysts who covered GT’s stock, for example, noted GT’s expectation that +Apple would make the fourth installment payment as a positive development. +49. In its Form 10-Q for the second quarter 2014, GT also failed to disclose additional +material facts that would have been material to investors, especially in light of the misleading +statements on the earnings calls. These include: (a) the nature and extent of its sapphire +manufacturing difficulties; (b) the lack of progress against its supply commitment; (c) GT’s failure +to meet the fourth milestone and ability to cure the situation for several months past the April +deadline; (d) the debt agreement had been already amended once due to GT’s failure to meet the +second milestone; (e) GT had not met sapphire and supply and delivery obligations; and (f) power +failures represented not just a material risk, but a material event that had actually occurred. + 10 +GT’s Second Quarter Liquidity, Backlog, and 2014 EPS Estimate + +50. In connection with the second quarter Form 10-Q filing, GT’s external auditor +became concerned about GT’s cash flow, and for the first time, requested a liquidity analysis. In +addition, GT held debenture notes that included a covenant for default for inability to pay $100 +million in indebtedness. If GT defaulted on the Apple debt, the company faced significant risk of +cross-defaults under these debenture notes. +51. In response, GT, provided the external auditor with a liquidity analysis that +included inaccurate assumptions concerning its ability to sell: (1) $275 million in ASF furnaces to +non-Apple customers; and (2) 25 million millimeters of sapphire to Apple for $232 million. These +assumptions would result in GT ending the year with a cash balance of between $267 million and +$424 million. +52. GT relied in large part on Gutierrez’s internal projections that GT could achieve its +2014 ASF sales goals by selling in the second half of the year either 450 ASF’s to two Apple +suppliers or to a Taiwanese company. Based on the unsupported liquidity analysis, GT disclosed +in its second quarter Form 10-Q that it had “sufficient” cash to satisfy its commitments and +requirements for the next twelve months. Gutierrez’s projected furnace sales also provided, in +part, the basis for GT’s non-GAAP EPS guidance estimate of $0.12-$0.18 to be misleading as +disclosed in its second quarter earnings release attached to Form 8-K. +53. GT’s projections incorporated in GT’s liquidity analysis were unsupported, unduly +optimistic, and without reasonable basis. GT relied on these projections to assess revenue of +approximately $236 million and to maintain its books and records. + +54. As to the potential sales to the two Apple suppliers, Apple had offered on July 30, +2014, to “approach [two of its suppliers] with an offer to purchase 450 furnaces for their facilities” +to be “exclusively used for Apple projects.” Prior to the August 5, 2014 earnings call, Apple had +only given to Gutierrez the names of the sales contacts and informed him they had both been told +that “Apple is interested in [the two suppliers] expanding their sapphire growth capacity to reduce +parts pricing.” At the time of the filing, GT representatives had not yet met with either of the two +suppliers. Communications with the suppliers never advanced to the stage of completing non- +disclosure agreements, a necessary first step for any negotiations. + +55. As to the potential sale of 447 ASF to the Taiwanese customer, GT made the +representations despite the fact that these projected sales would violate the exclusivity provisions +of the Apple agreements with Apple and GT did not have permission from Apple to close on these +sales. As reflected in an August 3, 2014 email from Apple to Gutierrez, Apple specifically +declined to give permission to GT to sell furnaces to a potentially new customer in Taiwan, stating +“Tom, we are not going to waive the terms for the 983 [the total backlog] furnaces.” +56. GT knew or should have known that the market for ASF furnaces was limited. GT +received industry analysis reflecting that demand for ASF furnaces was based on Apple using GT’s +sapphire glass in its iPhone screens. By the time of the liquidity analysis, GT was aware that + 11 +Apple would not announce an iPhone with a sapphire screen in September 2014 and, thus, market +participants would have little interest in new ASF furnace purchases. +57. In July, at Gutierrez’s direction, GT increased the forecasted ASF furnace sales +from its original internal estimate of $130 million to $275 million, despite red flags indicating that +the forecasts were unrealistic. In this regard, ASF furnace customers presented limited sales +opportunities and discussions with potential Apple suppliers had not begun. In fact, Gutierrez +acknowledged in a July 30, 2014 email to Apple that five of GT’s six ASF furnace “backlog” +customers (that were in its pipeline at the time the Apple contract was executed) lacked the +capacity to purchase furnaces in 2014. The remaining client’s interest represented only about $65 +million in potential sales. + +58. GT’s cash analysis included the assumption that GT would receive the fourth +installment, despite Apple never providing such assurances and contrary to the legal opinion +drafted by its General Counsel. As a result of these unsupported assumptions, in its second quarter +2014 Form 10-Q, GT inaccurately stated that “existing cash, customer deposits and prepayment +installment proceeds will be sufficient to satisfy working capital requirements, commitments for +capital expenditures and other cash requirements for at least the next twelve months,” and “[GT] +will have sufficient cash resources to fund operations for at least the next twelve months.” +59. Based on these unsupported assumptions, GT also overstated sapphire equipment +(ASF furnaces) backlog in its second quarter 2014 Form 10-Q and earnings release, attached to +Form 8-K. Most of the agreements in backlog were over 18 months old. Although GT had sales +agreements with the backlog customers, it did not have an expectation of delivering furnaces to +them in the second half of 2014. Although GT’s second quarter 2014 Form 10-Q stated that “our +order backlog as of any particular date should not be relied upon as indicative of our revenues for +any future period,” analysts typically regard it as an indication of the company’s sales prospects. +GT’s backlog disclosure was material given that several analysts covering GT’s stock specifically +referenced the backlog disclosure as a positive factor. + +60. On October 6, 2014, two months after filing its second quarter 2014 Form 10-Q, +GT filed voluntary petitions for reorganization under Chapter 11 and filed a Form 8-K in which the +company stated that as of September 29, 2014 it had approximately $85 million of cash compared +to $333 million of cash at June 28, 2014. +The Offer and Sale of Securities + +61. During the relevant time, GT offered and sold securities pursuant to a Form S-8 the +Company filed on April 20, 2012. During fiscal year 2014, GT received payment from stock option +exercises as a result of exercises and sales of stock by GT employees. GT’s Form S-8 filed in 2012 +incorporated by reference GT’s subsequent periodic filings under the Exchange Act, including the +quarterly and current filings during fiscal year 2014. + + + + + 12 +Violations + +62. As a result of the conduct above, GT violated Sections 17(a)(2) of the Securities +Act, which makes it unlawful, in the offer or sale of securities, to obtain money or property by +means of any untrue statement of a material fact or any omission to state a material fact necessary +in order to make the statements made, in light of the circumstances under which they were made, +not misleading, and 17(a)(3) of the Securities Act, which, in the offer or sale of securities, +proscribes any transaction, practice or course of business which operates or would operate as a +fraud or deceit upon a purchaser of securities. +63. As a result of the conduct described above, GT violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder, which requires issuers to file with +the Commission accurate current reports, which include such further information as may be +necessary to make the required statements not misleading. + +64. As a result of the conduct described above, GT violated Section 13(b)(2)(A) of the +Exchange Act, which requires issuers to “make and keep books, records, and accounts, which, in +reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the +issuer” and Section 13(b)(2)(B) of the Exchange Act, which requires issuers to devise and maintain +a system of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded to permit the preparation of financial statements in conformity with +generally accepted accounting principles. + +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED that: + + Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent cease and desist from committing or causing any violations and any future violations of +Sections 17(a)(2) and (3) of the Securities Act and Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of +the Exchange Act and Rules 12b-20, 13a-11, and 13a-13 thereunder. + + By the Commission. + + Vanessa A. Countryman + Acting Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4046.txt b/raw/aaer/2019/AAER-4046.txt new file mode 100644 index 0000000000000000000000000000000000000000..f48c19587bd1ee5ad9c276075edfa2061da99c4e --- /dev/null +++ b/raw/aaer/2019/AAER-4046.txt @@ -0,0 +1,279 @@ + +1 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85819 / May 9, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4046 / May 9, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19162 + + +In the Matter of: + +Telefônica Brasil S.A., +: +Respondent. +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS, PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER + I. +The Securities and Exchange Commission (“Commission”) deems it appropriate that +cease-and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the +Securities Exchange Act of 1934 (“Exchange Act”), against Telefônica Brasil S.A. (“Telefônica +Brasil” or “Respondent”). + II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Cease-and-Desist Proceedings, Pursuant to 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth +below. + +2 + + III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +1. These proceedings arise out of Telefônica Brasil’s violations of the internal +accounting controls and recordkeeping provisions of the Foreign Corrupt Practices Act of 1977 +(the “FCPA”) [15 U.S.C. § 78m]. +2. As described below, Telefônica Brasil failed to devise and maintain sufficient +internal accounting controls over a hospitality program that the company hosted in connection +with the 2014 World Cup and 2013 Confederations Cup. In the context of this program, +Telefônica Brasil offered and provided tickets and hospitality to government officials who were +directly involved with, or in a position to influence, legislative actions, regulatory approvals, and +business dealings involving the company. In total, Telefônica Brasil provided World Cup tickets +and related hospitality to approximately 93 government officials and Confederations Cup tickets +and related hospitality to approximately 34 government officials. +3. The payments for the tickets were not accurately reflected in Telefônica Brasil’s +books and records, and the company failed to devise and maintain a sufficient system of internal +accounting controls. This conduct arose in an environment in which the company failed to +adequately enforce its corporate antibribery and anticorruption policies. +4. As a result, Telefônica Brasil violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the +Exchange Act. +Respondent +5. Telefônica Brasil is a subsidiary of Telefónica S.A., a Spanish multinational +broadband and telecommunications provider with worldwide operations, and is the largest +telecommunications company in Brazil with headquarters in São Paulo. Telefônica Brasil’s +American Depositary Receipts are registered with the Commission pursuant to Section 12(b) of +the Exchange Act and traded on the New York Stock Exchange under the symbol “VIV.” +6. Telefônica Brasil markets its mobile services under its Vivo brand. Telefônica Brasil +employs approximately 34,000 employees with revenues of approximately $14 billion as of +December 31, 2017. + + + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any other +person or entity in this or any other proceeding. + +3 + +Facts +Telefônica Brasil’s World Cup Ticket Program + +7. In March 2012, the opportunity arose for Telefônica Brasil to purchase tickets for +the World Cup that would take place in Brazil in June and July 2014. Telefônica Brasil agreed to +purchase 1860 World Cup tickets from a FIFA vendor, for a total of approximately $5.1 million, +to be paid in three installments in 2012, 2013, and 2014. An internal memorandum by Telefônica +Brasil’s Marketing Director dated May 23, 2012, which sought approval for the purchase of the +tickets, described the purchase as being “for relationship-building activities with strategic +audiences.” An executive expense committee at Telefônica Brasil, comprising of senior +leadership at the company, approved the general purchase of the tickets. The paperwork seeking +internal approval to purchase these tickets included no mention of giving tickets to government +officials. However, it was known within the company that some of the tickets would be given to +government officials. + +8. Telefônica Brasil purchased the World Cup tickets and intended to pay for related +hospitality at an average cost per guest of approximately $3,204, of which $2,750 comprised the +cost of the tickets. The company allocated these tickets to its various departments, including +approximately 10 percent of the tickets to the Institutional Relations Department (“IR +Department”), which interacted with the Brazilian government and foreign governments. +Telefônica Brasil, primarily through the IR Department, gave a total of 194 World Cup tickets to +93 government officials (in some cases, more than one ticket was given to an official so that he +or she could invite friends or family members). The total value of tickets and related hospitality +given to these government officials amounted to $621,576. + +9. Most of the tickets given to government officials were given to individuals who +were significant to the company’s business interests, including federal congressmen and +senators, mayors, and other government officials. A small number of personnel from foreign +embassies who were commercial customers of Telefônica Brasil, including one ambassador, also +received tickets. In selecting ticket recipients, management looked at the possible benefit to the +company and at opportunities to build relationships with important officials. In an internal IR +Department email dated May 27, 2014, an IR Manager noted that in creating the lists of +suggested guests, he took “into account the importance of the actions that each guest has already +effectively done in our favor.” The employee then suggested that certain government officials be +given tickets and outlined their roles in the Brazilian government. Among other examples, in a +June 4, 2014 email, an IR employee requested from an IR Manager a ticket for a federal +legislator’s chief of staff who “has opened many doors for us” and noted that there was further +legislative activity “going through the House and I will need his help.” Other June 2014 emails +reflect that a free trade tax zone official responsible for providing customs clearances was given +a ticket and asked for his “ongoing support” in receiving a customs clearance for a particular +invoice. A July 2014 email between IR Department employees suggested inviting two Brazilian +mayors but only if, during the telephone calls inviting them, the IT Department could raise with +them certain “legislative amendments” of importance to the company. + + +4 + +Telefônica Brasil’s Confederations Cup Ticket Program + +10. In 2013, the year before the World Cup, Telefônica Brasil also purchased +Confederations Cup tickets and related hospitality for invited guests. The Confederations Cup is +a major soccer tournament that precedes the World Cup by one year and takes place in the same +country that is hosting the World Cup. + +11. In March and April 2013, Telefônica Brasil paid a FIFA vendor $428,219 for 240 +tickets for the Confederations Cup which amounted to an average cost per ticket of +approximately $1,784. Telefônica Brasil also paid $312,226 for hospitality related to the +Confederations Cup. Taking both the cost of the tickets and hospitality into account, the average +cost per guest for the Confederations Cup amounted to approximately $3,085. As with the World +Cup, the company allocated these tickets to its various departments, including approximately 15 +percent to the IR Department. + +12. Telefônica Brasil, primarily through the IR Department, gave a total of 38 +Confederations Cup tickets to 34 government officials. The total value of tickets and related +hospitality given to these government officials amounted to $117,230. Confederations Cup +tickets were given to government officials who were significant to the company’s business +interests, including federal congressmen and various government ministry officials. + +Telefônica Brasil Lacked Internal Accounting Controls + +13. As with its parent company, Telefônica Brasil had a general code of ethics that +explicitly prohibited offering or accepting gifts, hospitality, or other types of incentives “which +may reward or influence a business decision,” as well as a policy that donations would not be +made if linked with political activity. + +14. However, Telefônica Brasil lacked internal accounting controls sufficient to +implement or maintain these policies and prevent giving things of value, like World Cup tickets, +to government officials where such gifts might influence or reward an official decision. As a +result, with the approval of senior managers, the company ended up offering such tickets and +hospitality to government officials who were directly involved with, or in a position to influence, +regulatory matters, legislation, and other business efforts of benefit to Telefônica Brasil. + +15. In implementing internal accounting controls over gifts, Telefônica Brasil +management focused on company employees accepting tickets and hospitality, as opposed to the +company offering tickets and hospitality to others, including government officials. Although the +broad policy prohibition was clear, and certain individuals inquired about its applicability, it was +not followed due to the lack of internal accounting controls, a compliance breakdown, and a +deficient internal audit function. + + + +5 + +Telefônica Brasil Improperly Accounted for its Purchase of World Cup and +Confederations Cup Tickets and Related Hospitality for Government Officials + +16. The total cost for the World Cup ticket purchase was approximately $5.1 million +and was paid in three installments in 2012, 2013, and 2014. Telefônica Brasil booked the first +two installment payments for the World Cup tickets as “Publicity Institutional Events” and the +third installment payment as “Advertising & Publicity” (the third payment was not also booked +as “Publicity Institutional Events” because of a change in accounting codes at the company). It +booked the hospitality provided for the World Cup as “Advertising & Publicity.” + +17. The total cost for the Confederations Cup ticket purchase was approximately +$428,000 and was paid in two installments in 2013. Telefônica Brasil booked the two installment +payments for the Confederations Cup tickets as “Publicity Institutional Events” and booked the +hospitality provided for the event as “Advertising & Publicity.” + +18. Telefônica Brasil failed to properly characterize the purchase of tickets and +related hospitality that were given to government officials. It recorded the purchases and +hospitality as being for general advertising and publicity purposes when in fact those tickets and +related hospitality were given to government officials. As such, Telefônica Brasil’s books and +records did not, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the company’s assets. + +19. As a result of the conduct described above, Telefônica Brasil violated Sections +13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. Telefônica Brasil violated Section 13(b)(2)(A) +of the Exchange Act by improperly recording the purchase of tickets and hospitality that were +given to government officials. Telefônica Brasil also violated Section 13(b)(2)(B) by failing to +devise and maintain sufficient internal accounting controls to detect and prevent the making of +improper payments to foreign officials. + +Telefônica Brasil’s Remedial Efforts and Cooperation + +20. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. Telefonica +Brasil’s remediation included enhancing its internal accounting controls and compliance +functions, and adopting a new anti-corruption policy and compliance structure. Telefônica +Brasil’s cooperation included timely sharing of facts developed during the course of an internal +investigation by its board and voluntarily producing and translating documents. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent cease and desist from +committing or causing any violations and any future violations of Sections 13(b)(2)(A) and + +6 + +13(b)(2)(B) of the Securities Exchange Act of 1934 [15 U.S.C. §§ 78m(b)(2)(A) and +78m(b)(2)(B)]. +B. Respondents shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $4,125,000 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Telefônica Brasil S.A. as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Charles Cain, +FCPA Unit Chief, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil + + +7 + +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. +By the Commission. + + + Vanessa Countryman + Acting Secretary + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4047.txt b/raw/aaer/2019/AAER-4047.txt new file mode 100644 index 0000000000000000000000000000000000000000..561027e032b60f234f2dc028bed4843054c48d3f --- /dev/null +++ b/raw/aaer/2019/AAER-4047.txt @@ -0,0 +1,185 @@ + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 85847 / May 13, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4047 / May 13, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19163 + +In the Matter of + +BRYAN B. LONG, CPA, +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Bryan +B. Long (“Respondent” or “Long”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + + + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Section III.5 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Long, age 42, is and has been a certified public accountant licensed to practice in the +State of Virginia. Long was the Director of SEC Reporting at eBay, Inc. (“eBay”) from October 2013 +to July 2015, and then at PayPal Holdings, Inc. (“PayPal”) from July 2015 to December 2015. Prior +to his employment at eBay and PayPal, Long worked for ten years at a prominent accounting and +auditing firm in a variety of roles related to auditing. + +2. eBay is a Delaware corporation headquartered in San Jose, California that owns +and operates, among other things, an online marketplace and, prior to July 17, 2015, PayPal’s digital +payments business. eBay’s common stock is registered with the Commission pursuant to Section +12(b) of the Exchange Act and trades on the NASDAQ Global Select Market (symbol: EBAY). eBay +files periodic reports with the Commission pursuant to Section 13(a) of the Exchange Act and related +rules thereunder. On July 17, 2015, eBay and PayPal separated into independent publicly traded +companies. + +3. PayPal is a Delaware corporation headquartered in San Jose, California that +operates a digital payment network. PayPal’s common stock is registered with the Commission +pursuant to Section 12(b) of the Exchange Act and trades on the NASDAQ Global Select Market +(symbol: PYPL). PayPal files periodic reports with the Commission pursuant to Section 13(a) of +the Exchange Act and related rules thereunder. Prior to July 17, 2015, PayPal was a subsidiary of +eBay. + +4. Xoom Corporation (“Xoom”) was a Delaware corporation headquartered in +San Francisco, California that provided international money transfer and remittances across a +number of cross-border corridors. Xoom’s common stock was registered with the Commission +pursuant to Section 12(b) of the Exchange Act and traded on the NASDAQ Stock Market (symbol: +XOOM). On July 1, 2015, PayPal and Xoom jointly announced that PayPal would acquire Xoom +for approximately $890 million net of cash. On November 12, 2015, PayPal’s acquisition of Xoom +closed. Xoom now operates as a separate service within PayPal. + + 3 +5. On September 28, 2018, the Commission filed a complaint against Long in +SEC v. Bryan B. Long (Civil Action No. 18-CV-05973-EMC). On May 7, 2019, the court entered +an order permanently enjoining Long, by consent, from future violations of Sections 10(b) of the +Exchange Act and Rule 10b-5 thereunder. Long was also ordered to pay $35,842.49 in +disgorgement of profits gained as a result of the conduct alleged in the complaint, and $636.66 in +prejudgment interest; and a $35,842.49 civil money penalty. + +6. The Commission’s complaint alleged, among other things, that Long bought +speculative call options on Xoom stock based on material nonpublic information about PayPal’s +planned acquisition of Xoom that he learned in advance of the announcement of the deal. The +complaint alleged that Long first purchased over $10,500 of Xoom call options on May 20, 2015, +within five days of PayPal making its initial offer to acquire Xoom. The complaint alleged that after +Long received information that a deal could be announced in early July, he made a second purchase +of another $5,000 of Xoom call options on June 22, 2015, which were set to expire less than thirty +days after his purchase. After the market closed on July 1, 2015, PayPal’s acquisition of Xoom was +made public. The next morning, Xoom stock opened trading at $25.50 per share, a 52-week high, +and Long sold all of his Xoom options, reaping $35,842.49 in profits. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Doe’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Long is suspended from appearing or practicing before the Commission as an +accountant. + + B. After three years from the date of this order, Long may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934). Such an application must satisfy the Commission that Long’s +work in his practice before the Commission as an accountant will be reviewed either by the +independent audit committee of the public company for which he works or in some other +acceptable manner, as long as he/she practices before the Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities Act +of 1934. Such an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating good cause for + 4 +reinstatement will be particularly high given the role of the audit committee in financial and +accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + + (a) Long, or the public accounting firm with which he is associated, is +registered with the Public Company Accounting Oversight Board (“Board”) in accordance with +the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Long, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did not identify any criticisms of +or potential defects in Long’s or the firm’s quality control system that would indicate that the +respondent will not receive appropriate supervision; + (c) Long has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Long acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to comply with all requirements +of the Commission and the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control standards. + +C. The Commission will consider an application by Long to resume appearing +or practicing before the Commission provided that his state CPA license is current and he +has resolved all other disciplinary issues with the applicable state boards of accountancy. +However, if state licensure is dependent on reinstatement by the Commission, the +Commission will consider an application on its other merits. The Commission’s review +may include consideration of, in addition to the matters referenced above, any other matters +relating to Long’s character, integrity, professional conduct, or qualifications to appear or +practice before the Commission as an accountant. Whether an application demonstrates +good cause will be considered on a facts and circumstances basis with due regard for +protecting the integrity of the Commission’s processes. + + By the Commission. + + + + Vanessa A. Countryman + Acting Secretary + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4051.txt b/raw/aaer/2019/AAER-4051.txt new file mode 100644 index 0000000000000000000000000000000000000000..442202aa7996fd95cd99c1065b28c712ac7e28e4 --- /dev/null +++ b/raw/aaer/2019/AAER-4051.txt @@ -0,0 +1,879 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86118 / June 17, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4051 / June 17, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19203 + + + +In the Matter of + +KPMG LLP, + +Respondent. + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- + AND- DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Respondent +KPMG LLP (“KPMG”) pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . (1) +not to possess the requisite qualifications to represent others; (2) to be lacking in character or integrity, +or to have engaged in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or the rules and +regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +2 +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) that the Commission has determined to accept. Respondent admits the +facts set forth in Section III below, acknowledges that its conduct violated PCAOB Rule 3500T +and provides a basis for the Commission to impose remedies pursuant to Exchange Act Sections +4C(a)(2) and (a)(3) and Rules 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice; admits +the Commission’s jurisdiction over it and the subject matter of these proceedings; and consents to +the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This matter involves two separate courses of misconduct that resulted in violations +of the fundamental requirement that auditors act with integrity. +2. First, from 2015 to 2017, now-former senior members of KPMG’s Audit Quality +and Professional Practice group (“AQPP” or “National Office”) – which is responsible for the +firm’s system of quality control – improperly obtained and used confidential information +belonging to the Public Company Accounting Oversight Board (“PCAOB” or “Board”) in an effort +to improve the results of the PCAOB’s annual inspections of KPMG audits. The information +obtained included lists of the specific audit engagements the PCAOB planned to inspect, the +criteria the PCAOB used to select engagements for inspection, and the focus areas of the +inspections. The personnel sought the information because the firm had experienced a high rate of +audit deficiency findings in prior PCAOB inspections and had made improving its inspection +results a priority. + + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing +before it . . . to any person who is found to be lacking in character or integrity or to have engaged in +unethical or improper professional conduct. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or practicing +before it . . . to any person who is found…to have willfully violated, or willfully aided and abetted the +violation of any provision of the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 +3. After obtaining the confidential list of the PCAOB’s planned inspections in 2016, +the now-former KPMG personnel oversaw a program to review and revise certain audit +workpapers after the audit reports had been issued to reduce the likelihood that the PCAOB would +find deficiencies in those audits. This effort resulted in a substantial improvement to KPMG’s +2016 inspection results. In 2017, the now-former KPMG personnel again obtained the list of audit +engagements that the PCAOB planned to inspect, but the misconduct was discovered by others +within the firm and reported to KPMG leadership before relevant workpapers could be changed. +In addition, a now-former KPMG partner attempted to use improperly-obtained confidential +information relating to the PCAOB’s inspection of another audit firm to win new business for +KPMG. +4. Second, before, during, and after the senior National Office professionals used +confidential PCAOB information, KPMG audit professionals – at all levels of seniority – engaged +in misconduct in connection with examinations on internally-administered training courses that +were intended to test whether they understood a variety of accounting principles and other topics of +importance. +5. This misconduct took a variety of forms. KPMG audit professionals shared exam +answers with one another. A number of audit partners gave exam answers to other partners, and a +number also sent answers to and solicited answers from their subordinates. In addition, for a +period of time up to November 2015, certain audit professionals made unauthorized changes to +KPMG’s server instructions that allowed them to manually select the scores necessary to pass the +tests, which they often lowered to the point of passing exams with less than 25 percent of the +questions answered correctly. The exams related to a variety of subjects that were relevant to the +test-takers’ audit practices, and included additional training required by a 2017 Commission Order +after the Commission found that KPMG engaged in improper professional conduct and had caused +a client’s reporting violations.4 +6. After discovering the training-related misconduct, KPMG reported the matter to +Commission staff and appointed a Special Committee of its Board of Directors to oversee an +internal investigation. During that investigation, two now-former partners who had shared exam +answers deleted relevant documents. One of those partners and certain other audit professionals +made misrepresentations to the firm’s investigators. +7. KPMG is required, both by PCAOB rules and by the Code of Conduct of the +American Institute of Certified Public Accountants (“AICPA”), to act with integrity in connection + +4 In August 2017, KPMG agreed to settle charges it engaged in improper professional conduct with respect +to the audit of the financial statements of an oil and gas client and caused the company’s reporting violations. As +part of the settlement, the Commission ordered KPMG to ensure its audit staff complete specific training programs +in various areas related to the Commission’s findings in that proceeding. KPMG LLP and John Riordan, CPA, +Exchange Act Release No. 81396 (Aug. 15, 2017). KPMG has required all personnel subject to that training +undertaking to re-test to ensure full compliance with the Commission’s 2017 Order. + +4 +with the professional services it provides its clients.5 Certified public accountants are required to +“be, among other things, honest and candid within the constraints of client confidentiality.”6 By +the misconduct described herein, these professionals caused KPMG’s failure to act with the +integrity required of a public company auditor.7 +8. As indicated above, KPMG’s Board of Directors has formed a Special Committee +led by an independent board member to oversee an investigation of the misconduct relating to +training examinations. The Special Committee has retained an outside law firm to investigate the +extent of such conduct within the past three years, and will recommend employment actions to +KPMG management as appropriate. As set forth in the Undertakings below, KPMG will retain an +independent consultant to review and assess the Special Committee’s investigation and whether +the firm has taken appropriate employment actions or other remedial steps, and to ensure the firm +has designed and implemented quality controls that reasonably assure compliance with all +professional standards relating to ethics and integrity. +RESPONDENT + +9. KPMG LLP is a Delaware limited liability partnership and PCAOB-registered +accounting firm. Headquartered in New York, New York, KPMG is the U.S. member firm of +KPMG International Cooperative, a Swiss entity. +OTHER RELEVANT PERSONS + +10. David Middendorf, 54, of Marietta, Georgia, was KPMG’s National Managing +Partner for AQPP until March 2017, and was separated from the firm the following month. +Middendorf is licensed as a CPA in Georgia, New York, and Ohio and was previously licensed in +Texas. The Commission has charged Middendorf for his role in the misconduct described in this +Order. +11. Thomas Whittle, 55, of Gladstone, New Jersey, was KPMG’s National Partner-In- +Charge for Quality Measurement until March 2017, and was separated from the firm the following +month. Whittle is licensed as a CPA in New York and New Jersey and was previously licensed in + +5 PCAOB Rule 3500T requires KPMG to maintain integrity when performing any professional service in +connection with the preparation or issuance of any audit report. As an AICPA member, KPMG was required to +comply with the AICPA’s Code of Professional Conduct, which requires the firm to maintain integrity in connection +with all professional services. The AICPA also prohibits members from committing acts “discreditable to the +profession.” See AICPA Code of Conduct 1.400.001 (“Acts Discreditable Rule”). + +6 See “Principles of Professional Conduct,” ET Section 54 (available at +https://www.aicpa.org/Research/Standards/CodeofConduct/DownloadableDocuments/2011June1CodeOfProfessiona +lConduct.pdf). Codified as AICPA Code 0.300.040. + +7 KPMG’s conduct also failed to conform to the requirements of PCAOB Quality Control Standards (“QC”) +requiring registered firms to “have a system of quality control for its accounting and auditing practice” that provides +“reasonable assurance that (a) personnel . . . perform all professional responsibilities with integrity.” QC 20.01 and +20.09. +5 +Pennsylvania and Connecticut. The Commission has charged Whittle for his role in the +misconduct described in this Order. +12. David Britt, 55, of New Canaan, Connecticut, was a Partner in KPMG’s +Department of Professional Practice within AQPP, in which he was the Banking and Capital +Markets Group Co-Leader until March 2017, and was separated from the firm the following +month. Britt is licensed as a CPA in New York and California and was previously licensed in the +District of Columbia. The Commission has charged Britt for his role in the misconduct described +in this Order. + +13. Brian Sweet, 41, of Fresno, California, was a Partner in KPMG’s Department of +Professional Practice-Inspections group until March 2017. He was separated from the firm at the +end of March 2017. Prior to joining KPMG, Sweet was an Associate Director in the PCAOB’s +inspections group from March 2014 until April 2015. Sweet was previously licensed as a CPA in +New York, Illinois, and California. The Commission has charged Sweet for his role in the +misconduct described in this Order. +14. Cynthia Holder, 52, of Houston, Texas was an Executive Director in KPMG’s +Department of Professional Practice-Inspections group from August 2015 until April 2017, and +was separated from the firm the following month. Prior to joining KPMG, Holder was an +Inspections Leader at the PCAOB from December 2011 until August 2015. Holder was previously +licensed as a CPA in Texas and New Jersey. The Commission has charged Holder for her role in +the misconduct described in this Order. +15. Jeffrey Wada, 43, of Tustin, California was an Inspections Leader at the PCAOB +from February 2012 until February 2017. Wada is no longer at the PCAOB. Wada is licensed as a +CPA in California. The Commission has charged Wada for his role in the misconduct described in +this Order. +FACTS + +I. THE MISAPPROPRIATION OF CONFIDENTIAL PCAOB INFORMATION + +A. The PCAOB’s Inspections Process and KPMG’s Efforts to Improve Its Results + +16. The PCAOB was created as part of the Sarbanes-Oxley Act of 2002 to oversee the +audits of public companies that are subject to the federal securities laws in order to protect the +interests of investors and further the public interest in the preparation of informative, accurate, and +independent audit reports. +17. One of the essential ways in which the PCAOB fulfills this mission is by inspecting +audits of public companies conducted by registered public accounting firms. Through these +inspections, the PCAOB assesses the audit firms’ compliance with the statutes, regulations, and +professional standards governing the accounting profession. The PCAOB typically selects the +audit engagements it will inspect based on confidential internal analyses and thereafter notifies +firms of which audits it will inspect. The PCAOB typically issues inspection reports, only parts of +6 +which are made public, after all the inspections for a firm in a given cycle are complete. To ensure +the integrity of the inspection process, the PCAOB closely guards the confidentiality of both its +inspection targets prior to firm notification and its methodology for selecting those targets. +18. In September 2014, the PCAOB issued a report regarding its 2013 inspections of +KPMG audits. The report found that out of 50 audits the PCAOB inspected, 23 had deficiencies. +This 46 percent deficiency rate reflected a significant decline from KPMG’s 34 percent deficiency +rate the previous year. David Middendorf, who then oversaw the National Office’s audit quality +and professional practice work understood then that the Commission’s Office of the Chief +Accountant had been highly critical of KPMG’s worsening inspection results. +B. The Use of Confidential PCAOB Information Misappropriated by Sweet + +19. As part of its efforts to improve its PCAOB inspection results, KPMG hired Brian +Sweet, an Associate Director at the PCAOB who had worked on the team inspecting KPMG +audits. Sweet joined KPMG as a partner in the group within the firm’s National Office responsible +for PCAOB inspections. Sweet reported to Thomas Whittle, who was then the KPMG partner +responsible for overseeing the PCAOB’s inspections of the firm. Whittle, in turn, reported to +Middendorf. +20. In April 2015, shortly before leaving the PCAOB, Sweet copied from an internal +database to his office computer various confidential inspection-related materials he believed might +be of use to him when he joined KPMG. On his final day at the PCAOB, Sweet transferred these +materials, along with the other files on his PCAOB computer, to a personal hard drive that he took +with him. Sweet also took from the PCAOB hard copy documents and retained other confidential +PCAOB documents he had previously brought home. +21. The documents Sweet improperly took included PCAOB inspection planning +information, inspection guides and manuals, and drafts of confidential inspection comment forms. +The planning materials included the confidential list of KPMG audit engagements the PCAOB +intended to inspect in 2015, the focus areas for each inspection, and a list of all the quantitative and +qualitative criteria the Board used in deciding which KPMG audit engagements to inspect. +22. Upon joining KPMG in May 2015, Sweet transferred the PCAOB documents from +his personal hard drive to his computer at the firm. +The Use of the PCAOB’s Confidential List of 2015 Inspections + +23. On his first day at the firm in May 2015, Sweet had lunch with Middendorf and +other partners in KPMG’s National Office, including David Britt, who was then a Partner in the +National Office’s Department of Professional Practice and co-leader of KPMG’s Banking and +Capital Markets Group. Over lunch, Sweet’s new colleagues asked him various questions about +the PCAOB’s inspections of KPMG. Sweet testified that one of the questions Middendorf asked +Sweet was whether the PCAOB intended to inspect a specific KPMG banking client that year. +Without answering directly, Sweet indicated the PCAOB planned to do so. Sweet testified that +Middendorf told him the next day that Sweet needed “to share insight and add value and be fully +7 +open when it came to that type of information,” and to “remember where [your] paycheck came +from” and that Sweet had to be “completely loyal to KPMG and KPMG only.” +24. Several days later, at Middendorf’s direction, Whittle asked Sweet to provide him +the list of the PCAOB’s planned inspections for 2015.8 Sweet testified that he showed Whittle a +hard copy of a PCAOB inspection planning document listing the KPMG banking and financial +service audits the PCAOB intended to inspect that year. +25. The next day, Whittle emailed Sweet, asking him to have an assistant “scan and +send me the banking selection list,” i.e. KPMG’s bank holding company clients the PCAOB had +selected for inspection. Sweet complied by sending Whittle the complete list of planned +inspections and asked Whittle to exercise discretion given the nature of the information. Whittle +forwarded this information to Middendorf the same day, writing, “The complete list. Obviously, +very sensitive. We will not be broadcasting this.” +26. Though Whittle immediately assigned Sweet to review the workpapers of one of +the inspection targets, it does not appear that any workpapers were changed in response to Sweet +providing the 2015 inspection list. At the time Sweet provided this information to Middendorf and +Whittle, KPMG had, pursuant to its policy, already locked the audit workpapers for all but two of +the engagements from editing absent special circumstances. +27. Whittle also instructed Sweet to speak to certain engagement partners responsible +for audits on the 2015 list to explain the reasons for their selection. By learning why they were +selected, engagement partners could better tailor their responses to questions from PCAOB +inspectors to mitigate concerns. Middendorf and Whittle also assigned Sweet to one of the firm’s +large audit engagements on the 2015 list to help prepare for the inspection. Internal training +materials KPMG created for audit staff undergoing PCAOB inspection stressed the importance of +replying to inspectors’ questions – especially during the critical first meeting with PCAOB staff – +with the “best first answer.” KPMG’s National Office believed the audit staff’s ability to respond +effectively to inspectors’ questions had a significant impact on whether the PCAOB would find +deficiencies in the audit. +28. In June 2015, Sweet identified for Britt a number of KPMG banking clients the +PCAOB planned to inspect in 2015. The next day, Britt asked Sweet to review his notes so he +could give Britt the “last 3 Bank names.” Sweet shared this information later that day, asking Britt +to note its sensitivity and “use your discretion with this info.” +The Use of the PCAOB’s Confidential Process for Selecting Audits to Inspect + +29. In April 2015, KPMG engaged an outside consultant to help it predict which audit +engagements the PCAOB would inspect in 2016. Sweet recalls that in June 2015 Middendorf and +Whittle directed Sweet to share with the outside consultant everything he knew about how the + +8 By that time, the PCAOB had informed KPMG of less than half of the audit engagements it intended to +inspect in 2015. + +8 +PCAOB selected audits to inspect, including the confidential information Sweet had taken. Sweet +understood this to be an instruction to give the consultant all of the information he took from the +PCAOB. +30. Sweet complied with Middendorf and Whittle’s directive by providing information +about the Board’s selection criteria to a Director in KPMG’s National Office, who then gave that +information to the consultant. In September 2015, Sweet spoke directly with the consultant and +gave the consultant additional confidential information regarding the inspections selection process, +including how the PCAOB’s Inspections group used confidential information received from others +at the Board and the Commission. At the end of September, Sweet reported to Middendorf and +Whittle that he had “spent quite a bit of time with [the outside consultant] trying to guide their +modeling efforts.” +The Use of Confidential PCAOB Information Regarding Another Audit Firm + +31. Sweet also provided confidential PCAOB information to an audit partner (who is +no longer at KPMG) who was preparing a client pitch for a Spanish bank’s audit business. +Securing this audit business was a high priority for KPMG. +32. In April 2016, Sweet sent the audit partner confidential PCAOB comment forms +related to the Board’s inspection of another Spanish bank’s audit, writing that he had attached +“some examples of the types of issues that have been raised in the past. I hope this helps!” The +comment forms discuss specific ways in which that bank’s auditor had failed to adequately test the +valuation of its Allowance for Loan and Lease Losses. +C. The Solicitation of Confidential PCAOB Information from Holder + +33. Before he left the PCAOB, Sweet had discussed with Cynthia Holder, a friend who +was then a PCAOB Inspections Leader, the prospect of her joining him at KPMG. On Sweet’s +first day at KPMG (May 4, 2015), he informed Holder that he would be meeting with Whittle to +push the firm to hire her. On May 11, 2015, Sweet told Holder he was going to hand-deliver her +resume to Whittle and “make a sell again” in person. +34. On May 12, 2015, Sweet asked Holder to send him a confidential PCAOB +document reflecting comments he had written about KPMG’s audits while he was at the Board. At +that time, KPMG personnel were preparing for a meeting with the PCAOB to discuss the firm’s +performance on its audits, during which KPMG would make a presentation on the root causes of +audit deficiencies. Sweet asked Holder for a document he had written while he was at the PCAOB +so he could review it before helping his KPMG colleagues with that presentation. That day, +Holder sent Sweet the confidential document he requested. +35. On June 17, 2015, Holder again shared confidential PCAOB information with +Sweet, telling him that the Board had decided to cancel its planned inspection of a KPMG audit +client for 2015, and that the Board did not intend to replace it with another selection. Sweet +immediately relayed this information to Whittle. +9 +36. KPMG sent Holder an employment offer in July 2015. She joined the firm the +following month as an Executive Director in KPMG’s National Office, performing internal +inspections and advising banking engagement teams on their audits. +D. The Use of Confidential PCAOB Information Obtained from Wada in 2016 + +37. In early March 2016, Jeffrey Wada, an Inspections Leader at the PCAOB who had +previously performed work on KPMG inspections but was then assigned to inspect another audit +firm, learned that he had not been selected for a promotion. Wada reacted angrily, telling a +colleague the PCAOB had “screwed” him by passing him over. +38. On March 28, 2016, Wada, who remained friends with Holder after she left the +PCAOB, called her and read to her the names of thirteen KPMG clients the Board planned to +inspect.9 Holder provided this information to Sweet, who then immediately relayed the list to +Middendorf, Whittle, and Britt, informing them that it had come from a former colleague at the +PCAOB. +39. Wada sent the list of the PCAOB’s planned inspections at a critical time. In early +February 2016, Middendorf and other members of KPMG’s leadership team had met with staff +from the Commission’s Office of the Chief Accountant. During that meeting, Commission +personnel expressed significant concerns about the firm’s audit quality and questioned whether +KPMG was adequately addressing these issues. Middendorf told Whittle, Sweet, and Britt they +should use the list of inspection targets Wada had sent to protect KPMG from further criticism by +its regulators. +40. Middendorf, Whittle, Britt, and Sweet believed they could use Wada’s list in this +way because they had learned of the audits that would be inspected at a time when firm personnel +were still able to access and revise audit workpapers. Though KPMG had already issued audit +reports for each of these engagements, it was within the 45-day period in which professional audit +standards and firm policy allowed audit teams to complete the administrative process of +assembling final audit files.10 At the end of this 45-day period, KPMG locked audit workpapers +from editing absent special circumstances.11 + +9 Of the 13 clients, 11 were bank holding or other financial services companies and 2 were other issuers that +Wada appears to have thought were also bank holding or other financial services companies. It appears that Wada +identified these engagements for Holder because her responsibilities at KPMG included advising banking +engagement teams. + +10 See Auditing Standard No. 3, Audit Documentation, paragraph 15. “Prior to the report release date, the +auditor must have completed all necessary auditing procedures and obtained sufficient evidence to support the +representations in the auditor’s report. A complete and final set of audit documentation should be assembled for +retention as of a date not more than 45 days after the report release date (documentation completion date).” +References to PCAOB standards are to those that were in effect at the time of the relevant conduct. + +11 KPMG has since revised its audit documentation policies, requiring electronic workpapers to be assembled +and locked within two business days of issuance of the report. + +10 +41. Recognizing that the workpapers had not yet been locked per KPMG’s policy, +Middendorf, Whittle, and Britt agreed to have Sweet and others conduct an additional review of +the audit workpapers for the seven banks on the list Wada had provided that were part of a key +monitoring program run by the National Office to determine whether anything could be done to +minimize the risk of receiving inspection comments from the PCAOB.12 Middendorf and Whittle +instructed that no one in the briefing should disclose that they had obtained confidential PCAOB +information. +42. To conceal the true purpose of their efforts, Britt falsely told others at KPMG that +they were performing work in the ordinary course of business on all 35 banking engagements in +the ALLL monitoring program. On March 28, 2016, Britt sent the engagement partners for these +audits an email stating that, “[a]s part of our wrap up and reporting of the results of the ALLL +monitoring program we need to gather some additional information” from the audit workpapers.13 +43. Over the next few weeks, Sweet, Holder, and various partners and managing +directors in the National Office engaged in a review of the audit workpapers of the seven banks in +the monitoring program that were on the list Wada provided. The National Office professionals +suggested edits and proposed revisions to the engagement teams, which then decided what +revisions to incorporate into the final audit workpapers.14 +44. In contrast to prior years, KPMG’s 2016 inspection results did not include any +comments related to the general Allowance for Loan and Lease Losses – an area where KPMG had +historically received criticism related to financial services audits. The PCAOB did not publish the +results because KPMG reported the misconduct to the PCAOB before the PCAOB issued the 2016 +report. However, the PCAOB had designated two of the bank audits in the ALLL monitoring +program whose workpapers Sweet had reviewed as “positive quality events,” which meant they +were so successful the PCAOB wanted to understand the factors driving the audit’s quality. +Indeed, the level of improvement in the inspection results led Whittle to be concerned that if + + +12 As the PCAOB found an increasing number of audit deficiencies by KPMG beginning in 2013, KPMG’s +National Office implemented “monitoring programs” that worked with audit engagement teams and reviewed +workpapers to improve compliance with professional standards. One of these progra ms focused on the audits of +certain banking clients’ Allowance for Loan and Lease Losses. KPMG further developed this monitoring program +in 2015 in response to numerous deficiencies the PCAOB had identified in this area. The success of this program +was especially important to KPMG because the firm had promoted it as proof of the seriousness with which the firm +was working to improve its audit quality. + +13 Britt also asked a subordinate who previously had been in the Department of Professional Practice and was +then assigned to an audit engagement on the list to conduct his own “stealth” review of workpapers for one KPMG +audit client. + +14 Middendorf, Whittle, Sweet, and Britt had agreed that Sweet would lead a team of National Office +professionals to review the workpapers of the banks in the monitoring program, and that Middendorf, Whittle, and +Britt would handle the other issuers on the list they received from Wada. + +11 +KPMG could not obtain confidential PCAOB information for the next inspection cycle, there could +be a return of audit deficiencies that would be difficult to explain. +45. After the misconduct was discovered, the PCAOB conducted inspections of ten +additional banks for the 2016 inspection cycle to replace the ones for which improper advance +notice had been obtained. The PCAOB found that six of these audits had deficiencies with respect +to auditing the ALLL. +E. The Use of Confidential PCAOB Information Obtained from Wada in 2017 + +46. In early January 2017, Wada provided Holder a “preliminary” list of PCAOB +inspection targets for 2017. On January 9, Holder relayed the names of the clients on the list to +Sweet, and together, they briefed Whittle. That night, Sweet, Whittle, and Britt discussed this +information. After that meeting, Sweet contacted the engagement partners for two of the audits on +the January 2017 list to warn them about the potential inspections. Whittle also discussed the +January 2017 list with Middendorf. As a result of that discussion, Middendorf and Whittle +assigned additional National Office resources to assist with two of the active audits on that list.15 +47. In early February 2017, Wada conveyed to Holder a list of 47 ticker symbols that +Holder understood to be the final list of KPMG audits the PCAOB would inspect that year. Wada +also provided Holder the inspection focus areas for the banks on the list (as well as for another +KPMG engagement), and the PCAOB’s list of KPMG engagement partners with “poor +performance evaluations.” +48. Holder relayed the information to Sweet, who then shared it with Middendorf, +Whittle, and Britt. Though Sweet questioned what to do with that information, Middendorf +replied, “this is information that’s too good not to use.” Unlike the prior lists of PCAOB +inspection targets, the audits on the February 2017 list were ongoing, thus providing substantially +greater ability to improve the audit workpapers. +49. Whittle instructed Sweet to warn certain engagement partners about the impending +inspections. Though Whittle had warned Sweet to be circumspect in how he communicated this to +KPMG colleagues, Sweet’s notice to one KPMG engagement partner caused her to suspect that the +firm may have received confidential PCAOB information. These concerns were subsequently +reported to the firm’s management, which then reported the matter to the PCAOB, and KPMG +began an investigation. +II. AUDIT PROFESSIONALS IMPROPERLY SHARED TRAINING EXAM ANSWERS + +A. Professional Education Requirements for KPMG Auditor Personnel + + +15 Middendorf was the Engagement Quality Review partner on one of those audits. In this role, he was +responsible for evaluating the significant judgments and related conclusions the audit team made in reaching the +overall conclusion reflected in the audit report. + +12 +50. As accountants licensed by state accountancy boards, many KPMG audit +professionals are required to complete a minimum number of continuing professional education +(“CPE”) courses periodically – typically 120 hours every three years. KPMG requires its audit +professionals to complete additional training in excess of state requirements. These training +requirements vary by position, role, and industry, and are designed by the firm to be relevant to the +audit work its professionals are performing. +51. In addition to state accountancy boards’ and KPMG’s own continuing education +requirements, the Commission ordered KPMG audit professionals to complete a minimum of 12 +hours of training in specific audit areas as part of an August 2017 settlement of charges that KPMG +failed to properly audit the financial statements of an oil and gas client.16 +52. To help its audit professionals satisfy these requirements, KPMG administers its +own set of online training programs that also qualify for CPE credit. KPMG requires its auditors to +pass an examination at the conclusion of each online training program. Audit professionals are +given three opportunities to pass each examination. If one of KPMG’s audit professionals is +unable to pass after two attempts, their Performance Management Leader is notified. If they are +unable to pass after three attempts, the consequences are more significant: they are required to re- +take the training; they are prohibited from conducting audit work until they pass the exam; and +others at the firm may be notified. Audit professionals also understood that failing to pass an exam +could lead to their compensation being reduced. +B. KPMG Audit Professionals Shared Answers to Training Exams + +53. On numerous occasions, KPMG audit professionals who had passed training exams +sent their answers to colleagues to help them pass those exams. They sent colleagues images of +their answers primarily by email or printed their answers and gave them to their colleagues. This +conduct was committed by audit professionals at all levels of seniority, including lead audit +engagement partners who were responsible for compliance with PCAOB standards in auditing +their clients’ financial statements. A number of lead audit engagement partners not only sent exam +answers to other partners, but also solicited answers from and sent answers to their subordinates.17 +54. Upon learning of the potential cheating, KPMG leadership alerted the Commission +staff and began an internal investigation. Soon after, the firm’s Board of Directors formed a +Special Committee led by an independent board member to oversee an independent investigation +of this conduct. The Special Committee hired an outside law firm to conduct this review. The +investigation has revealed extensive sharing of exam answers, with the bulk of this misconduct +occurring among junior personnel. While many of those who shared and/or received exam +answers engaged in misconduct only once, others sent or received answers to multiple exams. + +16 KPMG LLP and John Riordan, CPA, Exchange Act Release No. 81396 (Aug. 15, 2017). + +17 As KPMG itself has recognized, “[t]hose who manage others act as role models.” KPMG Transparency +Report (January 2019), available at https://audit.kpmg.us/content/dam/audit/pdfs/2018/2018-transparency- +report1.pdf. + +13 +Prior to the firm’s investigation, no one reported the improper sharing of exam answers to the +firm’s Ethics and Compliance Hotline. The firm has been taking disciplinary action against certain +partners and other audit professionals in connection with its investigation. +55. After KPMG began to investigate the misconduct, certain now-former audit +professionals, including a few lead audit engagement partners, attempted to conceal what they had +done. For example, in September 2018, one engagement partner who is no longer with KPMG +(“Former Partner 1”) solicited from a junior partner answers to the exam for a training program +relating to leases. The now-former junior partner sent Former Partner 1 the answers from his exam +by text message. After receiving a document preservation notice from the firm, Former Partner 1 +deleted the text messages the junior partner sent him, and encouraged his colleague to do the same. +Former Partner 1 also encouraged the junior partner to say, falsely, that the texts were deleted by +accident. When Former Partner 1 was asked in a written questionnaire in December 2018 whether +he had received any answers to KPMG training exams, he answered “no.” +56. In another example, a lead audit engagement partner who is no longer with the firm +(“Former Partner 2”) also answered “no” to the December 2018 questionnaire that asked whether +he had sent or received answers to KPMG training programs. In fact, Former Partner 2 had +received answers to training exams on seven occasions and sent answers to training exams on three +occasions – all within eight months of completing the survey, and all with junior members of his +engagement team. +C. KPMG Audit Professionals Manipulated the Scoring of Training Exams +57. In addition to sharing answers to training examinations, certain audit professionals +also manually changed the scores required to pass certain exams. Prior to November 2015, KPMG +hosted exams to training programs on an internal server with software provided by a third party. +KPMG sent participants in training programs a hyperlink that directed them to the applicable +exams. Embedded in the hyperlink was an instruction to the server that specified the score +necessary to pass the exam. Thus, the characters “MasteryScore=70” meant participants were +required to answer at least 70 percent of the answers accurately to pass the exam.18 By changing +the number in the hyperlink, audit professionals could change the score required to pass. +58. For a period of time up to November 2015, certain audit professionals, including +one partner, altered the URLs for their exams to lower the scores required to pass. Twenty-eight of +these auditors did so on four or more occasions. Certain audit professionals lowered the required +score to the point of passing exams while answering less than 25 percent of the questions correctly. +VIOLATIONS + +59. As a result of the conduct of personnel described above, KPMG willfully violated +PCAOB Rule 3500T, which requires KPMG and associated persons to comply with ethics +standards, including to maintain integrity, as described in the AICPA’s Code of Professional + +18 Some exams required a higher score to pass, while others allowed a lower score. + +14 +Conduct when performing any professional service in connection with the preparation or issuance +of any audit report,19 within the meaning of Section 4C(a)(3) of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. +60. The AICPA Code of Conduct requires that a member not commit any act +discreditable to the profession. AICPA Code of Conduct 1.400.001. As a result of the conduct of +personnel described above, KPMG failed to comply with AICPA Code of Conduct 1.400.001 +within the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. +61. PCAOB Quality Control Standards require that a registered firm “shall have a +system of quality control for its accounting and auditing practice.” QC 20.01. Those quality +control standards require further that firms should establish policies and procedures to provide +“reasonable assurance that (a) personnel ... perform all professional responsibilities with integrity.” +QC 20.09. As a result of the conduct described above, KPMG failed to comply with QC 20 within +the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice. +FINDINGS + +62. Based on the foregoing, the Commission finds that KPMG willfully violated +PCAOB Rule 3500T within the meaning of Section 4C(a)(3) of the Exchange Act and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice. +63. Based on the foregoing, the Commission finds that KPMG engaged in conduct that +provides a basis to impose remedies against the firm pursuant to Section 4C(a)(2) of the Exchange +Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +COOPERATION AND REMEDIAL EFFORTS + +64. In determining to accept KPMG’s Offer, the Commission considered that KPMG +reported these matters to the Commission and/or to the PCAOB, initiated an investigation of the +testing matter under the oversight of a Special Committee of the Board of Directors, has +cooperated with the Commission staff, and has undertaken various remedial measures, including: +revising its audit documentation policies to require that electronic workpapers be assembled and +locked within two business days of issuance of the report notwithstanding the 45-day period +allowed under professional auditing standards; retaining an advisory firm to conduct an + +19 The rule requires auditors to comply with the AICPA’s Code of Professional Conduct Rule 102, and +interpretations and rulings thereunder, as in existence on April 16, 2003. Although PCAOB Rule 3500T references +the AICPA Code as in existence on April 16, 2003, the definition of integrity remains identical to the current +definitions in the Code of Professional Conduct promulgated by the AICPA and applicable to current members of +the AICPA. + +15 +independent cultural assessment; and retaining a learning and development consultant to conduct a +current state assessment. +UNDERTAKINGS + + KPMG has undertaken to complete the following actions: + +65. KPMG’s Review. Within 120 days after the entry of this Order, KPMG shall +evaluate (“KPMG’s Review”) the sufficiency and adequacy of its quality controls relevant to ethics +and integrity (hereinafter referred to as KPMG’s “Policies and Procedures”) to determine whether +they are designed and implemented in a manner that provides reasonable assurance of compliance +with all professional standards relating to ethics and integrity. KPMG’s evaluation shall include +assessing: +a. the adequacy and sufficiency of ethics and integrity training and guidance, +including regarding anti-retaliation and whistleblowing; +b. whether KPMG’s culture is supportive of ethical and compliant conduct, +including strong, explicit, and visible support and commitment by the firm’s management and +Board of Directors; and +c. whether KPMG deploys proper resources and oversight for compliance +with ethics and integrity requirements, including seniority of executives and managers responsible +for implementation and oversight of these responsibilities, reporting lines, autonomy and +independence, compensation and rewards, consistent discipline, access to information and +personnel. +66. KPMG Report to the Commission. Within 60 days of completing KPMG’s +Review, KPMG shall deliver to the Commission staff a detailed written report (“KPMG Report to +the Commission”) summarizing its review and any changes it has made to KPMG’s Policies and +Procedures relating to the subjects described in paragraph 65. The KPMG Report to the +Commission shall provide written evidence of how the Policies and Procedures, including any +changes, are designed and implemented in a manner that provides reasonable assurance of +compliance with all professional standards relating to ethics and integrity in the form of a narrative +and be supported by exhibits. The Commission staff may request further evidence of how the +Policies and Procedures provide such assurance, and KPMG agrees to provide such evidence. +The KPMG Report to the Commission shall set forth the results of its assessment of the adequacy +and sufficiency of its ethics and integrity training, including a description of the training. The +KPMG Report to the Commission should also include a description of any training courses added +or modified as a result of the assessment conducted under this paragraph. + +67. KPMG’s Special Committee Review. Within 360 days after the entry of this Order, +a committee composed of independent members of KPMG’s Board of Directors and non-Audit +Partners (the “Special Committee”) shall complete the steps reasonably necessary to identify, and +to determine the extent to which, audit professionals violated ethics and integrity requirements in +16 +connection with training examinations within the past three years (“Special Committee +Investigation”), and to recommend any employment actions or other remedial steps to KPMG +management that the Special Committee deems appropriate. +68. Special Committee Report of Investigation. Within 60 days of completing the +Special Committee Investigation, the Special Committee shall deliver to KPMG’s Board of +Directors and Chief Executive Officer a detailed report (“Special Committee Report of +Investigation”) summarizing the investigative steps it has taken and any employment actions or +other remedial steps it recommends be taken. +69. Independent Consultant Review. KPMG shall retain, within 60 days after the +entry of this Order, an independent consultant (“Independent Consultant”), not unacceptable to +the Commission staff. The Independent Consultant shall have, at a minimum, the following +qualifications: (i) demonstrated expertise conducting ethics and integrity investigations; and (ii) +experience designing or reviewing compliance policies, procedures, and controls relating to +ethics and integrity. KPMG shall provide to the Commission staff a copy of the engagement +letter detailing the scope of the Independent Consultant’s responsibilities. KPMG shall deliver to +the Independent Consultant the KPMG Report to the Commission at the same time as KPMG +provides such report to the Commission staff as specified in paragraph 66. The Special +Committee shall deliver to the Independent Consultant the Special Committee Report of +Investigation at the same time as it provides such report to KPMG’s Board of Directors and +Chief Executive Officer as specified in paragraph 68. KPMG shall require that the Independent +Consultant: +a. perform a review (the “IC Review of Quality Controls”) of KPMG’s +Policies and Procedures to determine whether they are designed and being implemented in a +manner that provides reasonable assurance of compliance with all professional standards relating +to ethics and integrity, including whether the firm’s ethics and integrity training and guidance is +adequate and sufficient; the culture is supportive of ethical and compliant conduct, and KPMG is +deploying proper resources and oversight for compliance with ethics and integrity requirements; +and + +b. review and assess (the “IC Review of Investigation”) the Special +Committee Investigation and whether KPMG (i) has taken reasonable steps to identify, and to +determine the extent to which, those audit professionals who engaged in improper exam sharing +within the past three years, and (ii) has followed the Special Committee’s recommended +employment actions or other remedial steps. + +KPMG shall cooperate fully with the Independent Consultant and shall provide reasonable access +to information and records as the Independent Consultant may reasonably request, subject to +KPMG’s right to withhold from disclosure any information or records protected by any applicable +protection or privilege such as the attorney-client privilege or the attorney work product doctrine. +The Independent Consultant shall have the right to interview any partner, employee, agent, or +consultant of KPMG concerning any matter within or relating to the IC Review of Quality Controls +or the IC Review of Investigation. + +17 +70. Reports of IC Reviews. After the IC Review of Quality Controls and the IC +Review of Investigation are completed, but no later than 90 days after receiving the KPMG Report +to the Commission and the Special Committee Report of Investigation, the Independent Consultant +shall issue a detailed written report (the “IC Report”) to KPMG: (i) summarizing its work; (ii) +making recommendations, as the Independent Consultant deems appropriate, reasonably designed +to ensure that KPMG’s Policies and Procedures relating to the topics discussed in paragraph 65 are +adequate and sufficient to provide reasonable assurance of compliance with all relevant +professional standards relating to ethics and integrity; (iii) describing its review of KPMG’s +training and making additional recommendations, as the Independent Consultant deems +appropriate, regarding ethics and integrity training; (iv) making recommendations, as the +Independent Consultant deems appropriate, reasonably designed to ensure that the Special +Committee Investigation has taken reasonable steps to identify, and to determine the extent to +which, audit professionals who engaged in improper exam sharing within the past three years, +including recommending additional investigative steps for the Special Committee to take; and (v) +making recommendations, where appropriate, reasonably designed to ensure that KPMG has taken +appropriate employment actions or other remedial steps in light of the findings of the Special +Committee Investigation. KPMG shall require the Independent Consultant to provide a copy of the +IC Report to the Commission staff and the PCAOB staff when the IC Report is issued. +71. KPMG shall adopt, as soon as practicable, all recommendations of the Independent +Consultant in the IC Report. Provided, however, that within 30 days of issuance of the IC Report, +KPMG may advise the Independent Consultant in writing of any recommendation that it considers +to be unnecessary, unjust, outside the scope of this Order, unduly burdensome, or impractical. +KPMG need not adopt any such recommendation at that time, but instead may propose in writing +to the Independent Consultant an alternative approach designed to achieve the same objective or +purpose. If KPMG’s written proposal relates to an alternative policy, procedure, or investigative +step, it will submit its proposal to the Commission staff at the same time. KPMG and the +Independent Consultant shall engage in good-faith negotiations in an effort to reach agreement on +any recommendations objected to by KPMG. In the event that the Independent Consultant and +KPMG are unable to agree on an alternative proposal within 60 days of the issuance of the IC +Report, KPMG shall abide by the determinations of the Independent Consultant. +72. Ethics and Integrity Training. For the period immediately following the completion +of KPMG’s assessment of the adequacy and sufficiency of its ethics training and guidance as +specified in paragraph 65, and ending no earlier than 36 months after submission of the final CEO +certification required by paragraph 73, all audit professionals are required to complete a minimum +of 12 hours of ethics and integrity training each year, with a minimum 3 hours of such training +occurring every 3 months. +73. Certification by Chief Executive Officer. Within 60 days of issuance of the IC +Report, but not sooner than 30 days after a copy of the IC Report is provided to the Commission +staff, KPMG’s Chief Executive Officer must certify to the Commission staff in writing that (i) +KPMG has adopted and has implemented or will implement all recommendations of the +Independent Consultant, if any; and (ii) the Independent Consultant agrees with KPMG’s adoption +and implementation of the recommendations. To the extent that KPMG has not implemented all +recommendations of the Independent Consultant within 60 days of issuance of the IC Report, +18 +KPMG’s Chief Executive Officer must certify to the Commission staff in writing, 30 days after +their implementation, that (i) KPMG has adopted and has implemented all recommendations of the +Independent Consultant; and (ii) the Independent Consultant agrees that the recommendations have +been adequately adopted and implemented by KPMG. The certifications by KPMG’s Chief +Executive Officer shall provide written evidence of the implementation of the Independent +Consultant’s recommendations in the form of a narrative, and be supported by exhibits. The +Commission staff may request further evidence of the implementation of the Independent +Consultant’s recommendations, and KPMG agrees to provide such evidence. +74. Hiring Authority. The Independent Consultant shall have the authority to employ +legal counsel, consultants, investigators, experts, and other personnel necessary to assist in the +proper discharge of the Independent Consultant’s duties. +75. The Independent Consultant’s compensation and expenses shall be borne +exclusively by KPMG. To ensure the independence of the Independent Consultant, KPMG: (i) +shall not have the authority to terminate the Independent Consultant or substitute another +independent compliance consultant for the initial Independent Consultant, without the prior written +approval of the Commission staff; and (ii) shall compensate the Independent Consultant and +persons engaged to assist the Independent Consultant for services rendered pursuant to this Order +at their reasonable and customary rates. +76. KPMG shall require the Independent Consultant to enter into an agreement that +provides that, for the period of engagement and for a period of two years from completion of the +engagement, the Independent Consultant shall not enter into any employment, consultant, attorney- +client, auditing or other professional relationship with KPMG, or any of its present or former +affiliates, directors, officers, employees, or agents acting in their capacity as such. The agreement +shall also provide that the Independent Consultant will require that any firm with which he/she is +affiliated or of which he/she is a member, and any person engaged to assist the Independent +Consultant in performance of his/her duties under this Order shall not, without prior written +consent of the Division of Enforcement, enter into any employment, consultant, attorney-client, +auditing or other professional relationship with KPMG, or any of its present or former affiliates, +directors, officers, employees, or agents acting in their capacity as such for the period of the +engagement and for a period of two years after the engagement. +77. KPMG shall not be in, and shall not have an attorney-client relationship with the +Independent Consultant and shall not seek to invoke the attorney-client privilege or any other +doctrine or privilege to prevent the Independent Consultant from transmitting any information, +reports, or documents to Commission staff. +78. KPMG shall inform its audit professionals of the terms of the Order within ten +business days after entry of the Order. +79. By no later than 15 months after the entry of this Order, unless otherwise extended +by the Commission staff, KPMG’s Chief Executive Officer shall certify, in writing, compliance +with the undertakings set forth above. The certification shall provide written evidence of +compliance in the form of a narrative, and be supported by exhibits sufficient to demonstrate +19 +compliance. The Commission staff may request further evidence of compliance, and KPMG +agrees to provide such evidence. +80. Annual Certification. With respect to calendar years 2020 and 2021, KPMG’s +Chief Executive Officer shall certify that KPMG has assessed whether KPMG’s Policies and +Procedures relating to the topics discussed in paragraph 65 are adequate and sufficient to provide +reasonable assurance of compliance with all professional standards relating to ethics and integrity +by, among other things, testing the firm’s implementation of KPMG’s Policies and Procedures +during the twelve (12) months preceding the certification (“Annual Certification”). The Annual +Certification shall describe the nature and scope of KPMG’s testing. The Annual Certification +shall represent that the Chief Executive Officer has reviewed and evaluated the firm’s assessment +and testing process and that, based on belief and after reasonable inquiry, the Chief Executive +Officer believes that KPMG’s Policies and Procedures relating to the topics discussed in paragraph +65 are adequate and sufficient to provide reasonable assurance of compliance with all professional +standards relating to ethics and integrity. If the Chief Executive Officer cannot represent that +KPMG’s Policies and Procedures are adequate and sufficient, then the Chief Executive Officer +shall describe in reasonable detail the reasons for the inability to so certify. The Chief Executive +Officer shall provide the Annual Certifications to the Commission’s staff within 60 days of the end +of the annual period. KPMG shall preserve and retain all documentation regarding the Chief +Executive Officer’s Annual Certification for seven (7) years and will make it available to the staffs +of the Commission or the PCAOB upon request. +81. All reports and certifications mentioned in these undertakings shall be submitted to +Melissa Hodgman, Associate Director, Division of Enforcement, Securities and Exchange +Commission, 100 F Street, NE, Washington, DC 20549, or such other person as the Commission +staff may request, with a copy to the Office of Chief Counsel of the Enforcement Division. +82. For good cause shown, the Commission staff may extend any of the procedural +dates relating to the undertakings. Deadlines for procedural dates shall be counted in calendar +days, except that if the last day falls on a weekend or federal holiday, the next business day shall be +considered to be the last day. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent KPMG’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. KPMG shall cease and desist from committing or causing any violations and any +future violations of PCAOB Rule 3500T. + +B. KPMG be, and hereby is, censured. + +C. KPMG shall comply with the undertakings enumerated in paragraphs 65 through 82 +above. +20 + +D. KPMG shall, within 10 days of the entry of this Order, pay a civil money penalty in +the amount of $50 million to the Securities and Exchange Commission for transfer to the general +fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +E. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying KPMG as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Melissa Hodgman, Division of +Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + +F. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a + +21 +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + + + + + Vanessa A. Countryman + Acting Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4052.txt b/raw/aaer/2019/AAER-4052.txt new file mode 100644 index 0000000000000000000000000000000000000000..6697aa661686cdfd39eb2e28d59d8b221ee40cd9 --- /dev/null +++ b/raw/aaer/2019/AAER-4052.txt @@ -0,0 +1,94 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86123 / June 17, 2019 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4052 / June 17, 2019 +ADMINISTRATIVE PROCEEDING +File No. 3-15645 + +In the Matter of +Stephen D. Cheaney, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT + +On December 12, 2013, Stephen D. Cheaney, CPA (“Cheaney”) was denied the privilege +of appearing or practicing as an accountant before the Commission as a result of settled public +administrative proceedings instituted by the Commission against Cheaney pursuant to Rule +102(e)(1) of the Commission’s Rules of Practice.1 This order is issued in response to Cheaney’s +application for reinstatement to appear and practice before the Commission as an accountant. + +The Commission’s order involved misconduct by Cheaney in completing a surprise exam +pursuant to Section 206(4) of the Advisers Act of 1940 and Rule 206(4)-2 thereunder (the +“Custody Rule”). Freedom One Investment Advisors, Inc. (“Freedom One”), a formerly +registered investment adviser, had custody of client assets and was required by the Custody Rule +to have an independent public accountant conduct annual surprise exams to verify those assets. +For 2006 and 2008, Freedom One engaged UHY LLP to perform the surprise exams. Cheaney +was a member of the engagement team for the 2008 surprise exam. For his role in the failure to +to complete the surprise exam (i.e. conduct fieldwork, prepare and issue a surprise exam report, +and file Forms ADV-E), Cheaney engaged in improper professional conduct and caused +Freedom One to violate the Custody Rule. + +Cheaney has met all of the conditions set forth in the original order and, in his capacity as +an independent accountant, has stated that he will comply with all requirements of the +Commission and the Public Company Accounting Oversight Board, including, but not limited to + +1 See Accounting and Auditing Enforcement Release No. 3518 dated December 12, 2013. Cheaney was permitted, +pursuant to the order, to apply for reinstatement after two years upon making certain showings. +all requirements relating to registration, inspections, concurring partner reviews and quality +control standards. In his capacity as a preparer or reviewer, or as a person responsible for the +preparation or review, of financial statements of a public company to be filed with the +Commission, Cheaney attests that he will undertake to have his work reviewed by the +independent audit committee of any company for which he works, or in some other manner +acceptable to the Commission, while practicing before the Commission in this capacity. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of the information supplied, representations made, and undertakings agreed +to by Cheaney, it appears that he has complied with the terms of the December 12, 2013 order +denying him the privilege of appearing or practicing before the Commission as an accountant, +that no information has come to the attention of the Commission relating to his character, +integrity, professional conduct, or qualifications to practice before the Commission that would be +a basis for adverse action against him pursuant to Rule 102(e) of the Commission’s Rules of +Practice, and that Cheaney, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, and that Cheaney, by undertaking to +comply with all requirements of the Commission and the Public Company Accounting Oversight +Board, including, but not limited to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards, in his practice before the Commission +as an independent accountant has shown good cause for reinstatement. Therefore, it is +accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Stephen D. Cheaney, CPA is hereby reinstated to appear and practice before the Commission as +an accountant. + +By the Commission. + + + +Vanessa A. Countryman +Acting Secretary + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a heari ng; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4054.txt b/raw/aaer/2019/AAER-4054.txt new file mode 100644 index 0000000000000000000000000000000000000000..101a00c683192884225025d91ac2a7ec395bd6cb --- /dev/null +++ b/raw/aaer/2019/AAER-4054.txt @@ -0,0 +1,584 @@ + +1 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86159 / June 20, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4054 / June 20, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19207 + + +In the Matter of + +WALMART INC., + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Walmart Inc. (“Walmart,” “the Company,” or +“Respondent”). +II. + In anticipation of the institution of these proceedings, Walmart has submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, Respondent admits the Commission’s jurisdiction over +Respondent and the subject matter of these proceedings, and consents to the entry of this Order +Instituting Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act +of 1934, Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. +III. + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +2 + +Summary +1. This matter concerns violations of the books and records and internal accounting +controls provisions of the Foreign Corrupt Practices Act (“FCPA”) by Walmart, a global retailer. +From in or around July 2000 through in or around April 2011, Walmart’s subsidiaries in Brazil, +China, India, and Mexico operated without a system of sufficient anti-corruption related internal +accounting controls. As a result, during this time period, those Walmart subsidiaries paid certain +third-party intermediaries (“TPIs”) without reasonable assurances that certain transactions were +consistent with their stated purpose or consistent with the prohibition against making improper +payments to government officials. Additionally, during this time period, when Walmart learned of +certain anti-corruption risks, the Company did not either sufficiently investigate the allegations or +sufficiently mitigate the known risks. +Respondent +2. Walmart is a Delaware corporation with its principal place of business located in +Bentonville, Arkansas. Walmart had a class of securities registered under Section 12(b) of the +Exchange Act during the relevant time period. The Company’s shares trade on the New York +Stock Exchange under the ticker symbol “WMT.” +Other Relevant Entities and Individuals +3. Mexico Subsidiary is a Walmart subsidiary that operates retail stores in Mexico. +Walmart has a majority equity stake in Mexico Subsidiary with the remaining shares traded on the +Mexican Stock Exchange. +4. China Subsidiary is Walmart’s wholly owned subsidiary that operates Walmart’s +stores in China. +5. Brazil Subsidiary was Walmart’s wholly owned subsidiary that operated +Walmart’s stores in Brazil. +6. India Joint Venture was a joint venture with India Partner that was majority +owned and controlled by Walmart and operated wholesale stores and distribution centers in India. +7. India Retail Business was a franchisee of Walmart that operated retail stores in +India. +8. India Subsidiary was Walmart’s wholly owned subsidiary that was the franchisor +of India Retail Business. +9. India Partner was India Subsidiary’s Joint Venture partner and the owner of India +Retail Business. +10. Walmart Executive was a Walmart International senior real estate employee. +11. Walmart Lawyer was a Walmart International senior attorney. + +3 + +12. Walmart Compliance Employee was a Walmart International compliance +employee. +13. Walmart Investigator was a Walmart special investigator. +14. Mexico Subsidiary Executive A was a Mexico Subsidiary senior officer. +15. Mexico Subsidiary Executive B was a Mexico Subsidiary senior real estate +executive. + +16. Mexico Subsidiary Lawyer A was a Mexico Subsidiary real estate attorney. +17. Mexico Subsidiary Lawyer B was a Mexico Subsidiary senior attorney. +18. Mexico Subsidiary Internal Auditor was a Mexico Subsidiary senior audit +employee. +19. Outside Lawyer was an attorney retained by Walmart to investigate certain anti- +corruption allegations in Mexico. +20. Brazil Construction Firm was a construction firm retained by Brazil Subsidiary to +build and renovate certain stores in Brazil. +FACTS +Background +21. At the end of Walmart’s fiscal year 1990, the Company had 1,528 stores which had +generated annual sales of $26 billion—all within the United States. Walmart, recognizing that +international expansion could help it become the world’s largest retailer, entered its first foreign +market, Mexico, in 1991. In 1993, Walmart established Walmart International as an operating +segment, headquartered in Bentonville, Arkansas, responsible for overseeing the Company’s +operations outside the United States. Between 1994 and 1996, the Company established additional +outposts in other countries, including Brazil and China. During fiscal year 2010, the year in which +Walmart opened its first Indian wholesale outlet, the Company operated stores in 14 foreign +countries, with international sales of approximately $100 billion. + +22. Walmart’s formula for success centered on Everyday Low Prices and Everyday +Low Cost. Walmart’s rapid international growth, combined with its low-cost philosophy, +contributed to the Company’s insufficient anti-corruption related internal accounting controls in +Walmart’s subsidiaries in Mexico, India, China, and Brazil from in or around July 2000 until in or +around April 2011. +Early Corruption Warnings +23. In or around 2002 and 2003, Walmart received a request for FCPA training from +China Subsidiary and also a request for a detailed FCPA policy covering TPIs and joint venture +partners for China Subsidiary. Walmart did not immediately provide widespread anti-corruption + +4 + +training to China Subsidiary or implement TPI and joint venture anti-corruption policies at China +Subsidiary. +24. In or around June 2003, China Subsidiary identified a potentially troubling +historical payment made by a certain China Subsidiary joint venture. In 1999 or 2000, the joint +venture had entered into an agreement to pay RMB 500,000 (approximately $60,000) to the +landlord of a China Subsidiary store for government relationship consulting services and various +permits. The permit costs should have likely been nominal but China Subsidiary did not further +inquire into the matter at the time. +25. In or around October 2003, China Subsidiary’s internal audit team analyzed gifts +with an average dollar value of less than $20 given to Chinese government officials by China +Subsidiary corporate affairs employees and small amounts of cash provided to other Chinese +officials for travel and meal expenses related to business meetings by the Chinese partner of a +China Subsidiary joint venture. China Subsidiary’s internal audit team observed that these +transactions appeared to be inconsistent with corporate policy. China Subsidiary’s internal audit +team also observed that certain China Subsidiary anti-corruption related internal accounting +controls had weaknesses. In response, Walmart did not promptly implement all of China +Subsidiary internal audit’s suggested remedial actions. +Walmart’s First Anti-Corruption Compliance Program +26. In or around 2001, Walmart’s anti-corruption policy consisted of a paragraph in the +Company’s Statement of Ethics. The paragraph summarized the FCPA’s prohibitions and +described the statute’s facilitating payment exception and the procedure for making such payments. +In or around July 2002, Walmart planned to implement a worldwide comprehensive anti- +corruption compliance and training program within a few months. In or around 2003, Walmart +prepared draft anti-corruption compliance materials. However, nearly a year passed before the +Company took additional steps to revise the proposed anti-corruption compliance program. +27. Walmart published its International Anti-Corruption Policy and Procedures on or +around March 21, 2005, and distributed them to the Company’s foreign markets. In or around +November 2005, the implementation of Walmart’s anti-corruption compliance program was +formally put on hold until further notice. +Mexico +28. On or around September 21, 2005, Mexico Subsidiary Lawyer A, who had been +separated from Mexico Subsidiary over a year earlier, wrote an email to Walmart Lawyer. In the +email, Mexico Subsidiary Lawyer A stated that he was responsible for many real estate projects in +Mexico from 1975 through 2004 and wrote, “[I]f you’re interested to know confidential details +about the way we achieved 300 projects…contact me and in that case, I would ask you do it before +you contact [Mexico Subsidiary] because the kind of issues (for instance, we used to undercover +expenses identified with a code known and authorized by the highest levels).” +29. Walmart retained Outside Lawyer to advise the Company in response to Mexico +Subsidiary Lawyer A’s allegations. During the first half of October 2005, Outside Lawyer +interviewed Mexico Subsidiary Lawyer A twice. Mexico Subsidiary Lawyer A alleged that during + +5 + +his last six to seven years at Mexico Subsidiary, Mexico Subsidiary had very aggressive growth +goals that required new stores to open in record time. He further alleged that Mexico Subsidiary +frequently employed TPIs, known as gestores, who in some cases made improper payments to +Mexican government officials to obtain licenses, permits, and other approvals for certain store +projects in Mexico. He also detailed several projects where he claimed Mexico Subsidiary made +improper payments to obtain licenses, permits, and other approvals. +30. Mexico Subsidiary Lawyer A alleged the scheme worked in the following manner: +a. Mexico Subsidiary would determine which government officials +needed to receive an improper payment to obtain a permit or license. +Mexico Subsidiary Lawyer A would then tell one of the gestores +which official to make an improper payment to and then obtained +checks from Mexico Subsidiary payable to the gestores. +b. The gestores cashed the checks and delivered the agreed-upon +improper payments. +c. Occasionally, the officials preferred to deal only with Mexico +Subsidiary Lawyer A. In those instances, according to Mexico +Subsidiary Lawyer A, the gestores provided cash to Mexico +Subsidiary Lawyer A who made the improper payments himself. +d. Mexico Subsidiary Lawyer A and Mexico Subsidiary Executive B +developed a system of three-digit codes, or claves, which were typed +or handwritten on the gestores’ invoices and tracked the improper +benefits obtained by Mexico Subsidiary. +e. The clave descriptions included: “avoidance or omission of +requirement;” “influence, control, or knowledge of privileged +information in the head of the governmental office;” and “payments +to eliminate fines.” +f. Mexico Subsidiary Lawyer A claimed that Mexico Subsidiary +Executive A, Mexico Subsidiary Internal Auditor, and Mexico +Subsidiary Lawyer B—who had been named Mexico Subsidiary’s +compliance officer after Mexico Subsidiary Lawyer A left Mexico +Subsidiary—also participated in the scheme. +31. Mexico Subsidiary’s use of real estate gestores stopped after Mexico Subsidiary +Lawyer A was separated from the Company in or around August 2004 and before Walmart’s 2005 +investigation into the gestores allegations. +32. Walmart retained a law firm to initially advise the Company regarding Mexico +Subsidiary Lawyer A’s allegations and decided to use internal audit and corporate investigations +employees to conduct an investigation in Mexico. In mid-November 2005, these “preliminary +inquiry” teams spent two weeks in Mexico investigating the allegations. While there, they +identified a draft March 2004 Mexico Subsidiary internal audit review of gestoria payments that + +6 + +had not previously been shared with Walmart internal audit executives and employees in the +United States. The final report that was sent to Walmart in December 2004 omitted references, +contained in earlier versions, to MXN $45.6 million (approximately USD $4 million) paid to one +of the gestores that Mexico Subsidiary Lawyer A alleged was corrupt. While the draft report stated +that the transactions reviewed were reasonably appropriate, complied with documentation and +classification standards, and were compliant with local policies, legislation and generally accepted +accounting principles, it also described “unusual” and “facilitating” payments made in connection +with Mexico Subsidiary’s use of gestores. The final report provided to Walmart in December 2004 +had also omitted these references to suspicious transactions. +33. In or around November 2005, a Mexico Subsidiary employee explained to +investigators that when problems arose when obtaining licenses, Mexico Subsidiary typically +negotiated a payment with the relevant official to resolve the problem. The same employee, +although unsure whether improper payments were made to government officials, said that Mexico +Subsidiary utilized gestores to “smooth out the road” so that “there would not be any bumps during +the request for a license.” The employee also conceded that it was unusual that Mexico Subsidiary +paid the gestores when most of the payments were supported by only one invoice and that no +records showed what work they did, with whom they met, or how many hours they worked. +34. In or around December 2005, Walmart Investigator circulated a report concerning +the Mexico Subsidiary allegations that stated that laws had been potentially violated, and +recommended several additional investigative steps. +35. Walmart internal audit produced its own report one week later, which indicated that +the work performed constituted only a preliminary review of the gestoria payments and that the +auditors were unable to determine how the gestores used the funds received from Mexico +Subsidiary. The report also made several recommendations for investigative next steps. +36. Walmart did not follow the investigators’ proposed action plans. On or around +February 7, 2006, Walmart tasked Mexico Subsidiary Lawyer B with leading the remainder of the +investigation. +37. In March 2006, Mexico Subsidiary Lawyer B prepared his investigative report, +which concluded that the corruption allegations were unsubstantiated. However, it did +acknowledge that certain of Mexico Subsidiary’s anti-corruption related internal accounting +controls were deficient and, although some improvements had been made, certain additional anti- +corruption related internal accounting controls were recommended. Walmart did not address those +recommendations by implementing sufficient anti-corruption related internal accounting controls +until in or around April 2011. +38. Another corruption risk identified was Mexico Subsidiary’s practice of donations in +the form of checks, cash, and merchandise to Mexican municipalities and local government +entities. In some instances, the donations were made around the time Mexico Subsidiary obtained +permits and licenses or other government approvals. Some of the goods donated, such as cars and +computers, were capable of being converted to personal use. Mexico Subsidiary did not implement +sufficient internal accounting controls regarding the use of donations until in or around April 2011. + +7 + +China +39. Between in or around 2006 to in or around early 2011, China Subsidiary’s internal +audit team identified certain weaknesses in anti-corruption related internal accounting controls. In +January 2006, it observed: China Subsidiary’s draft anti-corruption policy and procedures were +inconsistent with the policy adopted by Walmart in or around March 2005; China Subsidiary’s +policy excluded employees of state-owned and state-controlled enterprises from the definition of +“government official;” and formal anti-corruption training at China Subsidiary had not yet been +provided and most Chinese managers were unfamiliar with the FCPA and misunderstood the +concept of facilitating payments. Other anti-corruption related internal accounting controls +weaknesses at China Subsidiary observed by China Subsidiary internal audit included lack of TPI +retention procedures and lack of a charitable donation policy. Although internal audit raised +recurring issues during this time period, China Subsidiary’s anti-corruption related internal +accounting controls were not improved until in or around April 2011. +India +40. In or around late 2006, Walmart conducted a review of India Partner. The initial +due diligence, while generally positive, raised certain anti-corruption red flags about doing +business in India. One report stated that Walmart would “be targeted by corrupt individuals and +organizations seeking bribes or kickbacks in exchange for favorable business relationships or the +easing of bureaucratic restrictions.” The report also said that corruption would likely cause +Walmart “delays in the processing of permits, licenses and other paperwork.” The report suggested +that Walmart could mitigate its corruption risk with “[s]trict adherence” to the FCPA and by +establishing “strong internal controls and management oversight.” +41. In or around November 2006, prior to the formation of India Joint Venture, a +Walmart real estate employee wrote to Walmart Executive that he had received a “wink and nod” +when he “brought up transparency and clean transactions relative to the FCPA” with an employee +of India Partner. The India Partner employee also admitted that “speed payments” were used in the +past by India Partner. Walmart did not sufficiently address the Walmart real estate employee’s +warning prior to forming India Joint Venture. +42. Because of certain anti-corruption related red flags, Walmart obtained additional +due diligence reports and reviewed their results. +43. Walmart entered the Indian market in partnership with India Partner. Due to foreign +direct investment restrictions, Walmart proposed that retail operations initially be franchised to +India Partner with a wholesale business structured as a joint venture majority owned by Walmart. +In or around August 2007, Walmart and India Partner executed franchise and joint venture +agreements. Walmart tasked its partner with obtaining all licenses, permits, certifications, and +zoning for retail stores in India. +44. Between in or around March 2009 and in or around January 2011, Walmart’s +internal audit team in India conducted at least three reviews of India Subsidiary and India Joint +Venture. All of those reviews identified certain weaknesses in anti-corruption related internal +accounting controls that required remediation, which were not immediately addressed. During this + +8 + +time period, Walmart continued to rely on India Partner for permitting, licensing, and real estate +matters for retail stores in India. +45. In or around July 23, 2011, an anonymous source sent an email to certain Walmart +executives alleging several issues. According to the anonymous email, an employee of India Joint +Venture and an employee of India Retail Business were involved in a scheme to make improper +payments to government officials to obtain store operating permits and licenses, and that a senior +legal employee of India Joint Venture knew about the scheme. Although one executive requested +that Walmart investigators examine the allegations, Walmart did not conduct an inquiry at that +time. +46. Despite the audit reports discussing control deficiencies and the anonymous email +alleging improper payments to government officials, Walmart did not begin to implement and +maintain a system of sufficient internal accounting controls related to anti-corruption to address +corruption concerns in India until in or around April 2011. +47. Because of Walmart’s failure to implement sufficient internal accounting controls +related to anti-corruption, from in or about 2009 through in or about at least 2011, India Joint +Venture and India Retail Business were able to retain TPIs that made improper payments to +government officials in order to obtain store operating permits and licenses during that period. +These improper payments were then recorded in India Joint Venture’s books and records with +vague descriptions like “misc fees,” “miscellaneous,” “professional fees,” “incidental,” and +“government fee.” +Brazil +48. Despite certain observations from Brazil Subsidiary internal audit regarding the +Brazil Subsidiary anti-corruption related internal accounting controls weaknesses, Brazil +Subsidiary continued to retain certain high-risk TPIs. Starting in or around 2008 to in or around +April 2012, Brazil Subsidiary employed Brazil Construction Firm to build or renovate eight stores +and obtain all required construction permits. Although certain Brazil Subsidiary employees were +aware of the Brazil Construction Firm’s reputation for corruption, no due diligence was conducted +until in or around 2009, a year after Brazil Construction Firm was engaged. That due diligence +review cited allegations that Brazil Construction Firm had made improper payments to Brazilian +officials for non-Walmart projects and engaged in other illegal acts for non-Walmart projects. +Citing these allegations, the report recommended that Brazil Subsidiary not renew Brazil +Construction Firm’s contract. Notwithstanding the due diligence results, Walmart continued to use +Brazil Construction Firm until in or around April 2012. +49. One of the Brazil Subsidiary projects that Brazil Construction Firm worked on was +the construction of a new Walmart store that was originally scheduled to open on or around +November 19, 2009. Brazil Subsidiary tasked Brazil Construction Firm with obtaining the +construction permit and with handling all aspects of the store’s construction in May 2009. Later, +because Brazil Construction Firm was unable to timely obtain all permits, the grand opening was +delayed until mid-December. On or around December 7, 2009, Brazil Subsidiary’s real estate +committee met and discussed the store project, which was on the committee’s agenda due to its +missing operating license. At the meeting, a Brazil Subsidiary executive stated that the store + +9 + +needed an “extraordinary process” to obtain the license. That same day, certain members of Brazil +Subsidiary management approved hiring another TPI—indirectly through Brazil Construction +Firm—to secure the license. Nine days later, the TPI obtained all governmental approvals for the +store. The TPI received approximately $127,000, an amount greater than Brazil Subsidiary’s other +permitting consultants, for the TPI’s efforts with these permits and certain operating permits +obtained after the store opened. +50. Certain Brazil Subsidiary employees expressed their concerns regarding the TPI to +Brazil Subsidiary management prior to the TPI’s engagement. Their concerns included the +possibility that the TPI was a government official and that the TPI did not have a formal +corporation to accept payment. A former employee of Brazil Construction Firm later stated that the +TPI told him at that time that when the TPI was working on obtaining the construction permit +under the direction of Brazil Construction Firm, 1) the TPI needed cash which the TPI had +requested from Brazil Construction Firm and had received from the former employee; and 2) the +TPI stated the money was for “people I have to pay,” which the former employee stated he +understood to mean would be used to provide improper payments to Brazilian government +officials. That former Brazil Construction Firm employee later stated that he made improper +payments himself, without the knowledge of Brazil Subsidiary, in connection with two other Brazil +Subsidiary stores. +51. In or around 2010, Brazil Subsidiary planned to open two other stores in the same +area. As with the earlier project, Brazil Subsidiary engaged the same TPI at year-end to assist with +stores that had been delayed due to licensing problems. The TPI again commanded an unusually +high fee for the TPI’s services—approximately $400,000—and was paid indirectly through Brazil +Subsidiary’s contractor. Despite earlier corruption concerns, no due diligence was conducted on +the TPI prior to the TPI’s work. The TPI’s ability to obtain licenses and permits quickly earned the +TPI the nickname “sorceress” or “genie” within Brazil Subsidiary. +Walmart’s Subsequent Anti-Corruption Compliance Programs +52. Although certain Walmart executives discussed revising the anti-corruption policy +and procedures shortly after their publication in March 2005, the Company did not announce the +launch of a “new and enhanced” anti-corruption program until on or around February 8, 2007. The +program would feature a revised policy, new procedures, and improved auditing and investigative +protocols—with an emphasis on training and TPI due diligence. Its rollout was scheduled to begin +two months later and conclude in or around 2008. +53. Walmart published the revised anti-corruption program as Company policy on or +around December 12, 2008. However, this policy was not sufficiently implemented at that time. +Shortly thereafter, Walmart appointed Walmart Compliance Employee as the Company’s first vice +president of international compliance and tasked him with updating the anti-corruption compliance +program. +54. In or around April 2009, Walmart informed its foreign subsidiaries that it would +soon promulgate anti-corruption standards that would be more flexible and easier and quicker to +implement. Instead of taking a centralized approach, each country would be required to devise its +own program based on the standards. On or around June 11, 2009, Walmart circulated to the + +10 + +subsidiaries a one-page document entitled Global Anti-Corruption Standards that: 1) summarized +the FCPA; 2) acknowledged that in certain instances Walmart may provide gifts, meals, travel, and +entertainment to government officials; 3) noted that the standards applied to TPIs; and 4) provided +contact information for the Company’s global ethics office. The markets were instructed to design +and implement risk-based internal accounting controls, procedures, and training to ensure the +standards were met. +55. Walmart’s fiscal year 2010 FCPA reviews in Brazil, India, and Mexico identified +certain of its anti-corruption related internal accounting controls had weaknesses in each +subsidiary. +56. By around April 2011, Walmart recognized that its existing anti-corruption +compliance program was not sufficient and hired an international law firm and an international +consulting firm to conduct a worldwide anti-corruption compliance review for the purpose of +reviewing and testing Walmart’s anti-corruption compliance program in various foreign +subsidiaries around the world, including in Mexico, India, Brazil, and China. +Legal Standards and Violations +57. Under Section 21C(a) of the Exchange Act, the Commission may impose a cease- +and-desist order upon any person who is violating, has violated, or is about to violate any provision +of the Exchange Act or any regulation thereunder, and upon any other person that is, was, or would +be a cause of the violation, due to an act or omission the person knew or should have known would +contribute to such violation. +FCPA Violations +Books and Records Violations +58. As a result of the conduct described above, Walmart violated Section 13(b)(2)(A) +of the Exchange Act, which requires issuers that have a class of securities registered pursuant to +Section 12 of the Exchange Act and issuers with reporting obligations pursuant to Section 15(d) of +the Exchange Act to make and keep books, records, and accounts which, in reasonable detail, +accurately and fairly reflect their transactions and dispositions of their assets. +Internal Accounting Controls Violations +59. As a result of the conduct described above, Walmart violated Section 13(b)(2)(B) of +the Exchange Act, which requires issuers that have a class of securities registered pursuant to +Section 12 of the Exchange Act and issuers with reporting obligations pursuant to Section 15(d) of +the Exchange Act to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that (i) transactions are executed in accordance with management’s +general or specific authorization; (ii) transactions are recorded as necessary (I) to permit +preparation of financial statements in conformity with generally accepted accounting principles or +any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) +access to assets is permitted only in accordance with management’s general or specific +authorization; and (iv) the recorded accountability for assets is compared with the existing assets at +reasonable intervals and appropriate action is taken with respect to any differences. + +11 + +Walmart’s Disclosures, Cooperation, and Remediation +60. In determining to accept the Offer, the Commission considered Walmart’s +disclosures, cooperation, and remedial efforts. +61. Walmart made an initial self-disclosure of the potential FCPA violations in Mexico +to the Commission’s staff in November 2011, after it retained outside counsel to conduct an +internal investigation under the direction of the Audit Committee of Walmart’s Board of Directors. +Subsequently, Walmart voluntarily expanded its investigation and disclosed its findings concerning +Brazil, China, and India to the Commission staff, although such disclosure was after the +Commission staff had already begun investigating the Company related to conduct in Mexico. +62. Walmart further cooperated by identifying issues and facts that would likely be of +interest to the Commission and the staff and providing regular updates to the staff; making regular +factual presentations to the staff and sharing information that would not have been otherwise +readily available to the staff; making foreign-based employees available for interviews in the +United States; producing translations of relevant documents; and obtaining cooperation of former +employees and third parties, including their consent to interviews. +63. Walmart’s remedial measures include: (1) hiring a Global Chief Ethics & +Compliance Officer , an International Chief Ethics & Compliance Officer, and a dedicated Global +Anti-Corruption Officer, with separate reporting lines to the Audit Committee of Walmart’s Board +of Directors; (2) adding dedicated regional and market Chief Ethics & Compliance Officers, +foreign market anti-corruption directors, and anti-corruption compliance personnel at Walmart’s +home office and in Walmart’s foreign markets; (3) conducting, across each of Walmart’s markets, +enhanced monthly and quarterly anti-corruption monitoring; (4) enhancing on-site global anti- +corruption audits to test adherence to enhanced anti-corruption related internal accounting controls +and procedures; (5) enhancing anti-corruption related internal accounting controls on the selection +and use of third parties; (6) enhancing global anti-corruption training and awareness programs; (7) +implementing an automated global license management system for obtaining and renewing +licenses and permits and a global donation management system, which enhances controls relating +to charitable donations; and (8) terminating business relationships with third parties involved in the +conduct at issue. +Non-Prosecution Agreement +64. Walmart has entered into a non-prosecution agreement with the United States +Department of Justice that acknowledges responsibility for criminal conduct relating to certain +findings in the Order. +Non-Imposition of a Civil Penalty +65. Respondent acknowledges that the Commission is not imposing a civil penalty +based upon Walmart’s payment of a $137,955,249 monetary fine as part of Walmart’s resolution +with the United States Department of Justice. + + +12 + +IV. +Undertakings +66. Respondent undertakes to cooperate fully with the Commission in any and all +investigations, litigation, or other proceedings relating to or arising from the matters described in +this Order. In connection with such cooperation, Respondent shall: +A. Produce, without service of a notice or subpoena, any and all non-privileged +documents and other information requested by the Commission staff subject to any +restrictions under the law of any foreign jurisdiction; +B. Use its best efforts to cause its current or former officers, employees, and +directors to be interviewed by Commission staff at such times and places as the +Commission staff reasonably may direct; and +C. Use its best efforts to cause its current or former officers, employees, and +directors to appear and testify without service of a notice or subpoena in such +investigations, depositions, hearings, or trials as may be requested by the Commission staff. +67. Respondent undertakes to report to the Commission staff periodically, at no less +than one-year intervals, during a two-year period from the date of this Order on the status of +Respondent’s remediation and implementation of anti-corruption related compliance measures. +During this two-year period, Respondent shall (1) submit an initial report, and (2) conduct and +prepare one follow-up review and report, as described below: +A. Respondent shall submit to the Commission staff a written report within +twelve (12) months from the date of entry of this Order setting forth a complete +description of its FCPA and anti-corruption related remediation efforts to date, its +proposals reasonably designed to improve its policies and procedures for ensuring +compliance with the FCPA and other applicable anti-corruption laws, and the parameters +of the subsequent review (“Initial Report”). The Initial Report shall be transmitted to +Charles Cain, Chief, FCPA Unit, Division of Enforcement, Securities and Exchange +Commission, 100 F Street, N.E., Washington, DC 20549. Respondent may extend the +time period for issuance of the Initial Report with prior written approval of the +Commission staff. +B. Respondent shall undertake one follow-up review, incorporating any +comments provided by the Commission staff on the Initial Report, to further monitor and +assess whether the policies and procedures of Respondent are reasonably designed to +detect and prevent violations of the FCPA and other applicable anti-corruption laws (the +“Follow-Up Report”). + +C. The Follow-Up Report shall be completed no later than twelve (12) +months after the Initial Report. Respondent may extend the time period for issuance of +the Follow-Up Report with prior written approval of the Commission staff. + +13 + +68. The Initial Report, Follow-up Report, supporting documentation, and any related +communications, presentations, and certifications submitted by Respondent may include +proprietary, financial, confidential, and competitive business information. Public disclosure of +the reports could discourage cooperation, impede pending or potential government investigations +or undermine the objectives of the reporting requirement. For these reasons, among others, the +reports and contents thereof are intended to remain and shall remain nonpublic, except (1) +pursuant to court order, (2) as agreed by the parties in writing, (3) to the extent that the +Commission determines in its sole discretion that disclosure would be in furtherance of the +Commission’s discharge of its duties and responsibilities, or (4) is otherwise required by law. +69. Should Respondent, during the two-year period from the date of this Order, +discover credible evidence, not already reported to the Commission staff, that corrupt payments +or corrupt transfers of property or interests may have been offered, promised, paid, or authorized +by a Respondent entity or person, or any entity or person while working directly for Respondent, +or that related false books and records have been maintained, Respondent shall promptly report +such conduct to the Commission staff. +70. During this two-year period from the date of this Order, Respondent shall provide +its external auditors with its annual internal audit plan and reports of the results of internal audit +procedures and, subject to Respondent’s attorney-client privilege and attorney work product +protections, its assessment of its anti-corruption compliance policies and procedures. +71. During this two-year period from the date of this Order, Respondent shall provide +the Commission staff with any written reports or recommendations provided by Respondent’s +external auditors in response to Respondent’s annual internal audit plan, reports of the results of +internal audit procedures, and its assessment of its anti-corruption compliance policies and +procedures. +72. Respondent shall certify, in writing, compliance with the undertakings set forth +above. The certification shall identify the undertaking(s), provide written evidence of compliance +in the form of a narrative, and be supported by exhibits sufficient to demonstrate compliance. +The Commission staff may make reasonable requests for further evidence of compliance, and +Respondent agrees to provide such evidence. The certification and supporting materials shall be +submitted to Charles Cain, Chief, FCPA Unit, Division of Enforcement, with a copy to the +Office of the Chief Counsel of the Division of Enforcement, Securities and Exchange +Commission, 100 F Street, N.E., Washington, DC 20549, no later than 60 days from the date of +the completion of the undertakings. +73. In determining whether to accept the Offer, the Commission has considered these +undertakings. +V. + Accordingly, pursuant to Section 21C of the Exchange Act, it is hereby ORDERED that: + A. Respondent cease and desist from committing or causing any violations and any +future violations of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act, 15 U.S.C. §§ +78m(b)(2)(A) and 78m(b)(2)(B). + +14 + +B. Respondent shall, within 10 days of the entry of this Order, pay disgorgement of +$119,647,735 and prejudgment interest of $25,043,437 for a total payment of $144,691,172, to the +Securities and Exchange Commission for transfer to the general fund of the United States +Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional +interest shall accrue pursuant to SEC Rule of Practice 600. Payment must be made in one of the +following ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + Payments by check or money order must be accompanied by a cover letter identifying +Walmart as the Respondent in these proceedings, and the file number of these proceedings; a copy +of the cover letter and check or money order must be sent to Charles Cain, Chief, FCPA Unit, +Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC +20549. +C. Respondent shall comply with the undertakings enumerated in Section IV, +paragraphs 67 through 72 above. + By the Commission. + + Vanessa A. Countryman + Acting Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4055.txt b/raw/aaer/2019/AAER-4055.txt new file mode 100644 index 0000000000000000000000000000000000000000..440f7f7554ed41465aa2e828e6e888324e42a066 --- /dev/null +++ b/raw/aaer/2019/AAER-4055.txt @@ -0,0 +1,426 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86239 / June 28, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4055 / June 28, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19224 + ORDER INSTITUTING PUBLIC +In the Matter of ADMINISTRATIVE AND CEASE-AND-DESIST + PROCEEDINGS PURSUANT TO SECTIONS 4C + AND 21C OF THE SECURITIES EXCHANGE +R. GORDON JONES, CPA, ACT OF 1934 AND RULE 102(e) OF THE + COMMISSION’S RULES OF PRACTICE, + MAKING FINDINGS, AND IMPOSING +Respondent. + +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against R. Gordon +Jones, CPA (“Respondent” or “Jones”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice.2 + + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . . (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations issued +thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or +willfully aided and abetted the violation of any provision of the Federal securities laws or +the rules and regulations thereunder. +2 +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purposes of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + +1. These proceedings arise out of Jones’s improper application of generally accepted +accounting principles (“GAAP”) and participation in the preparation of materially misstated +financial statements included in Blue Earth, Inc.’s (“Blue Earth”) periodic reports filed with the +Commission for at least the reporting periods ended September 30, 2013 through December 31, +2014. Blue Earth used Jones, an accounting consultant, to make GAAP determinations and assist in +preparing the company’s financial statements. + +2. Jones failed to comply with GAAP in determining the accounting treatment of the +company’s most significant transactions. His actions resulted in the company improperly recording +on its books and records and reporting in its financial statements a purported $44 million +“Construction in Progress” asset, instead of allocating almost the entirety of that amount to +goodwill. The asset comprised 56% and 51% of the company’s reported assets in the financial +statements included in the company’s Form 10-Q for the third quarter of 2013, filed in November +2013, and its 2013 Form 10-K, filed in March 2014, respectively. + +3. Jones further compounded the improper application of GAAP when he +recharacterized the improperly classified “Construction in Progress” to “Property and Equipment” +on the company’s balance sheets included in the company’s Forms 10-Q for the first and second +quarters of 2014, filed in May and August 2014, respectively. + +4. Lastly, Jones failed to comply with GAAP in determining that a fully vested share- +based payment award issued pursuant to an employment contract, the cost of which, in this instance, + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. +3 +should have been immediately expensed, could be recorded as an asset and amortized over three +years. This resulted in the company improperly recording on its books and records and reporting in +its financial statements a purported $4.6 million asset that should have been expensed. The +improper accounting resulted in Blue Earth understating its expenses by approximately $4.3 million, +which constituted a 43% understatement of its net income (loss) before taxes and of its net loss, in +its financial statements included in the Form 10-Q for the first quarter of 2014, and a 10% +understatement of its net income (loss) before taxes, a 9.4% understatement of its net loss and 3.4% +overstatements of assets in the financial statements included in the company’s Form 10-K for the +year ending December 31, 2014. + +5. As a result, Jones knowingly generated misstated books, records and accounts for +Blue Earth. Jones also aided and abetted and caused Blue Earth’s failure to make and keep books, +records, and accounts which fairly and accurately reflected the company’s transactions, to maintain +a system of internal accounting controls, and to file accurate periodic reports with the Commission. + +Respondent + +6. R. Gordon Jones, age 64, resides in Farmington, Utah. Jones has been licensed as +a Certified Public Accountant (“CPA”) in the State of Utah since June 1980. He was licensed as a +CPA in Oklahoma from December 1995 until June 2001, at which time his license was cancelled +at his request. During the relevant period, he provided accounting services to public and private +companies, including making accounting determinations and preparing financial statements in +accordance with GAAP. + + On May 4, 2001, the Commission issued a consent order against Jones pursuant to Rule +102(e)(1)(ii) of the Commission’s Rules of Practice which denied him the privilege of appearing or +practicing before the Commission as an accountant based on his failure to perform an independent +audit according to the Generally Accepted Auditing Standards, with a right to apply for +reinstatement after three years. In the Matter of R. Gordon Jones, CPA and Mark F. Jensen, Ex. +Act Rel. No. 44265 (May 4, 2001) (“2001 SEC Order”). In 2015, the U.S. District Court for the +District of Utah found in a contempt proceeding that Jones had violated the 2001 SEC Order and +ordered him to comply with the 2001 SEC Order and disgorge $600,000 in fees associated with +prohibited work he engaged in after entry of the Order, including fees earned from Blue Earth +through mid-2012. + +Relevant Entity + +7. Blue Earth, Inc., a company incorporated in Nevada and headquartered in +Henderson, Nevada during the relevant period, purported to be a comprehensive provider of +renewable and energy efficient services for small and medium-sized commercial and industrial +facilities. During the relevant period up to August 28, 2014, the company had a class of common +stock registered with the Commission pursuant to Exchange Act Section 12(g) which was quoted +on the OTC Bulletin Board. Effective August 28, 2014, the company registered its common stock +with the Commission pursuant to Section 12(b) of the Exchange Act, and the stock was listed on +the NASDAQ Capital Market. On March 21, 2016, Blue Earth filed for Chapter 11 bankruptcy. +4 +The NASDAQ suspended trading in Blue Earth’s common stock on March 28, 2016 and then +delisted the stock effective April 18, 2016. Blue Earth filed with the Commission a Form 15 +terminating the registration of its common stock under Section 12(g) of the Exchange Act on +August 1, 2016 and a Form 15 suspending its periodic reporting obligations under Section 15(d) of +the Exchange Act on January 4, 2017. + +$44 Million “Construction in Progress” Asset + +8. Since 2010, Jones, a contract accountant, had prepared Blue Earth’s financial +statements and made all GAAP determinations for the company, with limited substantive review +by others in the company. During the relevant period, Jones assisted the company in devising and +maintaining the company’s internal accounting controls. + +9. On July 15, 2013, Blue Earth acquired a subsidiary it eventually renamed Blue +Earth CHP (“BE CHP”).4 Through BE CHP, Blue Earth intended to enter into agreements with +customers pursuant to which Blue Earth would develop, build, own, and operate combined heat +and power (“CHP”) plants on land leased from the customer. The plants would generate steam and +electricity for the customer at below market rates, and Blue Earth would sell the excess electricity +to the local utility. Blue Earth paid for BE CHP with 15,500,000 shares of restricted company +stock. To determine the purchase price, the company multiplied the number of shares transferred +by the share price resulting in $44,035,500. + +10. Shortly after the acquisition, BE CHP entered into seven non-binding term sheets +with a major meat processing company. At the insistence of the meat processing company, the +term sheets expressly stated that they were non-binding. The meat processing company would be +bound only when the parties signed a “definitive agreement” for each facility, meaning: (i) a +ground lease allowing Blue Earth access to the premises for purposes of constructing and operating +the plant and (ii) a power purchase agreement obligating BE CHP to sell, and meat processing +company to buy, steam and electricity at a set price. No such contract was signed until August +2014, when Blue Earth and the meat processing company executed a definitive agreement for one +plant. Blue Earth and the customer signed a definitive agreement for a second, smaller plant in +December 2014. Definitive agreements were not executed for any other plants. + +11. The GAAP provision governing accounting for business combinations, Accounting +Standards Codification (“ASC”) 805, Business Combinations (“ASC 805”), generally requires the +accounting acquirer to: (a) determine the purchase price which, in the case of a stock-for-stock +acquisition is the fair market value of the shares transferred by the acquirer (unless the acquiree’s +share price is more reliably measured); (b) identify all assets acquired, including intangible assets, +and liabilities assumed; (c) determine the fair value of each such asset and liability; (d) allocate the +purchase price to each identified asset and liability; and (e) allocate the residual to goodwill. + +4 Blue Earth initially acquired and combined two affiliated private entities to form BE CHP. BE +CHP is used herein to refer to the pre-merger entities and the single post-merger subsidiary into +which they were combined. +5 + +12. Applying ASC 805 to its acquisition of BE CHP, Blue Earth should have identified +all the assets acquired, including any intangible assets; determined the fair value of those assets; +and then allocated the purchase price to the acquired assets, liabilities, and, if there was any +residual, to goodwill. + +13. Jones knew the explicitly set forth requirements of ASC 805, but he deviated from +them in several respects in accounting for the acquisition during the third quarter of 2013. First, +Jones took the position that, because BE CHP had no customer base or revenues at the time Blue +Earth acquired it, it could have no goodwill. Accordingly, Jones concluded that no portion of the +$44 million could be allocated to goodwill. Second, he had the entire purchase price recorded as +an asset he named “Construction in Progress”, with no portion of the purchase price allocated to +the immaterial tangible assets and liabilities. Third, Jones did not determine whether Blue Earth +obtained any identifiable intangible assets in the acquisition. Fourth, Jones did not obtain a fair +value of any identifiable intangible asset prior to his having the entire $44 million recorded on Blue +Earth’s books as “Construction in Progress.” + +14. After the asset was booked in the company’s internal records, Jones sought from +the company’s Chief Financial Officer (“CFO”) support for the $44 million “Construction in +Progress” asset in connection with the year-end audit. + +15. In October 2013, the CFO provided to Jones a discounted cash flow (the “October +2013 DCF”) the CFO had prepared which purportedly supported the $44 million “Construction in +Progress” asset valuation. It purported to be a DCF of the cash flows anticipated from constructing +and operating non-existent and speculative CHP plants at seven of the meat processing company’s +sites and from the sale of steam and electricity to the facilities and local utility companies over a +more than 10-year period. The DCF was based on two assumptions: (a) that definitive agreements +existed in relation to all seven sites; and (b) that full financing was available to BE CHP to +construct and operate the seven plants. Neither assumption was based in fact. + +16. Jones knew that the October 2013 DCF purported to value the equity cash flows of +the BE CHP enterprise, and not any discrete asset or assets of the acquired business. He knew +from the face of the October 2013 DCF that it was based on cash flows from CHP plants at seven +sites for which definitive agreements had not been signed. Nonetheless, the company provided the +October 2013 DCF to the auditor in connection with the year-end audit. Jones made additional +inquiries about the status of the contracts prior to Blue Earth’s filing of its 2013 Form 10-K with +the Commission in March 2014, and he learned that definitive agreements still were not signed for +any site. + +17. Despite knowing all of this, Jones proceeded to assist in the preparation of financial +statements included in the third quarter Form 10-Q filed with the Commission in November 2013 +and fiscal year 2013 Form 10-K filed in March 2014 that listed the $44 million “Construction in +Progress” asset under “Other Assets” on the balance sheet and allocated nothing to goodwill. The +$44 million “Construction in Progress” asset represented 56% and 51% of Blue Earth’s total assets +on its balance sheet for the reporting period ended September 30, 2013 and December 31, 2013, +6 +respectively. + +18. In the first and second quarters of 2014, Jones improperly recharacterized the $44 +million “Construction in Progress” asset originally under “Other Assets” as “Construction in +Progress” under “Property and Equipment” on the company’s books and records and on the +balance sheet of the company’s financial statements reported with the Forms 10-Q filed in May +and August 2014. + +Improper Capitalization of Compensation Expense + +19. In February 2014, Blue Earth hired an individual to run its capital formation +subsidiary pursuant to a three-year employment agreement for a salary of $120,000 per year. At +the same time, Blue Earth separately issued to the individual 1,725,000 shares of Blue Earth +restricted common stock, with no vesting schedule, valued at approximately $4.6 million. The +value of the shares should have been expensed in the quarter they were issued as a compensation +expense under ASC 718 Compensation — Stock Compensation (“ASC 718”). Instead, Blue Earth +recorded the $4.6 million as an asset, capitalized it, and amortized it over three years. + +20. The shares were issued to the individual pursuant to a so-called “Sale of Goodwill” +agreement under which Blue Earth purported to purchase the executive’s “Seller’s Goodwill” +which included, among other things, an agreement that the individual share information about +certain of his relationships, recommend Blue Earth to his contacts in the energy efficiency and +clean tech industry, and enter into an employment agreement with Blue Earth. Under the “Sale of +Goodwill” agreement, Blue Earth issued the shares to the individual upon the execution of the +agreement. There were no conditions to the individual receiving the shares, nor was there any +vesting period. + +21. Although it was characterized as a purchase of “Seller’s Goodwill,” the purpose of +the transaction was to secure the services of the individual. The value Blue Earth derived from the +transaction was the individual’s services, namely the executive’s contacts within the industry and +his potential use of that information to raise funds for Blue Earth. + +22. Under ASC 718, the $4.6 million fair value of the shares issued should have been +treated as stock compensation. As stock compensation, without a vesting period, the $4.6 million +share payment from Blue Earth to the individual should have expensed in the period it was made, +instead of being capitalized as an asset and amortized over three years. + +23. Jones, who was charged with determining the appropriate accounting treatment +under GAAP, knew the facts set forth in Paragraph 21. However, instead of recognizing the $4.6 +million expense in the year incurred, Jones improperly had it recorded as an asset which Jones +determined should be amortized over three years. + +24. Jones also proceeded to assist in the preparation of financial statements included in +the Forms 10-Q filed with the Commission in May, August, and November 2014 and in the 2014 +Form 10-K filed in March 2015 that listed the asset, reduced to nearly $3.2 million through +7 +amortization. In the financial statements included in the Form 10-Q for the first quarter of 2014, +this accounting error resulted in Blue Earth understating its expenses by approximately $4.3 +million, which constituted a 43% understatement of its net income (loss) before taxes and of its net +loss. In the financial statements included in the 2014 Form 10-K, this resulted in a Blue Earth +understating its expenses by nearly $3.2 million, which constituted a 10% understatement of its net +income (loss) before taxes and 9.4% understatement of its net loss, and overstatement of its assets +by 3.1%. + +25. In February 2016, the company restated its financial statements for the year ending +December 31, 2014, after concluding that the $4.6 million originally recorded as an asset should +have been expensed in the quarter during which it was paid. + +Violations + +26. Section 13(b)(5) of the Exchange Act provides that no person shall knowingly +falsify any book, record, or account subject to Section 13(b)(2)(A). Rule 13b2-1 under the +Exchange Act provides that no person shall, directly or indirectly, falsify or cause to be falsified +any book, record or account subject to Section 13(b)(2)(A). + +27. As a result of Jones’s conduct described above, certain assets and expenses were +misrecorded on Blue Earth’s books, records, and accounts. Jones willfully violated Section +13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder by, directly or indirectly, knowingly +falsifying Blue Earth’s books, records, and accounts. + +28. Section 13(b)(2)(A) of the Exchange Act requires issuers with a class of securities +registered under Exchange Act Section 12 to make and keep books, records, and accounts which in +reasonable detail accurately and fairly reflect the transactions and dispositions of their assets. +Section 13(b)(2)(B) of the Exchange Act requires issuers with a class of securities registered under +Exchange Act Section 12 to devise and maintain a system of internal accounting controls sufficient +to provide reasonable assurances that transactions are recorded as necessary to permit preparation +of financial statements in conformity with GAAP. + +29. Blue Earth violated Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act by +failing to keep books, records and accounts that accurately and fairly reflected the above-described +transactions and failed to maintain a system of internal accounting controls. Jones improperly +applied GAAP to the above-described transactions, as a result of which assets and expenses were +misrecorded on Blue Earth’s books, records, and accounts. Jones knew, or was reckless in not +knowing, that by engaging in the conduct described above, he provided substantial assistance to +Blue Earth in its violation of Sections 13(b)(2)(A) and 13(b)(2)(B) of the Exchange Act. As a +result, Jones willfully aided and abetted and caused Blue Earth’s violations of Sections 13(b)(2)(A) +and 13(b)(2)(B) of the Exchange Act. + +30. Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder +require issuers with a class of securities registered under Section 12 of the Exchange Act to file +quarterly and annual reports with the Commission and to keep this information current. The +8 +obligation to file such reports embodies the requirement that they be true and correct. See, e.g., +SEC v. Savoy Indus., Inc., 587 F.2d 1149, 1165 (D.C. Cir. 1978). + +31. Blue Earth included materially misstated financial statements in its quarterly and +annual reports for periods ended September 30, 2013 through December 31, 2014 in violation of +Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. The materially +misstated financials resulted from Jones improperly applying GAAP to the above-described +transactions. Jones knew, or was reckless in not knowing, that by engaging in the conduct +described above, he provided substantial assistance to Blue Earth in its violation of Section 13(a) +of the Exchange Act and Rules 12b-20, 13a-1 and 13a-13 thereunder. As a result, Jones willfully +aided and abetted and caused Blue Earth’s violations of Section 13(a) and Rules 12b-20, 13a-1 and +13a-13 thereunder. + +Findings + + Based on the foregoing, the Commission finds that Jones: (a) willfully violated Section +13(b)(5) of the Exchange Act and Rule 13b2-1 thereunder; and (b) willfully aided and abetted and +caused Blue Earth’s violations of Sections 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange +Act, and Rules 12b-20, 13a-1, and 13a-13 promulgated thereunder. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Jones’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Jones shall cease and desist from committing or causing any violations of and any +future violations of Sections 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and +Rules 12b-20, 13a-1, 13a-13, and 13b2-1 promulgated thereunder. + + B. Jones be, and hereby is, denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. Jones shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $70,000 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +9 +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying R. +Gordon Jones as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Carolyn M. Welshhans, Division +of Enforcement, Securities and Exchange Commission, 100 F St., NE, Washington, DC 20549. + + D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission's counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree + + + + + + +10 + +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4057.txt b/raw/aaer/2019/AAER-4057.txt new file mode 100644 index 0000000000000000000000000000000000000000..1913b049c81995cf61462d2ed91d45f11f26c72c --- /dev/null +++ b/raw/aaer/2019/AAER-4057.txt @@ -0,0 +1,351 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86252 / July 1, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4057 / July 1, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19226 + + + +In the Matter of + +THOMAS CHANG, CPA + +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING +FINDINGS, AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND-DESIST +ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Thomas +Chang (“Respondent” or “Chang”) pursuant to Sections 4C1 and 21C of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others . . . (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may censure any person, or deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct. + + 2 +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission ’s jurisdiction over him and the subject matter of +these proceedings, which are admitted, and except as provided herein in Section V, Respondent +consents to the entry of this Order Instituting Public Administrative and Cease -and-Desist +Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + +1. This matter arises from violations of the auditor independence rules caused by +Chang between April 2016 and August 2018. These violations stem from a business relationship +between Chang’s auditing firm, KCCW Accountancy Corp. (“KCCW”), and Entity A, a company +that created and maintained an inventory of public companies that it made available to its +customers. In 2008, KCCW began a business relationship with Entity A whereby it agreed to pay +Entity A a percentage of the audit fees it earned from audit clients referred by Entity A. + +2. Starting in April 2016, Entity A’s owner and an employee—its marketing director— +retained KCCW on multiple occasions, through Chang, to audit public shell companies in their +control. From April 2016 to August 2018, KCCW served as the purportedly independent auditor +for at least five public companies controlled by the Entity A-related individuals while maintaining a +business relationship with them as defined by Rule 2-01(c)(3) of Regulation S-X. As detailed +below, Chang caused the firm to issue audit reports stating that the audits were performed in +accordance with Public Company Accounting Oversight Board standards, thereby causing KCCW +to violate Rule 2-02(b) of Regulation S-X. + +Respondent + +3. Thomas Chang, age 42, resides in Pasadena, California. During the relevant +period, he was a 50% equity partner in KCCW and the engagement partner for the audits of the +public shell companies discussed herein. He has been a CPA licensed in California since 2007. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + + 3 +Other Relevant Entities + +4. KCCW Accountancy Corp. (“KCCW”), incorporated in California with offices in +California and Taiwan, is a Public Company Accounting Oversight Board (“PCAOB”) registered +public accounting firm. It has three partners, including Chang. According to its most recent +PCAOB annual report, KCCW had approximately 60 public issuer audit clients. KCCW also +provided audit and tax services to private companies. + +5. Entity A was a Delaware corporation with its principal place of business in Beverly +Hills, California that assisted companies in going public. Entity A created and maintained an +inventory of public shell companies that it made available to its customers. Entity A’s owner and +marketing director served as the officers, directors, and fifty percent shareholders of the public +shell companies. + +Facts + +6. As Chang started his practice in 2008, KCCW and Entity A entered into an oral +agreement (the “referral agreement”) through which KCCW paid Entity A a referral fee for audit +clients that it introduced to KCCW. The referral agreement entitled Entity A to 30% of the total +first-year fees KCCW received from any audit client referred by Entity A. KCCW agreed to pay +Entity A 20% of fees for the second year and 10% of fees for subsequent years. Pursuant to the +referral agreement, from October 2009 through January 2016, KCCW paid Entity A a total of +$70,725 and, from January 2016 through March 2017, accrued another $25,278 in unpaid referral +fees. + +7. Prior to April 2016, Entity A introduced KCCW to at least nine audit clients, +pursuant to the referral agreement. + +8. As part of Entity A’s business, its owner and marketing director maintained control +of public shell companies that Entity A made available to its customers. Prior to transferring +control of a public shell to an Entity A customer, the owner and marketing director served as the +officers, directors, and fifty-percent shareholders of each public shell. At times, certain public +shells would remain in their control for more than one year and require an audit in connection with +the public shells’ obligations to file with the Commission annual reports on Form 10-K. + +9. Starting in April 2016, Entity A’s owner and its marketing director engaged KCCW +to conduct year-end audits of the public shells that they controlled. In parallel, KCCW continued +to accrue referral fees with respect to companies not controlled by Entity A and maintained its +business relationship with Entity A pursuant to the referral agreement. Chang failed to identify the +independence concerns raised by this arrangement. + +10. KCCW, by and through Chang, signed audit reports for five public companies +between April 2016 and August 2018 that Entity A’s owner and marketing director controlled, and +for which they were the only officers and directors. The audit reports stated that the audits were + + 4 +performed in accordance with the standards of the PCAOB. During these audits, and at the time +the audit reports were signed, the referral agreement was still in effect and Entity A was accruing +referral fees from KCCW. + +11. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent. Specifically, after being approached by Commission staff +during the investigation, Chang discontinued the referral agreement with Entity A. + +Legal Analysis + +12. Regulation S-X Section 2-01(c)(3) states that an auditor is not independent if, “at +any point during the audit and professional engagement period, the accounting firm or any covered +person in the firm has any direct or material indirect business relationship with an audit client, or +with persons associated with the audit client in a decision-making capacity, such as an audit +client’s officers, directors, or substantial stockholders.” KCCW’s referral agreement with Entity +A—whose owner and marketing director were the only officers, directors, and shareholders of the +public shell companies—rendered KCCW not independent of the five audit clients for the audits +described in Paragraph 10. + +13. As a result of the conduct described above, Chang caused KCCW to violate Rule 2- +02(b) of Regulation S-X, which requires an accountant’s report to “state whether the audit was +made in accordance with generally accepted auditing standards” [“GAAS”] which, in turn, require +auditors to maintain independence—both in fact and appearance—from their audit clients.4 Thus, +the audit reports signed by KCCW, by and through Chang, for the five public companies from +April 2016 to August 2018 incorrectly stated that they were performed in accordance with PCAOB +Standards. + +14. As a result of the conduct described above, Chang engaged in improper +professional conduct under Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, which provide, in pertinent part, that the Commission may +“censure a person or deny, temporarily or permanently, the privilege of appearing or practicing +before it... to any person who is found... to have engaged in... improper professional conduct.” +Such conduct can be established by, inter alia, negligence in the form of either “a single instance +of highly unreasonable conduct … in circumstances [warranting] heightened scrutiny” or of +“repeated instances of unreasonable conduct...” See Rule 102(e)(1)(iv)(B)(1) and (2). + + +4 Securities Act Release No. 33-8422 (May 14, 2004) states that reference to GAAS should be understood to mean +the standards of the PCAOB plus any applicable rules of the Commission. PCAOB Rule 3520 states that a +“registered public accounting firm and its associated persons must be independent of the firm’s audit client +throughout the audit and professional engagement period.” Note 1 to Rule 3520 further clarifies that independence +“with respect to an audit client encompasses not only an obligation to satisfy the independence criteria applicable to +the engagement set out in the rules and standards of the PCAOB, but also an obligation to satisfy all other +independence criteria applicable to the engagement, including the independence criteria se t out in the rules and +regulations of the Commission under the federal securities laws.” + + + 5 +Findings + +15. Based on the foregoing, the Commission finds that Respondent engaged in +improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice , and caused a violation of Rule 2-02(b) of +Regulation S-X. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +Accordingly, pursuant to Sections 4C and 21C of the Exchange Act, and Rule 102(e)(1)(ii) +of the Commission’s Rules of Practice, it is hereby ORDERED that: + + A. Respondent Chang shall cease and desist from committing or causing any violations +and any future violations of Rule 2-02(b) of Regulation S-X. + + B. Respondent Chang is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. After one (1) year from the date of this order, Respondent Chang may request +that the Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Respondent Chang’s work +in his practice before the Commission as an accountant will be reviewed +either by the independent audit committee of the public company for which +he works or in some other acceptable manner, as long as he practices before +the Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + + 6 + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Respondent Chang, or the public accounting firm with which he is +associated, is registered with the PCAOB in accordance with the +Sarbanes-Oxley Act of 2002, and such registration continues to be +effective; + + (b) Respondent Chang, or the registered public accounting firm with +which he is associated, has been inspected by the PCAOB and that +inspection did not identify any criticisms of or potential defects in +the respondent’s or the firm’s quality control system that would +indicate that Respondent Chang will not receive appropriate +supervision; + (c) Respondent Chang has resolved all disciplinary issues with the +PCAOB, and has complied with all terms and conditions of any +sanctions imposed by the PCAOB (other than reinstatement by the +Commission); and + + (d) Respondent Chang acknowledges his responsibility, as long as he +appears or practices before the Commission as an independent +accountant, to comply with all requirements of the Commission +and the PCAOB, including, but not limited to, all requirements +relating to registration, inspections, concurring partner reviews and +quality control standards. + +D. The Commission will consider an application by Respondent Chang to resume +appearing or practicing before the Commission provided that his state CPA license is current and +he has resolved all other disciplinary issues with the applicable state boards of accountancy. +However, if state licensure is dependent on reinstatement by the Commission, the Commission +will consider an application on its other merits. The Commission’s review may include +consideration of, in addition to the matters referenced above, any other matters relating to +Respondent Chang’s character, integrity professional conduct, or qualifications to appear or +practice before the Commission as an accountant. Whether an application demonstrates good +cause will be considered on a facts and circumstances basis with due regard for protecting the +integrity of the Commission’s processes. + + E. Respondent Chang shall, within 10 days of the entry of this Order, pay +disgorgement of $13,000, representing audit fees earned from Entity A-controlled public shells, +prejudgment interest of $1,590.45, and a civil money penalty in the amount of $13,000 to the +Securities and Exchange Commission for transfer to the general fund of the United States Treasury, +subject to Exchange Act Section 21F(g)(3). If timely payment is not made, additional interest shall +accrue pursuant to SEC Rule of Practice 600 and 31 U.S.C. § 3717. + + 7 + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Respondent Chang as a Respondent in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Antonia Chion, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + + G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil + + 8 +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a debt +for the violation by Respondent of the federal securities laws or any regulation or order issued +under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. +§ 523(a)(19). + + By the Commission. + + + Vanessa A. Countryman + Secretary + + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4062.txt b/raw/aaer/2019/AAER-4062.txt new file mode 100644 index 0000000000000000000000000000000000000000..000ad37773d52515f18a32ace17149a59100c3af --- /dev/null +++ b/raw/aaer/2019/AAER-4062.txt @@ -0,0 +1,82 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86564 / August 5, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4062 / August 5, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19307 +______________________________ +: +In the Matter of : + : ORDER OF SUSPENSION PURSUANT +NANDU THONDAVADI, : TO RULE 102(e)(2) OF THE +: COMMISSION’S RULES OF PRACTICE +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Nandu Thondavadi (“Thondavadi”) pursuant to Rule 102(e)(2) of the +Commission’s Rules of Practice [17 C.F.R. 201.102(e)(2)].1 + + II. + +The Commission finds that: + +1. Thondavadi was the Chief Executive Officer of Quadrant 4 System Corp., an +Illinois corporation headquartered in Schaumburg, Illinois. At the time of Thondavadi’s +misconduct relevant to his guilty plea below, QFOR did not have any class of securities +registered with the Commission, but was a reporting company pursuant to Section 15(d) of the +Securities Exchange Act of 1934. + +2. On November 28, 2018, Thondavadi pleaded guilty to wire fraud in U.S. v. Nandu +Thondavadi and Dhru Desai, 16-cr-772, in the United States District Court for the Northern +District of Illinois. ECF No. 93. According to Thondavadi’s plea agreement, Thondavadi and +others “knowingly devised, intended to devise and participated in a scheme to defraud Quadrant + +1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or pr acticing before the +Commission.” + + + +2 + +4 System Corporation (‘QFOR’) and QFOR’s shareholders, and to obtain money and property by +means of materially false and fraudulent pretenses, representations, and promises, and by +concealment of material facts. ECF No. 94 at 2. + +3. On June 6, 2019, Thondavadi was sentenced to 60 months in prison and $2.916 +million in restitution. ECF No. 122 at 2, 7. + +III. + +In view of the foregoing, the Commission finds that Thondavadi has been convicted of a +felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + +Accordingly, it is ORDERED, that Nandu Thondavadi is forthwith suspended from +appearing or practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s +Rules of Practice. + + + +By the Commission. + + + +Vanessa A. Countryman +Secretary + + + + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4063.txt b/raw/aaer/2019/AAER-4063.txt new file mode 100644 index 0000000000000000000000000000000000000000..cdd6189541f2e2f3b824152d5c11840b8e9ec0e2 --- /dev/null +++ b/raw/aaer/2019/AAER-4063.txt @@ -0,0 +1,111 @@ + + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86594 / August 7, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4063 / August 7, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19322 + + + +In the Matter of + +THOMAS W. AVENT, JR., +CPA, ESQ. + +Respondent. + + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS +PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Thomas +W. Avent, Jr., CPA, Esq. (“Respondent” or “Avent”) pursuant to Rule 102(e)(3)(i) of the +Commission’s Rules of Practice.1 + +II. + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . attorney, accountant. . . +who has been by name . . . permanently enjoined by any court of competent jurisdiction, by +reason of his or her misconduct in an action brought by the Commission, from violating or aiding +and abetting the violation of any provision of the Federal securities laws or of the rules and +regulations thereunder. + 2 + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, e xcept as to the Commission’s jurisdiction over him and the subject matter of these +proceedings and the findings contained in paragraph III.2 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Avent was a partner at KPMG between 1999 and 2016, and a partner at Rogers & +Wells from 1994 to 1999. Avent is a licensed certified public accountant in Mississippi and a +member of the Mississippi bar. Avent, age 67, is a resident of Oxford, Mississippi. + +2. On July 7, 2016, the Commission filed a complaint against Avent in Securities and +Exchange Commission v. Thomas W. Avent, Jr., et al., 1:16-cv-02459-WMR in the United States +District Court for the Northern District of Georgia. On August 2, 2019, the court entered an order +permanently enjoining Avent 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. The judgment also +orders Avent to pay a civil penalty of $125,000. + +3. The Commission’s complaint alleged, among other things, that, in connection with +the purchase or sale of securities, Avent misappropriated material, nonpublic information from +KPMG about three potential acquisitions of publicly traded companies while performing tax due +diligence work for three KPMG clients between 2011 and 2012. Avent tipped this information to +his registered representative at the time. Avent received a personal benefit from the registered +representative in exchange for sharing the material, nonpublic information. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondent Avent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + + + + + + 3 +Respondent Avent is suspended from appearing or practicing before the Commission as an +attorney or accountant. + +By the Commission. + + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4064.txt b/raw/aaer/2019/AAER-4064.txt new file mode 100644 index 0000000000000000000000000000000000000000..31f6a83a32cb236299feee338855b8b6a0a48c53 --- /dev/null +++ b/raw/aaer/2019/AAER-4064.txt @@ -0,0 +1,955 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86720 / August 21, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4064 + +ADMINISTRATIVE PROCEEDING +File No. 3-19368 + + +In the Matter of + +MICHAEL FILKOSKI, CPA, +and +SCOTT MAGNUSON, CPA, + +Respondents. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Michael +Filkoski and Scott Magnuson (collectively “Respondents.”), pursuant to Sections 4C1 and 21C of +the Securities Exchange Act of 1934 (“Exchange Act”) and Rules 102(e)(1)(ii) and (iii) of the +Commission’s Rules of Practice. 2 + +1 Section 4C provides, in pertinent part, that: +The Commission may censure any person, or deny, temporarily or permanently, to any person the privilege +of appearing or practicing before the Commission in any way, if that person is found … (1) not to possess +the requisite qualifications to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or willfully aided and +abetted the violation of any provision of the federal securities laws or the rules and regulations issued +thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +The Commission may censure a person or deny, temporarily or permanently, the privilege of appearin g or +practicing before it in any way to any person who is found … to have engaged in unethical or improper +professional conduct. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + + +2 +II + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them, and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondents consent +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Exchange Act Sections 4C and 21C and Rule 102(e) of the Commission’s Rules of +Practice, Making Findings and Imposing Remedial Sanctions and a Cease-And-Desist Order +(“Order”), as set forth below. + +III + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: + +A. SUMMARY + +1. Michael Filkoski and Scott Magnuson, two senior audit partners employed by GHP +Horwath P.C. (“GHP”), an independent audit firm, engaged in improper professional conduct, +within the meaning of Exchange Act Section 4C and Rule 102(e) of the Commission’s Rules of +Practice, during audits of Agria Corporation (“Agria”). In performing the audits of Agria’s 2012 +and 2013 annual financial statements, Filkoski and Magnuson deviated from standards of the +Public Company Accounting Oversight Board (“PCAOB”) and ignored red flags indicating that +Agria’s financial statements and public filings contained material misstatements. Filkoski served +as the engagement partner on the 2012 and 2013 audits, and Magnuson served as the engagement +quality review partner. + +2. Filkoski and Magnuson also willfully aided and abetted and caused GHP to violate +Rule 2-02(b) of Regulation S-X. In connection with the 2012 and 2013 audits, GHP issued audit +reports in which it represented that GHP had conducted the audits in accordance with the standards +of the PCAOB, and further represented that, based on its opinion, Agria’s financial statements +presented fairly, in all material respects, the company’s financial condition and results of its +operations in accordance with Generally Accepted Accounting Principles (“GAAP”). Filkoski and +Magnuson each approved the issuance of GHP’s audit reports that contained unqualified opinions +when they knew or should have known that GHP’s representations were false because GHP’s +audits were not performed in accordance with PCAOB standards. + +The Commission may censure a person or deny, temporarily or permanently, the privilege of appearing or +practicing before it in any way to any person who is found … to have willfully violated, or willfully aided +and abetted the violation of any provision of the federal securities laws or the rules and regulations +thereunder. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not binding on any other +person or entity in this or any other proceeding. + +3 + +B. RESPONDENTS + +3. Michael Filkoski, CPA, age 59, of Denver, Colorado, is a Certified Public +Accountant who, during the relevant period, was licensed to practice in Colorado, California and +Indiana. Filkoski served as the engagement partner for GHP’s audits of Agria’s financial +statements for fiscal years 2010 through 2013. + +4. Scott Magnuson, CPA, age 56, of Denver, Colorado, is a Certified Public +Accountant who, during the relevant period, was licensed to practice in Colorado, Nevada, +California, New York, Tennessee, Florida and Indiana. Magnuson served as the engagement +quality review partner for GHP’s audits of Agria’s financial statements for fiscal years 2010 +through 2013. + +C. RELATED ENTITIES + +5. GHP was a public accounting firm head-quartered in Denver, Colorado. GHP was +formed in November 1990 and operated until January 1, 2017, when GHP’s personnel and +operations were acquired by another public accounting firm. GHP was registered with the PCAOB +through August 29, 2017 and was dissolved as a standalone entity on April 25, 2018. + +6. Agria is a Cayman Islands company engaged in the agricultural business, with +operations in the People’s Republic of China, New Zealand, and Australia. Agria’s corporate +headquarters during the relevant period was in Hong Kong. Agria is a foreign private issuer whose +ordinary shares were registered with the Commission pursuant to Exchange Act Section 12(b). +Agria’s American Depository Shares (“ADSs”), each representing two ordinary shares, traded on +the New York Stock Exchange under the symbol “GRO.” The NYSE suspended trading in Agria +ADSs on November 3, 2016 and the ADSs were delisted on January 2, 2017. + +7. Taiyuan Primalights III Modernized Agricultural Development Co., Ltd. +(“P3A”) was a limited liability company established in China with three primary product lines: +corn seed, sheep breeding, and seedlings. Prior to its divestiture in July 2010, P3A served as +Agria’s primary operating entity in China, and P3A’s financial results were recorded in Agria’s +consolidated financial statements. + +D. FACTS + +i. Background + +8. GHP was engaged by Agria as its independent auditor in late 2010 to conduct an +audit of Agria’s fiscal year 2010 consolidated financial statements, which were prepared on the +basis of GAAP. + + +4 +9. As the engagement partner, Filkoski had overall responsibility for the conduct of +the audits, including supervision of team members and compliance with PCAOB standards.4 As +the engagement quality review partner, Magnuson was required to evaluate the significant +judgments and conclusions made by the audit team and to evaluate whether, based on the +engagement documentation he reviewed, the engagement team responded appropriately to +significant risks and whether the documentation supported the audit team’s conclusions. + +10. The GHP audit team understood that Agria’s management expected the 2010 +divestiture of P3A to have “significant implications” on the auditor’s approach to the audit. The +divestiture resulted in Agria discontinuing all of its sheep-breeding operations, leaving it to focus +on its seed business in China. The divestiture involved a related-party exchange: Agria +transferred its 100% ownership interest in P3A to P3A’s president, and in return P3A’s president +transferred his ownership of 11.5% of Agria’s outstanding shares. As part of the transaction, +Agria also received land use rights from P3A relating to 13,500 acres of leased agricultural +property in China. + +a. Agria’s Fraudulent Accounting + +11. From the time Agria acquired the land use rights, it was clear to Agria’s +management that there were serious questions as to their valuation. The nine parcels of land, +covering 13,500 acres, were located in a remote area of Shanxi Province, far from Agria’s primary +bases of operations in Beijing and Shenzhen. The land itself was of poor soil quality, in an area +with little natural rainfall, serious water shortages, and no infrastructure for irrigation. Although +P3A had in the past used the land for sheep-breeding, Agria was no longer engaged in that +business. Agria was otherwise unable to use the lands for any revenue generating purposes. Nor +was Agria able to develop a business plan for the lands that would generate future cash flows. In +addition, legal defects precluded Agria from selling or subleasing the properties. Agria’s senior +management had been made aware of these defects in a legal opinion by Agria’s outside legal +counsel in July 2010, prior to the divestiture. + +12. The changes in use of the lands and the legal defects constituted impairment +indicators that required Agria to perform an impairment analysis to determine whether it would be +able to recover the carrying value of the land use rights. For the period 2010 through 2012, Agria’s +senior financial officers failed to perform the analysis and to impair the carrying value of the land +use rights. + +13. In early 2013, Agria performed an impairment analysis and wrote off the full $57.3 +million carrying value of the land use rights. The impairment decision was based on facts that +were known or readily knowable in 2010: Agria was unable to use the land in an economically +viable manner, and the legal defects precluded Agria from realizing any salvage value through +resale. Because the facts giving rise to the impairment had existed since 2010, Agria’s decision +to record the impairment in 2013 rather than in 2010 was improper. + + +4 Auditing standards referenced in this Order relate to PCAOB standards in effect when the audit was performed. + +5 +14. Agria’s delay in impairing the carrying value of the land use rights and its +subsequent failure to restate its 2010-2012 financial statements allowed it to hide the impact of +the impairment on its 2010 balance sheet and income statement and on its 2011 and 2012 balance +sheets. The prior period misstatements were material to Agria’s financial statements. + +b. The 2010 Audit + +15. As part of their audit planning, the GHP audit team identified the valuation of the +land use rights as a significant issue and risk. The team identified “land use rights impairment +assessment” as a “significant audit and accounting consideration.” Additionally, in considering +potential fraud risks, the audit team noted the potential for the overvaluation of the land use rights +as a scenario with high likelihood, high significance, and high risk level. In order to address this +risk, the audit team recognized the need to “[i]ndependently assess management’s valuation” of the +asset. Both Filkoski and Magnuson participated in the audit planning and signed off on the +planned audit procedures. + +16. The auditors were aware that Agria had been unable to use the lands for any +economically viable revenue-generating purpose, even one year after the acquisition. In addition, +the auditors were aware that Agria was unable to resell or sublet the land use rights because it had +been unable either to perfect the legal defects in the land titles or to obtain written consent of the +lessors to the lease transfer agreements. These developments constituted significant adverse +changes indicating that the carrying value of the land use rights might not be recoverable. + +17. The GAAP guidance addressing impairment testing is set forth in Accounting +Standards Codification 360-10 (“ASC 360-10”), which provides that a long-lived asset shall be +tested for impairment whenever significant adverse changes in circumstances indicate that its +carrying value may not be recoverable. (ASC 360-10-35-21). The carrying value of an asset is +considered not recoverable if it exceeds the undiscounted cash flows expected to result from the +asset’s use and eventual disposition. (ASC 360-10-35-17). + +18. ASC 360-10-35-21 provides examples of impairment indicators, including: + a significant adverse change in the extent or manner in which a long-lived +asset is being used or in its physical condition; + a significant adverse change in legal factors or in the business climate that +could affect the value of a long-lived asset, indicating an adverse action or +assessment by a regulator. +(ASC 360-10-35-21b and c). + +19. Given the existence of two significant adverse changes, the controlling GAAP +guidance required Agria to estimate the future cash flows “directly associated with and … +expected to arise as a direct result of the use and eventual disposition of the asset” to determine +whether they exceeded the carrying amounts of the land use rights, and if not, how much the +carrying amounts should be impaired. (ASC 360-10-35-29). GHP’s audit manual checklist advised +the auditors to determine whether the company had performed such a cash flow analysis. + + +6 +20. In Agria’s case, the auditors knew that the company was unable to develop cash +flow estimates. The company’s senior financial management told the auditors that, not only were +the land use rights not generating cash flows, but Agria was unable to develop cash flow estimates. +Further, in late June 2011 Agria’s then-CFO confirmed to the audit team that the company had not +yet been able to develop a feasible business plan for future economic use of the leased lands. +21. The audit team was also warned that the company would not be able to realize cash +flow from selling or subleasing the land use rights to third parties. Having received a copy of the +written opinion issued by Agria’s outside legal counsel identifying legal defects in both the legal +titles obtained by P3A and the lease transfer agreements between P3A and Agria, the audit team +sought written confirmation from counsel that Agria could “legally sublease its rights to the leased +land to a third party.” The audit team was made aware that the legal counsel refused to sign such a +confirmation. + +22. The GHP audit team, with Filkoski and Magnuson’s knowledge and approval, +failed to perform audit procedures to determine whether and how Agria had assessed the potential +impairment of the land use rights. Instead, Filkoski and Magnuson simply accepted management’s +representation that the company intended to perform future testing of the leased lands and that +management believed the land use rights would be economically viable in the future. + +23. GHP and Filkoski issued and Magnuson concurred in the issuance of the audit +report that contained an unqualified audit opinion regarding Agria’s fiscal year 2010 financial +statements, including Agria’s representation that “there was no impairment identified as of +December 31, 2010.” + +ii. The Failure to Audit the Impairment of Land Use Rights In the 2012 Audit + +24. Following a change in its fiscal year, Agria on December 16, 2011, filed a Form +20-F Transition Report containing financial statements for the six months ended June 30, 2011. +On October 10, 2012, Agria filed its 2012 Form 20-F with audited financial statements covering +the year ended June 30, 2012 and the six months ended June 30, 2011. + +25. The impairment indicators that required an assessment in connection with the 2010 +financial statements continued to exist in 2011 and 2012. Agria was still unable to use the land in a +commercially viable manner, was still unable to prepare any cash flow estimates based on future +use of the lands, and remained unable to realize any salvage value through resale. Nevertheless, +Agria failed to assess the land use rights for possible impairment for both its 2011 and 2012 +financial statements and continued to record the amortized carrying values for the land use rights in +its financial statements for both reporting periods. + +26. GHP audit planning work papers identified land use rights as a “Key area of +focus.” The audit team conveyed a similar message to the audit committee: the audit committee +meeting minutes on April 6, 2012 identified “P3A clean up” and “Land use rights” as areas that +“GHP would focus on.” Both Filkoski and Magnuson participated in the audit planning +discussions for this period. + + +7 +27. The audit planning documents identified the land use rights account as “significant +due to account balance, complexity of accounting method and possible misstatement due to +impairment and improper amortization.” The team viewed “the exposure to losses” based on “the +possibility of impairment issues and valuation issues” as “high.” + +28. Notwithstanding its recognition of the need to focus on the land use rights, the +audit team engaged in almost no audit procedures to assess the risk of an improper valuation. +Instead, the audit team simply recalculated the amortization of the land use rights’ carrying value +and made “a management inquiry with regard to the impairment analysis.” The auditors, led by +Filkoski, relied on management’s representation that they were still testing how to use the land. + +29. As he had done with the 2010 audit, Magnuson prepared a “Report on Audit +Engagement Quality Reviewer,” which checked off “Impairment of long-lived assets” as a +“selected key audit area[].” + +30. As they had done the prior period, GHP and Filkoski issued and Magnuson +approved the issuance of the audit report that contained an unqualified opinion regarding Agria’s +financial statements for fiscal year 2012. + +iii. Agria Improperly Impaired the Land Use Rights in 2013 Rather than +Restating its Financial Statements for 2010 through 2012. + +31. On March 13, 2013, Agria filed a Form 6-K reporting its financial results for the +six months ended December 31, 2012. The company reported that it had recorded a full +impairment of the carrying value of the land use rights (US$57.3 million). In support of its +decision to fully impair the land use rights, the company had prepared an agricultural report +purporting to summarize the results of a multi-stage land testing program. Agria also prepared a +“white paper” entitled “Proposal of provision of impairment of Land Use Rights” and obtained a +valuation report from an independent valuation specialist. + +32. Agria based its decision to take a full impairment on two factors that were known +to exist at the time the company acquired the rights to the land: (i) The leased lands had no +expected future economic viability, primarily due to the poor soil quality, the lack of rainfall and +irrigation infrastructure, and the cost of fertilizer; and (ii) as determined by an independent +valuation specialist, the legal defects that Agria’s counsel had identified in 2010 “severely +affected” the land values and prevented the company from reselling the land use rights. + +33. Agria’s fiscal year 2013 financial statements incorporated the impairment of the +land use rights in both its balance sheet and income statement. + +34. Under GAAP a company is required to restate its prior year financial statements +to correct prior period material errors resulting from, among other things, oversight or misuse of +facts that existed at the time the financial statements were prepared. ASC 250-10. + +35. As confirmed by the company’s internal documentation, Agria’s decision to write +off the full carrying value of the land use rights was based on facts known or readily knowable at + +8 +the time of the P3A divestiture. The prior period errors were material to Agria’s financial +statements in those earlier periods. Agria nevertheless failed to restate its prior financial +statements. + +iv. The Audit Team’s Limited Procedures Failed to Address Red Flags of +Prior Period Impairment + +36. In December 2012, when Filkoski first learned of management’s intention to +impair the carrying value of the land use rights, he raised with management a concern that the SEC +might review the impairment’s timing. Filkoski advised Agria’s CFO to “fully document” the +basis for the impairment decision. Filkoski also cautioned that “[c]onsultations with specialists and +outside appraisals are often items that third parties (such as the SEC) may inquire about after the +fact.” + +37. On December 28, 2012, in a telephone conference with Agria’s management, +Filkoski repeated his warning that the SEC might examine the timing of the impairment. He urged +management to consider alternative uses for the leased lands in order to determine the recoverable +amount and noted that the impairment loss amount should be determined by valuation. + +38. Between January and March, 2013, the audit team conducted limited procedures +related to the company’s decision to impair the carrying values of the land use rights in the six +month period ending December 31, 2012, including review of both the white paper and the 2013 +valuation report. + +39. The audit team, however, failed to address red flags in the company’s +documentation indicating that the impairment indicators had existed in prior periods. Specifically, +the white paper revealed that the land use rights had no economic viability due to soil and +weather conditions that predated the company’s testing; and both the white paper and valuation +report recorded that the land use rights had no salvage value because the legal defects identified +in July 2010 prevented the company from selling to third parties. + +40. Instead of advising management to address the red flags indicating that knowledge +of the impairment was known or knowable in prior periods, Filkoski provided Agria’s management +with comments on drafts of the white paper and suggested edits to a draft of Agria’s press release +announcing the impairment that changed the reported basis for the impairment decision, removed +or downplayed references to factors that had existed in earlier periods, and emphasized instead the +completion of testing in late 2012. + +41. GHP advised the audit committee in January 2013 that it was “in agreement with +[the] audit committee’s recommendation” to take the impairment in 2013. In March 2013, GHP +advised the committee that it “concurred with the conclusion of impairment provision for the P3A +land use right.” + +v. The Failure to Audit the Timing of the Land Use Rights Impairment in +the 2013 Audit + + +9 +42. Filkoski and the GHP audit team recognized that the company could not +appropriately impair the land use rights in 2013 unless the impairment had been based on new +information, rather than on information known to management in prior periods. The audit team +identified this risk in its audit planning but failed to perform audit procedures to address the risk or +to evaluate the evidence it obtained. + +43. In its audit planning and communications with the audit committee, the audit team +identified the impairment of the carrying value of the land use rights as a “significant audit and +accounting consideration.” Filkoski and Magnuson had previously reviewed the company’s white +paper and the 2013 valuation report and both participated in the audit planning sessions. + +44. A risk report prepared by the audit team in May/June 2013 identified the +possibility that the impairment could have been identified in prior periods. This was reported as a +“significant risk” with a resulting “high” risk of material misstatement. The risk report advised the +audit team to “obtain evidence surrounding timeline of events which led to the decision to impair +the assets and review for any indications that the information was available or known in prior +periods.” Filkoski signed off on the risk report. + +45. The audit team performed essentially no audit procedures regarding the timing of +Agria’s total write-off of the carrying value of the land use rights. The team did not prepare a +timeline of events and did not analyze the events to determine whether the basis for the impairment +had been available to management or known to exist in earlier periods. Instead, the audit team +merely “updated” the status of its earlier limited procedures, inquiring whether Agria’s +management had changed its intended use of the land and whether the land was “still abandoned +without any use, sublease or subsequent sale.” + +46. Moreover, in advising the audit committee of the auditor’s concurrence with +Agria’s full impairment of land use rights, Filkoski and the audit team misrepresented to the audit +committee that they had “tested the assumptions utilized on the valuation report.” In fact, no such +work had been performed. + +47. The audit team did not discuss with management whether the 2013 impairment +decision required a restatement of prior year financial statements. + +vi. Filkoski Failed to Audit Agria’s 2012 Financial Statements in Accordance with +Professional Standards. + +a. Filkoski Failed to Address Appropriately Risks of Material +Misstatements. + +48. Filkoski and the audit team identified risks of material misstatement relating to the +land use rights but failed to appropriately address those risks. + +49. The objective of PCAOB Standard AS No. 13, The Auditor’s Responses to the +Risks of Material Misstatement, is for the auditor to address the risks of material misstatements +through appropriate overall audit responses and audit procedures (AS 13.2). The auditor must + +10 +design and implement audit responses that address the risks of material misstatements that are +identified and assessed in accordance with Auditing Standard No. 12, Identifying and Assessing +Risks of Material Misstatements. (AS 13.3) + +50. PCAOB Standard AU § 333, Management Representations, states that +representations from a company’s management “are part of the evidential matter the independent +auditor obtains, but they are not a substitute for the application of those auditing procedures +necessary to afford a reasonable basis for an opinion regarding the financial statements under +audit.” (AU § 333.02). + +51. The audit team identified and assessed risks of material misstatements arising from +the land use rights account. The audit team listed the land use rights as a key area of focus and +identified it as “significant due to the account balance, complexity of accounting method and +possible misstatement due to impairment.” However, Filkoski and the audit team did not design +and implement audit procedures needed to assess those risks. Instead, the audit team relied on +management’s representations that the company was still testing how to use the land. + +52. Reliance on management’s representations is not an appropriate substitute for the +required audit procedures. The audit team made no inquiry, performed no procedures on, and had +no understanding of the progress of the testing or the company’s efforts to develop a feasible +business plan. The audit team performed no procedures to analyze the recoverability of the +carrying values of the land use rights. + +b. Filkoski Failed to Obtain Sufficient Appropriate Audit Evidence +or to Evaluate the Evidence Obtained. + +53. Filkoski and the audit team failed to obtain sufficient appropriate audit evidence +supporting Agria’s decision to maintain the carrying value of the land use rights and failed to +determine whether the audit evidence obtained supported the opinion expressed in the auditor’s +report. + +54. PCAOB Standard AS No. 15, Audit Evidence, requires the auditor to “plan and +perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable +basis for his or her opinion.” (AS 15.4). Appropriate audit evidence must be “both relevant and +reliable in providing support for the conclusions on which the auditor’s opinion is based.” +Relevance refers to the relationship of the audit evidence to the assertion or objective of the control +being tested; and reliability refers to the nature and source of the evidence and the circumstances +under which it is obtained. (AS 15.6-15.8). + +55. The objective of PCAOB Standard AS No. 14, Evaluating Audit Results, is for the +auditor to evaluate the results of the audit to determine whether the audit evidence obtained is +sufficient and appropriate to support the opinion to be expressed in the auditor’s report. (AS 14.2). +Factors that are relevant to the conclusion on whether sufficient appropriate audit evidence has +been obtained include the results of the audit procedures performed in the audit of the financial +statements and the appropriateness (i.e. the relevance and reliability) of the audit evidence +obtained. (AS No. 14.34). + +11 + +56. The audit evidence obtained did not support the opinion that the financial +statements were in conformity with GAAP and that the audit was performed in accordance with +PCAOB standards. Filkoski and the audit team did not obtain evidence regarding cash flow +estimates to support the conclusions that the carrying value of the land use rights was recoverable +and that no impairment was warranted. The actions that the audit team did take -- i.e., +recalculating the amortization of the carrying value and obtaining management’s representation +that land testing was ongoing -- were inadequate because they did not address the existence and +significance of the impairment indicators that had previously been presented to the audit team and +did not assess whether the carrying value was recoverable. + +57. Filkoski and the audit team also did not evaluate whether sufficient audit +procedures had been performed or whether the audit evidence obtained was sufficient and +appropriate to support the opinions in the audit report. + +c. Filkoski Failed to Document Sufficient Findings or Issues. + +58. Filkoski and the audit team did not properly document the team’s significant +findings or issues regarding possible misstatement due to the impairment of the land use rights. + +59. PCAOB Standard AS No. 3, Audit Documentation, requires auditors to document +the procedures performed, the evidence obtained, and the conclusions reached with respect to +relevant financial statement assertions. (AS 3.6). Audit documentation must contain, among +other things, information sufficient to allow an experienced auditor with no connection to the +work to understand the procedures performed, evidence obtained, and conclusions reached and to +determine who performed the work, the date the work was completed, the person who reviewed +the work, and the date of the review. (AS 3.6). + +60. Filkoski and the audit team did not document the procedures they performed, if +any, to address the issue of possible misstatement due to potential impairment, or the significant +findings and conclusions regarding this issue that were reached by the audit team. + + d. Filkoski Failed to Exercise Due Professional Care. + +61. Filkoski did not exercise due professional care in conducting the audit of Agria’s +financial statements. + +62. PCAOB Standard AU § 230, Due Professional Care in the Performance of Work, +requires auditors to exercise due professional care throughout the audit, including by “exercise of +professional skepticism.” Under this standard, “[p]rofessional skepticism is an attitude that +includes a questioning mind and a critical assessment of audit evidence,” (AU § 230.07) and one +that requires auditors to “consider the competency and sufficiency of the evidence.” (AU § 230.08) + +63. For the reasons outlined above, Filkoski failed to meet the standards of AU § 230. + + + +12 +vii. Filkoski Failed to Audit Agria’s 2013 Financial Statements in +Accordance with Professional Standards. + +a. Filkoski Failed to Design and Implement Appropriate Audit +Responses to Address the Risk of Material Misstatement. + +64. Filkoski and the audit team failed to design and implement audit responses that +address the risk of material misstatement related to the fiscal year 2013 impairment of the land use +rights. Even though the audit team’s risk report identified a high risk of a material misstatement +associated with the timing of the impairment and identified a proposed audit response, the audit +team prepared no timeline and performed no audit procedures to assess indications of impairment +in prior periods. As a result, Filkoski violated the PCAOB standards in AS 13. + +b. Filkoski Failed to Obtain Sufficient Appropriate Audit Evidence +or to Evaluate the Evidence Obtained. + +65. In its 2013 audit, the audit team performed essentially no audit procedures +regarding the timing of the company’s total impairment of the carrying value of the land use rights. +The audit team merely updated the status of their earlier limited review, verifying only whether +Agria had changed its intentions with regard to future use of the leased lands. Filkoski and the +audit team thereby failed to obtain sufficient appropriate audit evidence supporting the timing of +the impairment, in violation of the professional audit standards reflected in AS 15. + +66. Contrary to the requirements of AS 14, Filkoski and the audit team also failed to +evaluate whether the evidence that was obtained regarding the company’s decision to abandon the +land use rights constituted sufficient appropriate audit evidence to support the decision to impair in +2013, rather than earlier. Filkoski and the audit team made no assessment of whether Agria had +information available to it in earlier periods indicating that the land use rights should have been +impaired then. + +c. Filkoski Ignored Multiple Red Flags of Prior Impairment and +Failed to Exercise Due Professional Care. + +67. Agria’s white paper and the valuation report both contained multiple red flags that +the carrying value of the land use rights was impaired in prior periods, but Filkoski and the audit +team ignored those warnings. The white paper concluded that the poor test results were due to +conditions that existed from the time Agria had acquired the land use rights. The valuation report +concluded that the land use rights had no salvage value because of legal defects that had been +identified in 2010. + +68. Despite the risks identified in the May/June 2013 risk report and the red flags of +prior impairment, Filkoski failed to exercise due professional care, including professional +skepticism in gathering and evaluating audit evidence in accordance with the standards of AU 230. + + + +13 +d. Filkoski Failed to Document Sufficient Findings or Issues. + +69. As described above, Filkoski and the audit team did not properly document their +significant findings or issues regarding the appropriateness of the timing of the impairment. No +audit work papers reflected deliberation by the audit team of the issues considered, the evidence +obtained, and the conclusions reached. Filkoski thereby failed to conduct the audit in conformity +with the standards of AS 3. + +e. Filkoski Failed to Consider Whether a Restatement of Agria’s +2010 and 2012 Financial Information was Required. + +70. The white paper and the valuation report provided Filkoski and the audit team with +information existing at the time of the 2010 and 2012 audit reports that the land use rights were +potentially worthless. They made clear that the land had no economic viability due to pre-existing +topographical conditions at the time Agria acquired the rights. Similarly, the valuation report +provided reliable information that the rights had no salvage value due to the legal defects in +existence at the time of the 2010 audit. Further, the white paper and the agricultural report +provided additional information that by the time of the 2012 audit the first two stages of testing had +confirmed that the land had no economic viability. + +71. Despite this information, Filkoski and the audit team failed to consider whether a +restatement was required of the prior financial statements. No audit work papers reflected the audit +team’s consideration of the issue. + +viii. Magnuson Failed to Conduct Adequate Engagement Quality Reviews +Regarding GHP’s Audit of Agria’s 2012 and 2013 Financial Statements. + +72. PCAOB Standard AS No. 7, Engagement Quality Review, sets the requirements for +an engagement quality review and concurring approval of issuance for each audit engagement. +The role of the engagement quality reviewer is to evaluate the significant judgments made by the +engagement team and the related conclusions reached in forming an overall conclusion on the +engagement, and in preparing the engagement report, in order to determine whether to provide +concurring approval of issuance. (AS 7.2) + +73. The engagement quality reviewer should also evaluate the significant judgments +that relate to audit planning and the engagement team’s assessment of, and audit responses to, +significant risks identified by the engagement team, including fraud risks. (AS 7.10) The +engagement quality reviewer should evaluate whether the engagement documentation reviewed +supports the engagement team’s conclusions. (AS 7.11.) + +74. Further, the engagement quality reviewer may provide concurring approval of +issuance only if, after performing with due professional care the review required by this standard, +he or she is not aware of a significant engagement deficiency. (AS 7.12). Under PCAOB Standard +AU § 230 due professional care requires that an auditor exercise professional skepticism, which is +an attitude that includes a questioning mind and a critical assessment of the audit evidence. (AU § +230.07). + +14 + +a. Magnuson’s Engagement Quality Review Failures Regarding the +2012 Audit + +75. Magnuson was part of the audit team’s audit planning discussions for the fiscal +year 2012 audit. He was aware that the audit team had identified land use rights as a key area of +focus and gave consideration to the continued existence and valuation of the land use rights. +Magnuson was aware of red flags regarding the overvaluation of land use rights and non- +recoverability of the carrying values and the existence of legal defects affecting the company’s +ability to sell the land use rights. While Magnuson was aware that the audit team had significant +discussions with management, he was not aware of specific discussions. Magnuson did not know +what work had been done regarding valuation of the land use rights, and he was not aware of any +documentation regarding the company’s testing of the lands or the company’s development of a +business plan for their use. + +76. Magnuson violated the standards of AS 7 when he provided his concurring +approval of issuance of the audit report that contained an unqualified 2012 opinion despite the +audit team’s failure to obtain sufficient appropriate audit evidence assessing the potential +impairment and overvaluation of the land use rights. Magnuson failed to identify significant +engagement deficiencies and failed to make adequate inquiries. Magnuson thereby violated the +standards AU § 230 by failing to exercise due professional care, including exercising a sufficient +level of professional skepticism in the performance of his work. + +b. Magnuson’s Engagement Quality Review Failures Regarding the +2013 Audit + +77. Prior to the commencement of the full year audit, Magnuson received and reviewed +Agria’s white paper and the 2013 valuation report. Magnuson was therefore aware that Agria’s +decision to fully impair the carrying value of the land use rights in fiscal year 2013 was based +almost entirely on facts that the company and the auditors knew existed in 2010. + +78. In planning for the full year audit, the audit team and Magnuson recognized that the +decision to write off the entirety of the carrying value in 2013 was a “significant accounting and +auditing issue.” Magnuson had participated in the audit planning discussions with the audit team. + +79. Notwithstanding his knowledge of red flags of prior impairment, Magnuson did not +question the audit team’s failure to perform audit procedures to assess the timing of the +impairment. Magnuson knew, for example, that the legal defects identified in the 2013 valuation +report had first been identified no later than 2010. Yet Agria’s audit work papers revealed no +evidence that management or the audit team had assessed the significance of these facts on the +timing of the impairment. + +80. Magnuson provided his concurring approval of issuance of the 2013 audit report +that contained an unqualified audit opinion despite the failure of the audit team to obtain sufficient +appropriate audit evidence assessing the timing of the impairment of the land use rights. As with +the 2012 audit, Magnuson failed to identify significant engagement deficiencies. Further, he failed + +15 +to evaluate whether the audit team’s documentation supported the conclusion regarding the timing +of the impairment. Magnuson thereby failed to exercise due professional care in the performance +of his work. + +ix. GHP’s Inaccurate Audit Reports + +81. Despite multiple departures from PCAOB standards, as described above, GHP, +through Filkoski, issued audit reports that contained unqualified opinions on Agria’s financial +statements. As the engagement quality review partner on the audits, Magnuson provided +concurring approval of the issuance of the 2012 and 2013 audit reports, without which GHP would +not have been able to grant permission to Agria to use GHP’s audit reports for its Forms 20-F. + +82. Filkoski and Magnuson knew that the GHP audit reports would be filed with the +Commission as part of Agria’s Forms 20-F. Those reports contained GHP’s opinion that Agria’s +financial statements presented fairly, in all material respects, the company’s financial position and +results of operations in accordance with GAAP, and GHP’s representation that its audits were +conducted in accordance with PCAOB standards. + +83. Filkoski and Magnuson knew or were reckless in not knowing that GHP’s audit +reports inaccurately stated that they had been made in accordance with PCAOB standards. + +E. VIOLATIONS + +84. As a result of the conduct described above, Filkoski and Magnuson each engaged +in improper professional conduct within the meaning of Exchange Act Section 4C(a)(2) and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice. Section 4C(a)(2) and Rule 102(e)(1)(ii) +provide, in pertinent part, that the Commission may censure or deny, temporarily or permanently, +the privilege of appearing or practicing before the Commission to any person who is found by the +Commission to have engaged in improper professional conduct. Exchange Act Section 4C(b) and +Rule 102(e)(1)(iv) define improper professional conduct with respect to persons licensed to +practice as accountants as (1) a single instance of highly unreasonable conduct in circumstances for +which heightened scrutiny is warranted; or (2) repeated instances of unreasonable conduct that +indicate a lack of competence. + +85. As a result of the conduct described above, Filkoski and Magnuson each willfully +aided and abetted the violation of Rule 2-02(b) of Regulation S-X, which requires an audit report +to accurately state whether the audit was made in accordance with generally accepted auditing +standards. The phrase “generally accepted auditing standards” refers to the standards issued by the +PCAOB. Sec. Act Rel. No. 33-8422. Section 4C(a)(3) and Rule 102(e)(1)(iii) provide that the +Commission may censure or deny, temporarily or permanently, the privilege of appearing or +practicing before the Commission to any person who has willfully violated, or willfully aided and +abetted the violation of, any provision of the Federal securities laws or the rules and regulations +thereunder. + + +16 + +F. FINDINGS + +86. Based on the foregoing, the Commission finds that Respondents Filkoski and +Magnuson engaged in improper professional conduct within the meaning of Exchange Act Section +4C(a)(2) and Rules 102(e)(1)(ii) of the Commission’s Rules of Practice. + +87. Based on the foregoing, the Commission finds that Respondents Filkoski and +Magnuson willfully aided and abetted and caused GHP’s violations of Rule 2-02(b) of Regulation +S-X. + +IV + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effectively immediately, that: + + Michael Filkoski + +A. Respondent Filkoski shall cease and desist from committing or causing any +violations or future violations of Rule 2-02(b) of Regulation S-X. + +B. Respondent Filkoski is denied the privilege of appearing or practicing before the +Commission as an accountant. + +C. After 3 years from the date of this order, Filkoski may request that the Commission +consider his reinstatement by submitting an application (attention: Office of the Chief Accountant) +to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Filkoski’s work in his +practice before the Commission as an accountant will be reviewed either by +the independent audit committee of the public company for which he works +or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating + +17 +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Filkoski, or the public accounting firm with which he is associated, +is registered with the Public Company Accounting Oversight +Board (“Board”) in accordance with the Sarbanes-Oxley Act of +2002, and such registration continues to be effective; + + (b) Filkoski, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did +not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that Filkoski will not receive appropriate supervision; + (c) Filkoski has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Filkoski acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +D. The Commission will consider an application by Filkoski to resume appearing or +practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Filkoski’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + +E. Respondent Filkoski shall, within sixty (60) days of the entry of this Order, pay a +civil money penalty in the amount of $20,000 to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. + + +18 +Scott Magnuson + +F. Respondent Magnuson shall cease and desist from committing or causing any +violations or future violations of Rule 2-02(b) of Regulation S-X. + +G. Respondent Magnuson is denied the privilege of appearing or practicing before the +Commission as an accountant. + +H. After 1 year from the date of this order, Magnuson may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Magnuson’s work in his +practice before the Commission as an accountant will be reviewed either by +the independent audit committee of the public company for which he works +or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Magnuson, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + + (b) Magnuson, or the registered public accounting firm with which he +is associated, has been inspected by the Board and that inspection +did not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that Magnuson will not receive appropriate supervision; + +19 + (c) Magnuson has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Magnuson acknowledges his responsibility, as long as he appears +or practices before the Commission as an independent accountant, +to comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +I. The Commission will consider an application by Magnuson to resume appearing or +practicing before the Commission provided that his state CPA license is current and +he has resolved all other disciplinary issues with the applicable state boards of +accountancy. However, if state licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters +referenced above, any other matters relating to Magnuson’s character, integrity, +professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered +on a facts and circumstances basis with due regard for protecting the integrity of the +Commission’s processes. + +J. Respondent Magnuson shall, within sixty (60) days of the entry of this Order, pay a +civil money penalty in the amount of $10,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject to +Exchange Act Section 21F(g)(3). If timely payment is not made, additional interest +shall accrue pursuant to 31 U.S.C. §3717. + +Money Payments + +K. Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + + +20 +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Filkoski and Magnuson as Respondents in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Charles E. Cain, +Chief, FCPA Unit, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + + Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated +as penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondents agree that in any Related Investor Action, they +shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of any award +of compensatory damages by the amount of any part of Respondents’ payment of a civil penalty in +this action ("Penalty Offset"). If the court in any Related Investor Action grants such a Penalty +Offset, Respondents agree that they shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission's counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +in this proceeding. For purposes of this paragraph, a "Related Investor Action" means a private +damages action brought against Respondent by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + +V + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4067.txt b/raw/aaer/2019/AAER-4067.txt new file mode 100644 index 0000000000000000000000000000000000000000..ab034492f314dfbcab37e75aca4405c60fab1c00 --- /dev/null +++ b/raw/aaer/2019/AAER-4067.txt @@ -0,0 +1,98 @@ + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86771 / August 27, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4067 / August 27, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19380 + +In the Matter of + +ALAN G. HEIDE, CPA, +Respondent. + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Alan G. +Heide (“Respondent” or “Heide”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of +Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, and the findings contained in Paragraph III.3 below, which are admitted, Respondent +consents to the entry of this Order Instituting Public Administrative Proceedings Pursuant to Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + + 1. Heide, age 61, is and has been a certified public accountant licensed to +practice in the State of Florida. He served as Chief Financial Officer, Controller, and/or Executive +Vice President of 1 Global Capital, LLC (“1 Global”) from 2013 until 2017. + + 2. 1 Global was, at all relevant times, a limited liability company formed in +Florida with its principal place of business in Hallandale Beach, Florida. 1 Global was a financial +company engaged in the business of advancing money to businesses. 1 Global was not registered +with the Commission in any capacity and had no publicly traded stock. + + 3. On August 19, 2019, a judgment was entered against Heide, permanently +enjoining him from future violations of Section 10(b) of the Securities Exchange Act of 1934 and +Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933, in the civil action entitled +Securities and Exchange Commission v. Alan G. Heide, Civil Action Number 19-cv-62047, in the +United States District Court for the Southern District of Florida. + + 4. The Commission’s complaint alleged, among other things, that Heide, at +the direction of the former Chairman and Chief Executive Officer of 1 Global, engaged in a +fraudulent scheme that resulted in 1 Global disseminating materially false and misleading +information to investors: (1) overstating the value of investors’ accounts and their rates of return +on investors’ monthly account statements; and (2) misrepresenting the role of an auditor in 1 +Global’s marketing materials and investor account statements. + 3 + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Heide’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + Heide is suspended from appearing or practicing before the Commission as an accountant. + + By the Commission. + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4068.txt b/raw/aaer/2019/AAER-4068.txt new file mode 100644 index 0000000000000000000000000000000000000000..3d5ece380d178bf9988642d659ec4386fcf04399 --- /dev/null +++ b/raw/aaer/2019/AAER-4068.txt @@ -0,0 +1,76 @@ + + +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86804 / August 29, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4068 / August 29, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19391 +______________________________ +: +In the Matter of : + : ORDER OF FORTHWITH SUSPENSION +PURSUANT TO RULE 102(e)(2) OF THE +ROBIN SMYTH, : COMMISSION’S RULES OF PRACTICE +: +Respondent. : +______________________________: + + + I. + +The Securities and Exchange Commission deems it appropriate to issue an order of +forthwith suspension of Robin Smyth pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice, 17 C.F.R. § 201.102(e)(2).1 + + II. + +The Commission finds that: + +1. Smyth was the chief financial officer of KIT Digital, Inc., a public company, from +2003 (beginning at KIT Digital’s predecessor, ROO Group) until mid-2012, with the exception +of a brief period from April to September 2009. In addition, during the relevant period, Smyth +also served as KIT Digital’s principal accounting officer (with the exception of the same brief +period). + +2. On April 18, 2019 a criminal judgment of conviction was entered against Smyth +in United States v. Smyth, et al, No. 15-CR-536 (PGG), in the United States District Court for the +Southern District of New York, finding him guilty of one count of conspiracy to commit + +1 Rule 102(e)(2) provides in pertinent part: “Any ... person who has been convicted of a felony or a +misdemeanor involving moral turpitude shall be forthwith suspended from appearing or practicing before the +Commission.” + + + +securities fraud, one count of securities fraud, and three counts of making false statements in +annual and quarterly reports filed with the Securities and Exchange Commission. + +3. As a result of this criminal judgment, Smyth was sentenced to time served and +ordered to pay a penalty of $100,000, with the determination of any restitution amount to be +made at a later date. + +III. + +In view of the foregoing, the Commission finds that Smyth has been convicted of a +felony within the meaning of Rule 102(e)(2) of the Commission’s Rules of Practice. + +Accordingly, it is ORDERED, that Smyth is forthwith suspended from appearing or +practicing before the Commission pursuant to Rule 102(e)(2) of the Commission’s Rules of +Practice. + + +By the Commission. + + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4070.txt b/raw/aaer/2019/AAER-4070.txt new file mode 100644 index 0000000000000000000000000000000000000000..d0c4adceab6ef91286daa646e3b5b19fd0ab4334 --- /dev/null +++ b/raw/aaer/2019/AAER-4070.txt @@ -0,0 +1,516 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10680 / September 5, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86889 / September 5, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4070 / September 5, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19422 + + +In the Matter of + +Daniel Khesin + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Daniel +Khesin (“Khesin” or “Respondent”) pursuant to Section 8A of the Securities Act of 1933 + 2 +(“Securities Act”), Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. 2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Cease-And-Desist Proceedings Pursuant to Section 8A of the +Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-And-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + 3 +Summary + +This matter involves multiple violations of the federal securities laws by certain former +members of DS Healthcare Group, Inc.’s (“DS Healthcare” or the “Company”) senior +management, including Daniel Khesin, who was also DS Healthcare’s chairman of the board and +largest shareholder. During the first three quarters of 2015, Khesin, among others, acted to +overstate DS Healthcare’s revenues. This consisted of recognizing fictitious revenue; +intentionally or severely recklessly overbilling a customer and crediting the customer in a later +quarter; and authorizing sales practices, such as shipping products at the end of quarters with no +reasonable expectation of payment at the time of shipment and when the customer was on an +accounts receivable hold, improper bill and hold sales, improper consignment sales, and issuing +DS Healthcare stock and discounts as incentives to place orders without disclosing the incentives +to the Company’s finance department so that they could be recorded in the Company’s books +and records. As a result, DS Healthcare’s reported financial statements in its Forms 10-Q for the +first three quarters of 2015, in its August 4, 2014 and June 2, 2015 Form S-3 Registration +Statements, and in its May 1, 2015 S-8 Registration Statement were materially false and +misleading. The Forms 10-Q for each of these periods contained false officer and Sarbanes- +Oxley certifications signed by Khesin. + + Khesin also made selective disclosures to certain persons associated with a broker or +dealer and to DS Healthcare shareholders relating to earnings, sales and revenue forecasts, and +information on pending and future acquisitions without the Company simultaneously disclosing +the same information to the public. When some of the above conduct was discovered in early +2016, DS Healthcare’s board of directors terminated Khesin’s employment and removed him +from the board. In reaction to those efforts, Khesin improperly solicited shareholders for voting +proxies or consents, and used those consents to regain control of the Company, firing senior +management and appointing new directors. Khesin also failed to file forms disclosing beneficial +ownership of and transactions in DS Healthcare securities held by a trust benefiting his son +where he served as the trustee. + +Respondent +1. Khesin is 39 and resides in Boca Raton, Florida. From at least 2009 to January +2016, Khesin served as DS Healthcare’s president, chief financial officer, and chairman of the +board, after which he continued to serve as DS Healthcare’s president and chairman of the board +until June 2017. Khesin also served as the Company’s chief executive officer from at least 2009 +through the third quarter of 2015. Khesin oversaw DS Healthcare’s hiring of a new chief +executive officer and new chief financial officer in October 2015 and January 2016, respectively, +both of whom held those positions until April 2016. Khesin again served as the Company’s +chief financial officer from April 2016 to September 2016, and chief executive officer from +April 2016 to June 2017. Khesin resigned his positions as president, chief executive officer, and +chairman of the board on June 2, 2017. + + 4 +Other Relevant Entities +2. DS Healthcare is a Florida corporation organized in January 2007 and +headquartered in Pompano Beach, Florida. The Company focuses on hair and personal care +products. DS Healthcare’s fiscal reporting is based on the calendar year. DS Healthcare +disclosed in its 2013 and 2014 annual reports that it had material weaknesses in its internal +control over financial reporting and warned that without developing or maintaining an effective +system of internal controls, it may not be able to accurately report its financial results or prevent +fraud. DS Healthcare’s common stock (“DSKX”) previously was registered pursuant to Section +12(b) of the Exchange Act and traded on the NASDAQ until December 23, 2016, when +NASDAQ delisted the Company. DS Healthcare filed a Form S-3 Registration Statement on +June 2, 2015 that went effective June 11, 2015 for the resale of securities previously issued to a +consultant. DS Healthcare also filed a Form S-3 Registration Statement that went effective +August 4, 2014 and a Form S-8 Registration Statement that went effective May 1, 2015. The +above Forms S-3 and S-8 Registration Statements incorporated by reference the Forms 10-Q at +issue. DS Healthcare terminated the registration of its securities with the Commission in 2018. + +Background + +3. DS Healthcare develops proprietary technologies and products for hair and +personal care needs. The Company operates through a network of retailers across North +America and international distributors. Throughout 2015, DS Healthcare experienced intensified +pressure to increase sales due to the declining price of its stock and the pursuit of possible +acquisitions, which were reliant, in part, on the value of its stock. This pressure led Khesin to +improperly recognize revenue from sales that violated the Company’s revenue recognition +policies and departed from the accounting principles generally accepted in the United States +(“GAAP”). + +4. During the relevant period, Khesin engaged in misconduct to increase DS +Healthcare’s reported revenues. This included: recognizing fictitious revenue; intentionally or +severely recklessly overbilling a customer and crediting the customer in a later quarter; and +authorizing sales practices, such as shipping products at the end of quarters with no reasonable +expectation of payment at the time of shipment and when the customer was on an accounts +receivable hold, improper bill and hold sales, improper consignment sales, and issuing DS +Healthcare stock and discounts as incentives to place orders without disclosing the incentives to +the Company’s finance department so that they could be recorded in the Company’s books and +records. DS Healthcare recognized the revenue associated with the above sales practices at the +time the products were shipped to the Company’s freight forwarder in violation of DS +Healthcare’s revenue recognition policies, which also departed from the requirements of GAAP. +Khesin signed officer and Sarbanes-Oxley certifications attesting to the accuracy and +completeness of the Company’s financial statements, which improperly included revenue +attributable to the above transactions and sales practices. + + 5 +DS Healthcare Recognized Fictitious Revenue + +5. In 2015, Khesin and another DS Healthcare officer directed DS Healthcare’s +Mexico subsidiary (“DS Mexico”) to recognize revenue for products that neither DS Mexico nor +DS Healthcare sold. Specifically, in the second quarter of 2015, Khesin directed DS Mexico to +record $96,000 of revenue for sales of micro-needling devices that were sold and distributed by a +separate company partially owned by DS Mexico’s president. Khesin gave this direction +because DS Healthcare needed the additional revenue to assist with a possible acquisition and to +help increase the price per share of the Company’s stock. Thereafter, with two weeks left in the +third quarter of 2015 and the Company behind in its revenue goal by more than $700,000, +Khesin directed DS Mexico to record $201,000 of revenue for the sale of additional micro- +needling devices. + +6. DS Healthcare’s recognition of revenue relating to the micro-needling products +constituted a departure from GAAP, as revenue recognition standards include, among other +criteria, that revenue may only be recognized if there is persuasive evidence of a sales +arrangement between DS Mexico or DS Healthcare and the ultimate purchaser of the products. +Here, not only was there no persuasive evidence of a sales arrangement at the time of the +transactions, but neither DS Healthcare nor DS Mexico owned or had possession of the micro- +needling product inventory; had an agreement to sell or distribute the micro-needling products; +or bore the risk of loss for the products; all of which would be required to recognize the revenue +under GAAP. + +DS Healthcare Intentionally or Severely Recklessly +Overbilled a Consignment Sale to a Customer in China + +7. At the end of the third quarter of 2015, DS Healthcare intentionally or severely +recklessly overbilled a customer in China in order to generate higher revenues for that quarter. +Specifically, in the last week of the third quarter of 2015, DS Healthcare entered three orders +totaling $201,708 for a new customer in China. DS Healthcare entered the orders at a high price, +rather than the correct total price of $44,796. And, the products ordered were to be paid for as +they were sold, i.e., on a consignment basis, based on an agreement the customer had with DS +Healthcare’s senior management. Khesin and another DS Healthcare officer approved the +pricing and terms. Khesin knew or was severely reckless in not knowing that consignment sales +were not permitted under DS Healthcare’s revenue recognition policies. Having received emails +on that subject by the Company’s finance department as early as 2011, Khesin knew DS +Healthcare could not recognize the associated revenue at the time the products were shipped +because the customer was not obligated to pay until the products were sold. Despite that +understanding, DS Healthcare recognized the revenue in the third quarter of 2015. And, Khesin +certified the Company’s financial statements, which included the entire, overbilled consignment +sale. In a later quarter, Khesin authorized the pricing to be changed to a lower amount and +issued a credit for the amount of the overcharge, i.e., $156,912. DS Healthcare departed from +GAAP by intentionally or severely recklessly overbilling the customer and issuing a credit for +the overcharged amount in a subsequent quarter, and by recognizing the revenue from the sale at +the time of shipment of the products rather than at the time the customer sold the products. + 6 + +DS Healthcare Improperly Deployed Other Sales Practices to Increase Revenue + +8. During the first three quarters of 2015, Khesin authorized or permitted: the +shipment of products at the end of quarters with no reasonable expectation of payment at the +time of shipment as required by GAAP and when the customer was on an accounts receivable +hold; improper bill and hold sales that did not pass the risk of ownership to the customer at the +time of shipment and which did not have a fixed delivery schedule as required by GAAP; and +improper consignment sales that recognized revenue at the time of shipment even though +collectability was not assured as the customer was not obligated to pay for the products until they +were ultimately sold as required by GAAP. Khesin also authorized the issuance of DS +Healthcare stock and discounts as incentives to specific customers in an effort to meet DS +Healthcare’s revenue projections and goals without accounting for those issuances and discounts +in the Company’s books and records. All but one of these customers were under a credit and/or +an accounts receivable hold, requiring advance payment to ensure collectability. DS Healthcare +recognized more than $600,000 in revenue from these transactions at the time of shipment even +though doing so was a departure from GAAP and contrary to the Company’s revenue recognition +policies. + +9. Khesin knew or was severely reckless in not knowing the above sales practices as +implemented did not comply with the Company’s revenue recognition policies, having received +emails and guidance from the finance department as far back as 2011 and 2012. As a result of +the improper recognition of the above revenue, DS Healthcare materially overstated its net +revenue, gross profit, and accounts receivable in the first three quarters of 2015. DS Healthcare +also materially overstated its operating income and understated its net loss in the second quarter +of 2015, and understated its operating and net losses in the first and third quarters of 2015. DS +Healthcare also materially misrepresented the same metrics when it incorporated by reference its +first through third quarter 2015 financial statements in its August 14, 2014 and June 2, 2015 +Form S-3 Registration Statements, and in its May 1, 2015 Form S-8 Registration Statement. + +10. On March 23, 2016, following the initiation of an independent investigation by a +law firm hired by the Company’s audit committee, DS Healthcare reported in a Form 8-K, +among other things, that its financial statements for the second and third quarters of 2015 should +no longer be relied upon. DS Healthcare’s stock fell approximately 35% on the news to close at +$.86 per share on March 24, 2016. DS Healthcare subsequently restated, among others, its +financial statements for the first three quarters of 2015, materially decreasing its quarterly net +revenues. This had the result of increasing its losses for these periods by 921%, 979%, and 43% +to $869,546, $103,102, and $819,436, respectively. As DS Healthcare’s president, chief +executive officer, chief financial officer, and chairman of the board, Khesin was one of the +individuals responsible for preparing, reviewing and commenting on the Company’s public +filings. Khesin also was responsible for signing officer and Sarbanes-Oxley certifications +relating to, among others, the accuracy of the financial statements and results of operations and +the lack of knowledge of fraud involving management or other employees with a significant role +in the Company. Based on his knowledge and role in the above transactions, Khesin knew or +was severely reckless in not knowing DS Healthcare’s reported financial statements were + 7 +materially inaccurate and not in compliance with GAAP, and that his certifications were false at +the time he signed them. Likewise, Khesin caused the falsification of DS Healthcare’s books +and records, and failed to devise and maintain a sufficient system of internal accounting controls. + +False Representations to DS Healthcare’s Auditor + +11. For each of the quarters that were restated, Khesin represented to the Company’s +auditor, among other things, that DS Healthcare’s financial statements were prepared and fairly +presented in conformity with GAAP; all financial records and related data were made available +to the auditor; and the Company had not received any communications, nor had knowledge of +any fraud, allegations of fraud, or suspected fraud. Based on his knowledge and role in the +above transactions, Khesin knew or was severely reckless in not knowing those representations +were false at the time he made them. + +Selective Disclosure of Material, Non-Public Information + +12. On multiple occasions during Khesin’s tenure, he selectively disclosed material, +non-public information relating to earnings, revenue and sales forecasts, and pending and future +acquisition plans to certain persons associated with a broker or dealer and to DS Healthcare +shareholders. For example, Khesin regularly communicated with certain investors in 2016 via +telephone and face-to-face meetings, providing forward-looking statements, and information +about pending and future acquisitions before they had taken place and before they were disclosed +to the public. During 2015 and 2016 Khesin also communicated Company earnings, revenue and +sales forecasts, and acquisition efforts to certain investors without contemporaneously having the +Company provide the same information to the public. Khesin did not obtain express agreements +from the above individuals to maintain the confidentiality of the information conveyed. Khesin +knew or was severely reckless in not knowing such communications were improper based on the +Company’s policies on disclosing material, non-public information to the public. DS Healthcare +did not simultaneously disclose the information to the broader market. + +Khesin Failed to Report DSKX Stock Transactions as Trustee of His Son’s Trust + +13. On December 29, 2014, Khesin created a trust and named himself the sole trustee +and his young son the beneficiary. From March 2015 to at least February 2016, Khesin, on +behalf of the trust, executed 29 transactions in DS Healthcare stock. Pursuant to the trust and the +brokerage records, Khesin was the only person authorized to place trades on behalf of the trust. +Despite being obligated to do so, Khesin did not file Forms 4 or 5 disclosing these transactions. + +Khesin’s Fight for Control of the Company +14. In March 2016 and based on some of the conduct described above, DS +Healthcare’s board of directors terminated Khesin’s employment and removed him from the +board of directors for cause. Khesin countered by taking steps to secure control of the Company. +Specifically, Khesin sent voting agreements to more than ten persons on March 28, 2016, in +order to get enough voting rights to give him majority control of the Company. The voting +agreements purported to transfer to Khesin all voting rights to the underlying shares for a six- + 8 +month period. Khesin did not send a proxy statement or the information required to be in a +proxy statement to the shareholders or file anything with the Commission prior to his solicitation +of the voting agreements. By March 29, 2016, Khesin had received enough voting agreements to +have voting power over 56% of DS Healthcare’s common stock. + +15. On March 31, 2016, Khesin filed the agreements with the Commission as exhibits +to a Schedule 13D and announced that he had acquired voting power to change the board and +management structure of the Company. Khesin filed a definitive proxy statement on Schedule +14A on April 4, 2016, in which he admitted he telephonically solicited proxy consents and sent +the voting agreements to the shareholders he contacted on March 28, 2016, and that he sent the +proxy statement to the shareholders on April 2, 2016. Khesin’s oral solicitations were materially +misleading and contained material omissions because he misrepresented why he had been fired +and did not explain, among other things, that the Company had initiated an independent +investigation relating to the transactions Khesin had been involved in. + +16. The proxy statement, delivered to the shareholders after Khesin obtained voting +control of their stock, identified the purpose of the proxy solicitation was to accomplish the +“transfer of voting authority through proxy . . . for the purpose of replacement of the three +current Board of Directors . . . and to bring about management changes. . . .” Khesin filed a +Form 8-K on April 6, 2016, announcing that on March 31, 2016 DS Healthcare shareholders +removed the three independent directors from DS Healthcare’s board of directors. On April 22, +2016, Khesin filed a Schedule 14f-1 reporting the change in control and the future appointment +of new directors to DS Healthcare’s board of directors stemming from Khesin’s use of the voting +agreements. Khesin’s solicitation and use of the voting agreements was improper because he +obtained the voting agreements without providing the shareholders with a proxy statement +complying with the requirements of Schedule 14A. + +Violations + +17. Securities Act Sections 17(a)(1) and 17(a)(3) and Exchange Act Section 10(b) and +Rule 10b-5 thereunder prohibit fraudulent conduct in the offer or sale of securities and in +connection with the purchase or sale of securities, respectively. + +18. Exchange Act Section 13(a) and Rule 13a-13 thereunder require that every issuer +of a security registered pursuant to Exchange Act Section 12 file with the Commission, among +other things, quarterly and other reports as the Commission may require. Rule 13a-14 under the +Exchange Act requires all periodic reports to include certifications personally signed by the +issuer’s principal executive officer and financial officers in the form specified in the applicable +requirements. + +19. Rule 12b-20 under the Exchange Act requires that, in addition to the information +expressly required to be included in a statement or report filed with the Commission, there shall +be added such further material information, if any, as may be necessary to make the required +statements, in light of the circumstances under which they are made not misleading. + + 9 +20. Exchange Act Section 13(b)(2)(A) requires reporting companies to make and +keep books, records and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + +21. Exchange Act Section 13(b)(2)(B) requires all reporting companies to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with GAAP. + +22. Exchange Act Section 13(b)(5) prohibits any person from knowingly +circumventing or knowingly failing to implement a system of internal accounting controls or +knowingly falsifying any book, record, or account described in Section 13(b)(2). + +23. Rule 13b2-1 under the Exchange Act prohibits any person from directly or +indirectly, falsifying or causing to be falsified, any book, record, or account subject to Exchange +Act Section 13(b)(2)(A). Rule 13b2-2 under the Exchange Act prohibits any officer or director +from directly or indirectly making or causing to be made a materially false or misleading +statement to an accountant in connection with any audit, review, or examination of the financial +statements of an issuer. + +24. Regulation FD requires, among other things, that whenever an issuer, or anyone +acting on its behalf, intentionally makes a selective disclosure of material, non-public +information about the issuer to certain specified persons, including analysts and investors, the +issuer is required to make a simultaneous public disclosure of that information. + +25. Exchange Act Section 14(a) and Rule 14a-3 thereunder prohibits any person from +soliciting a proxy without furnishing information specified by Schedule 14A, including financial +statements meeting the requirements of Regulation S-X, management’s discussion and analysis +of financial condition and results of operations, among other things. Rule 14a-9 under the +Exchange Act prohibits the use of proxy statements that are materially false or misleading. + +26. Exchange Act Section 16(a) and Rules 16a-2 and 16a-3 thereunder require direct +or indirect beneficial owners of more than ten percent of a class of securities registered under +Section 12 of the Exchange Act, and directors and officers to file reports of ownership and +changes of beneficial ownership with the Commission. Exchange Act Rule 16a-8 requires that if +a trustee subject to Section 16 has a pecuniary interest in any holding or transaction in the +issuer’s securities held by the trust, such holding or transaction is attributable to the trustee and +shall be reported by the trustee in the trustee’s individual capacity. + +Findings + +27. Based on the foregoing, the Commission finds that Khesin: (i) willfully violated +Securities Act Sections 17(a)(1) and 17(a)(3), Exchange Act Sections 10(b), 13(b)(5), 14(a), and +16(a) and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, 14a-9, 16a-3, and 16a-8 thereunder; and + 10 +(ii) willfully aided and abetted and caused DS Healthcare’s violations of Exchange Act Sections +13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20, 13a-13 thereunder, and Regulation FD. + +28. Based on the foregoing, the Commission finds that by willfully violating +Securities Act Sections 17(a)(1) and 17(a)(3), Exchange Act Sections 10(b), 13(b)(5), 14(a), and +16(a) and Rules 10b-5, 13a-14, 13b2-1, 13b2-2, 14a-3, 14a-9, 16a-3, and 16a-8 thereunder, and +willfully aiding and abetting DS Healthcare’s violations of Exchange Act Sections 13(a), +13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20, 13a-13 thereunder, and Regulation FD, Khesin +engaged in conduct subject to Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Khesin’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Khesin shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections +10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), 13(b)(5), 14(a), and 16(a) of the Exchange +Act and Rules 10b-5, 12b-20, 13a-13, 13a-14, 13b2-1, 13b2-2, 14a-3, 14a-9, 16a-3, +and 16a-8 thereunder, and Regulation FD. + +B. Khesin be, and hereby is, prohibited for eight (8) years from the date of the Order +from acting as an officer or director of any issuer that has a class of securities +registered pursuant to Section 12 of the Exchange Act or that is required to file +reports pursuant to Section 15(d) of the Exchange Act. + +C. Khesin is denied the privilege of appearing or practicing before the Commission +as an accountant. + +D. After eight (8) years from the date of this Order, Khesin may request that the +Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing and practicing before the +Commission as an accountant. + +E. Khesin shall within twenty-one (21) days of the entry of the Order, pay a civil +money penalty in the amount of $130,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject +to Exchange Act Section 21F(g)(3). Payment shall be made in four installments of +$32,500 each as follows: the first installment of $32,500 due within 21 days of +the date of the entry the Order; the second installment of $32,500 due within 120 +days of the entry of the Order; the third installment of $32,500 due within 240 +days of the entry of the Order; and the fourth and final installment of $32,500 due + 11 +within 360 days of the entry of the Order. Payments shall be applied first to post +order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making the +final payment set forth herein, Khesin shall contact the staff of the Commission +for the amount due. If Khesin fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all +outstanding payments under this Order, including post-order interest, minus any +payments made, shall become due and payable immediately at the discretion of +the staff of the Commission without further application to the Commission. + +F. Payment must be made in one of the following ways: + +(1) Khesin may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Khesin may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Khesin may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying Daniel Khesin as a Respondent in these proceedings, and the file +number of these proceedings; a copy of the cover letter and check or money order +must be sent to Eric R. Busto, Assistant Regional Director, Securities and +Exchange Commission, 801 Brickell Avenue, Suite 1800, Miami, FL 33131. + +G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees +that in any Related Investor Action, he shall not argue that he is entitled to, nor +shall he benefit by, offset or reduction of any award of compensatory damages by +the amount of any part of Respondent’s payment of a civil penalty in this action +(“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a +final order granting the Penalty Offset, notify the Commission’s counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil penalty and +shall not be deemed to change the amount of the civil penalty imposed in this + 12 +proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or +more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4071.txt b/raw/aaer/2019/AAER-4071.txt new file mode 100644 index 0000000000000000000000000000000000000000..12ad28061cc7482ce004894ebcad4d2606593039 --- /dev/null +++ b/raw/aaer/2019/AAER-4071.txt @@ -0,0 +1,437 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10681 / September 6, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86900 / September 6, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4071 / September 6, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19426 + + +In the Matter of + +Abner Silva + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Abner Silva +(“Silva” or “Respondent”) pursuant to Section 8A of the Securities Act of 1933 (“Securities Act”), +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + + 2 + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Cease-And-Desist Proceedings Pursuant to Section 8A of the +Securities Act of 1933, Sections 4C and 21C of the Securities Exchange Act of 1934, and Rule +102(e) of the Commission’s Rules of Practice, Making Findings, and Imposing Remedial +Sanctions and a Cease-And-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + +This matter involves multiple violations of the federal securities laws by certain former +members of DS Healthcare Group, Inc.’s (“DS Healthcare” or the “Company”) senior +management, including Abner Silva. During the first three quarters of 2015, Silva, among +others, acted to overstate DS Healthcare’s revenues. This consisted of recognizing fictitious +revenue; intentionally or severely recklessly overbilling a customer and crediting the customer in +a later quarter; and shipping products that were sold pursuant to sales practices that violated the +Company’s revenue recognition policies, such as shipping products at the end of quarters with no +reasonable expectation of payment at the time of shipment and when the customer was on an +accounts receivable hold, improper bill and hold sales, and improper consignment sales. As a +result, DS Healthcare’s reported financial statements in its Forms 10-Q for the first three quarters +of 2015, in its August 4, 2014 and June 2, 2015 Form S-3 Registration Statements, and in its +May 1, 2015 S-8 Registration Statement were materially false and misleading. + + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + 3 + Silva also made selective disclosures to certain persons associated with a broker or dealer +and to DS Healthcare shareholders relating to earnings information and pending acquisitions +without the Company simultaneously disclosing the same information to the public. When some +of the above conduct was discovered in early 2016, recently hired senior management terminated +Silva’s employment. + +Respondent + +1. Silva is 38 and resides in Miami, Florida. From at least March 2015 to January +2016, Silva served as DS Healthcare’s chief operating officer. He previously served as the +Company’s investor relations contact and chief information officer while employed as a +consultant from 2009 to early 2015. Silva was a registered representative from 2001 to 2011 at +various times with FSC Securities Corp., Perrott, Mather & Gilday, Inc., Gray Stone Financial, +Inc., and Mediterranean Securities Group, LLC and held Series 7 and 24 licenses. + +Other Relevant Entities +2. DS Healthcare is a Florida corporation organized in January 2007 and +headquartered in Pompano Beach, Florida. The Company focuses on hair and personal care +products. DS Healthcare’s fiscal reporting is based on the calendar year. DS Healthcare +disclosed in its 2013 and 2014 annual reports that it had material weaknesses in its internal +control over financial reporting and warned that without developing or maintaining an effective +system of internal controls, it may not be able to accurately report its financial results or prevent +fraud. DS Healthcare’s common stock (“DSKX”) previously was registered pursuant to Section +12(b) of the Exchange Act and traded on the NASDAQ until December 23, 2016, when +NASDAQ delisted DS Healthcare. DS Healthcare filed a Form S-3 Registration Statement on +June 2, 2015 that went effective June 11, 2015 for the resale of securities previously issued to a +consultant. DS Healthcare also filed a Form S-3 Registration Statement that went effective +August 4, 2014 and a Form S-8 Registration Statement that went effective May 1, 2015. The +above Forms S-3 and S-8 Registration Statements incorporated by reference the Forms 10-Q at +issue. DS Healthcare terminated the registration of its securities with the Commission in 2018. + +Background + +3. DS Healthcare develops proprietary technologies and products for hair and +personal care needs. The Company operates through a network of retailers across North +America and international distributors. Throughout 2015, DS Healthcare experienced intensified +pressure to increase sales due to the declining price of its stock and the pursuit of possible +acquisitions, which were reliant, in part, on the value of its stock. This pressure led Silva to +improperly recognize revenue from sales that violated the Company’s revenue recognition +policies and departed from the accounting principles generally accepted in the United States +(“GAAP”). + +4. During the relevant period, Silva engaged in misconduct to increase DS +Healthcare’s reported revenues. This included: recognizing fictitious revenue; intentionally +overbilling a customer and crediting the customer in a later quarter; and shipping products that + 4 +were sold pursuant to sales practices that violated the Company’s revenue recognition policies, +such as shipping products at the end of quarters with no reasonable expectation of payment at the +time of shipment and when the customer was on an accounts receivable hold, improper bill and +hold sales, and improper consignment sales. DS Healthcare recognized the revenue associated +from the above sales practices at the time the products were shipped to the Company’s freight +forwarder in violation of DS Healthcare’s revenue recognition policies, which also departed from +the requirements of GAAP. + +DS Healthcare Recognized Fictitious Revenue +5. In 2015, Silva and another DS Healthcare officer directed DS Healthcare’s +Mexico subsidiary (“DS Mexico”) to recognize revenue for products that neither DS Mexico nor +DS Healthcare sold. Specifically, in the second quarter of 2015, Silva directed DS Mexico to +record $96,000 of revenue for sales of micro-needling devices that were sold and distributed by a +separate company partially owned by DS Mexico’s president. Silva gave this direction because +DS Healthcare needed the additional revenue to assist with a possible acquisition and to help +increase the price per share of the Company’s stock. Thereafter, with two weeks left in the third +quarter of 2015 and the Company behind in its revenue goal by more than $700,000, Silva +directed DS Mexico to record $201,000 of revenue for the sale of additional micro-needling +devices. + +6. DS Healthcare’s recognition of revenue relating to the micro-needling products +constituted a departure from GAAP, as revenue recognition standards include, among other +criteria, that revenue may only be recognized if there is persuasive evidence of a sales +arrangement between DS Mexico or DS Healthcare and the ultimate purchaser of the products. +Here, not only was there no persuasive evidence of a sales arrangement at the time of the +transactions, but neither DS Healthcare nor DS Mexico owned or had possession of the micro- +needling product inventory; had an agreement to sell or distribute the micro-needling products; +or bore the risk of loss for the products; all of which would be required to recognize the revenue +under GAAP. + +DS Healthcare Intentionally or Severely Recklessly +Overbilled a Consignment Sale to a Customer in China + +7. At the end of the third quarter of 2015, DS Healthcare intentionally or severely +recklessly overcharged a customer in China in order to generate higher revenues for that quarter. +Specifically, in the last week of the third quarter of 2015, DS Healthcare entered three orders +totaling $201,708 for a new customer in China. DS Healthcare entered the orders at a high price +rather than the correct total price of $44,796 and did so at Silva’s direction. And, the products +ordered were to be paid for as they were sold, i.e., on a consignment basis, based on an +agreement the customer had with DS Healthcare’s senior management, including Silva. Silva +and another DS Healthcare officer approved the pricing and terms. Silva knew or was severely +reckless in not knowing that consignment sales were not permitted under DS Healthcare’s +revenue recognition policies. Having received emails on that subject by the Company’s finance +department as early as 2011, Silva knew DS Healthcare could not recognize the associated +revenue at the time the products were shipped because the customer was not obligated to pay + 5 +until the products were sold. Despite that understanding, Silva shipped the products, allowing +DS Healthcare to recognize the revenue for these sales in the third quarter of 2015. In a later +quarter, the Company issued a credit for the amount of the overcharge, i.e., $156,912. DS +Healthcare departed from GAAP by intentionally or severely recklessly overbilling the customer +and issuing a credit for the overcharged amount in a subsequent quarter, and by recognizing the +revenue from the sale at the time of shipment of the products rather than at the time the customer +sold the products. + +DS Healthcare Improperly Deployed Other Sales Practices to Increase Revenue + +8. During the first three quarters of 2015, Silva authorized: the shipment of products +at the end of quarters with no reasonable expectation of payment at the time of shipment as +required by GAAP and when the customer was on an accounts receivable hold; improper bill and +hold sales that did not pass the risk of ownership to the customer at the time of shipment and +which did not have a fixed delivery schedule as required by GAAP; and improper consignment +sales that recognized revenue at the time of shipment even though collectability was not assured +as the customer was not obligated to pay for the products until the products were ultimately sold +as required by GAAP. All but one of these customers were under a credit and/or an accounts +receivable hold, requiring advance payment to ensure collectability. DS Healthcare recognized +more than $600,000 in revenue from these transactions at the time of shipment even though +doing so was a departure from GAAP and contrary to the Company’s revenue recognition +policies. + +9. Silva knew or was severely reckless in not knowing the above sales practices as +implemented did not comply with the Company’s revenue recognition policies, having received +emails and guidance from the finance department as far back as 2011 and 2012. As a result of +the improper recognition of the above revenue, DS Healthcare materially overstated its net +revenue, gross profit, and accounts receivable in the first three quarters of 2015. DS Healthcare +also materially overstated its operating income and understated its net loss in the second quarter +of 2015, and understated its operating and net losses in the first and third quarters of 2015. DS +Healthcare also materially misrepresented the same metrics when it incorporated by reference its +first through third quarter 2015 financial statements in its August 4, 2014 and June 2, 2015 Form +S-3 Registration Statements, and in its May 1, 2015 Form S-8 Registration Statement. + +10. On March 23, 2016, following the initiation of an independent investigation by a +law firm hired by the Company’s audit committee, DS Healthcare reported in a Form 8-K, +among other things, that its financial statements for the second and third quarters of 2015 should +no longer be relied upon. DS Healthcare’s stock fell approximately 35% on the news to close at +$.86 per share on March 24, 2016. DS Healthcare subsequently restated, among others, its +financial statements for the first three quarters of 2015, materially decreasing its quarterly net +revenues. This had the result of increasing its losses for these periods by 921%, 979%, and 43% +to $869,546, $103,102, and $819,436, respectively. As DS Healthcare’s chief operating officer +during the periods in question, Silva was one of the individuals responsible for preparing, +reviewing and commenting on the Company’s public filings for the first three quarters of 2015. +Based on his knowledge and role in the above transactions, Silva knew or was severely reckless + 6 +in not knowing DS Healthcare’s reported financial statements were materially inaccurate and not +in compliance with GAAP. Likewise, Silva caused the falsification of DS Healthcare’s books +and records, and failed to devise and maintain a sufficient system of internal accounting controls. +Silva’s employment with DS Healthcare was terminated in early 2016, following the hiring of +new executive leadership at the Company who questioned some of the above conduct. + +False Representations to DS Healthcare’s Auditor + +11. Silva signed a management representation letter to DS Healthcare’s auditor in +relation to the Company’s third quarter 2015 Form 10-Q. Silva specifically represented, among +other things, that DS Healthcare’s financial statements were prepared and fairly represented in +conformity with GAAP; all financial records and related data were made available to the auditor; +and the Company had not received any communications, nor had knowledge of any fraud, +allegations of fraud, or suspected fraud. Based on his knowledge and role in the above +transactions, Silva knew or was severely reckless in not knowing those representations were false +at the time he made them. + +Selective Disclosure of Material, Non-Public Information + +12. On multiple occasions during Silva’s tenure, he selectively disclosed material, +non-public information relating to DS Healthcare’s earnings, revenue and sales forecasts, and +pending and future acquisition plans to certain persons associated with a broker or dealer and to +DS Healthcare shareholders. For example, on December 20, 2015 Silva provided a new and +significant DS Healthcare shareholder, among other things, the anticipated closing date of a +pending acquisition and the current and forecast financial projections and models for the +combined companies. Silva also shared material non-public information about the status of a +DS Healthcare acquisition with others in January and February of 2016. Silva did not obtain +express agreements from the individuals to maintain the confidentiality of the information +conveyed. Silva knew or was severely reckless in not knowing such communications were +improper based on the Company’s policies on disclosing material, non-public information to the +public. DS Healthcare did not contemporaneously disclose the same information to the broader +market. + +Violations + +13. Securities Act Sections 17(a)(1) and 17(a)(3) and Exchange Act Section 10(b) and +Rule 10b-5 thereunder prohibit fraudulent conduct in the offer or sale of securities and in +connection with the purchase or sale of securities, respectively. + +14. Exchange Act Section 13(a) and Rule 13a-13 thereunder require that every issuer +of a security registered pursuant to Exchange Act Section 12 file with the Commission, among +other things, quarterly and other reports as the Commission may require. + +15. Rule 12b-20 under the Exchange Act requires that, in addition to the information +expressly required to be included in a statement or report filed with the Commission, there shall + 7 +be added such further material information, if any, as may be necessary to make the required +statements, in light of the circumstances under which they are made not misleading. + +16. Exchange Act Section 13(b)(2)(A) requires reporting companies to make and +keep books, records and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + +17. Exchange Act Section 13(b)(2)(B) requires all reporting companies to devise and +maintain a system of internal accounting controls sufficient to provide reasonable assurances that +transactions are recorded as necessary to permit preparation of financial statements in accordance +with GAAP. + +18. Exchange Act Section 13(b)(5) prohibits any person from knowingly +circumventing or knowingly failing to implement a system of internal accounting controls or +knowingly falsifying any book, record, or account described in Section 13(b)(2). + +19. Rule 13b2-1 under the Exchange Act prohibits any person from directly or +indirectly, falsifying or causing to be falsified, any book, record, or account subject to Exchange +Act Section 13(b)(2)(A). Rule 13b2-2 under the Exchange Act prohibits any officer or director +from directly or indirectly making or causing to be made a materially false or misleading +statement to an accountant in connection with any audit, review, or examination of the financial +statements of an issuer. + +20. Regulation FD requires, among other things, that whenever an issuer, or anyone +acting on its behalf, intentionally makes a selective disclosure of material, non-public +information about the issuer to certain specified persons, including analysts and investors, the +issuer is required to make a simultaneous public disclosure of that information. + +Findings + +21. Based on the foregoing, the Commission finds that Silva: (i) willfully violated +Securities Act Sections 17(a)(1) and 17(a)(3), Exchange Act Sections 10(b) and 13(b)(5) and +Rules 10b-5, 13b2-1 and 13b2-2 thereunder; (ii) willfully aided and abetted and caused a DS +Healthcare principal’s violations of Securities Act Sections 17(a)(1) and 17(a)(3) and Exchange +Act Section 10(b) and Rule 10b-5 thereunder; and (iii) willfully aided and abetted and caused DS +Healthcare’s violations of Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 12b- +20, 13a-13 thereunder, and Regulation FD. + +22. Based on the foregoing, the Commission finds that by willfully violating +Securities Act Sections 17(a)(1) and 17(a)(3), Exchange Act Sections 10(b) and 13(b)(5) and +Rules 10b-5, 13b2-1 and 13b2-2 thereunder, willfully aiding and abetting a DS Healthcare +principal’s violations of Securities Act Sections 17(a)(1) and 17(a)(3) and Exchange Act Section +10(b) and Rule 10b-5 thereunder, and willfully aiding and abetting DS Healthcare’s violations of +Exchange Act Sections 13(a), 13(b)(2)(A), 13(b)(2)(B) and Rules 12b-20, 13a-13 thereunder, + 8 +and Regulation FD, Silva engaged in conduct subject to Section 4C(a)(3) of the Exchange Act +and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Silva’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Silva shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(1) and 17(a)(3) of the Securities Act and Sections +10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules +10b-5, 12b-20, 13a-13, 13b2-1, and 13b2-2 thereunder, and Regulation FD. + +B. Silva be, and hereby is, prohibited for five (5) years from the date of the Order from +acting as an officer or director of any issuer that has a class of securities registered +pursuant to Section 12 of the Exchange Act or that is required to file reports +pursuant to Section 15(d) of the Exchange Act. + +C. Silva is denied the privilege of appearing or practicing before the Commission as +an accountant. + +D. After five (5) years from the date of this Order, Silva may request that the +Commission consider his reinstatement by submitting an application (attention: +Office of the Chief Accountant) to resume appearing and practicing before the +Commission as an accountant. + +E. Silva shall within twenty-one (21) days of the entry of the Order, pay a civil +money penalty in the amount of $80,000 to the Securities and Exchange +Commission for transfer to the general fund of the United States Treasury, subject +to Exchange Act Section 21F(g)(3). Payment shall be made in four installments of +$20,000 each as follows: the first installment of $20,000 due within 21 days of +the date of the entry the Order; the second installment of $20,000 due within 120 +days of the entry of the Order; the third installment of $20,000 due within 240 +days of the entry of the Order; and the fourth and final installment of $20,000 due +within 360 days of the entry of the Order. Payments shall be applied first to post +order interest, which accrues pursuant to 31 U.S.C. 3717. Prior to making the +final payment set forth herein, Silva shall contact the staff of the Commission for +the amount due. If Silva fails to make any payment by the date agreed and/or in +the amount agreed according to the schedule set forth above, all outstanding +payments under this Order, including post-order interest, minus any payments +made, shall become due and payable immediately at the discretion of the staff of +the Commission without further application to the Commission. + + 9 +F. Payment must be made in one of the following ways: + +(1) Silva may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Silva may make direct payment from a bank account via Pay.gov through +the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Silva may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying Abner Silva as a Respondent in these proceedings, and the file number +of these proceedings; a copy of the cover letter and check or money order must be +sent to Eric R. Busto, Assistant Regional Director, Securities and Exchange +Commission, 801 Brickell Avenue, Suite 1800, Miami, FL 33131. + +G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondent agrees +that in any Related Investor Action, he shall not argue that he is entitled to, nor +shall he benefit by, offset or reduction of any award of compensatory damages by +the amount of any part of Respondent’s payment of a civil penalty in this action +(“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a +final order granting the Penalty Offset, notify the Commission’s counsel in this +action and pay the amount of the Penalty Offset to the Securities and Exchange +Commission. Such a payment shall not be deemed an additional civil penalty and +shall not be deemed to change the amount of the civil penalty imposed in this +proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or +more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by + 10 +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4072.txt b/raw/aaer/2019/AAER-4072.txt new file mode 100644 index 0000000000000000000000000000000000000000..49097e756d7bc77829a94b807151e782f6eae80a --- /dev/null +++ b/raw/aaer/2019/AAER-4072.txt @@ -0,0 +1,127 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86903 / September 9, 2019 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4072 / September 9, 2019 +ADMINISTRATIVE PROCEEDING +File No. 3-17651 + +In the Matter of +Adrian D. Beamish, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION AND AS AN +INDEPENDENT ACCOUNTANT + +On September 7, 2017, Adrian D. Beamish, CPA (“Beamish”) was denied the privilege +of appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against Beamish pursuant to Rule +102(e)(1) of the Commission’s Rules of Practice. 1 This order is issued in response to Beamish’s +application for reinstatement to appear and practice before the Commission as an accountant +responsible for the preparation or review of financial statements required to be filed with the +Commission (other than as a member of an audit committee, as that term is defined in Section +3(a)(58) of the Securities Exchange Act of 1934 (“Exchange Act”)) and as an independent +accountant. + +The Commission’s order found that Beamish engaged in improper professional conduct +during PricewaterhouseCoopers LLP’s audits of Burrill Life Sciences Capital Fund III, LP’s +2009, 2010, 2011, and 2012 year-end financial statements. Beginning in 2009, Beamish became +aware that the fund’s founder had arranged for the fund to pre-pay millions of dollars in +purported management fees to the fund’s management company that the founder owned and +controlled. Beamish failed to inquire whether the management company had the authority to +take the unusual payments, nor did he scrutinize the rationale for the payments. Despite a +growing advanced management fee balance, and Beamish’s own audit team’s suggested financial +disclosure language being rejected by management, the Commission found that Beamish +improperly signed audit reports with unqualified audit opinions. In addition, the fund’s financial + +1 See Accounting and Auditing Enforcement Release No. 3892 dated September 7, 2017. Beamish was permitted, +pursuant to the order, to apply for reinstatement after one year upon making certain showings. +statements did not comply with Generally Accepted Accounting Principles. Further, Beamish +relied upon unreasonable bases as the supposed means for repayment of the advanced +management fee balance. + +Beamish has met all of the conditions set forth in the original order and, in his capacity as +an independent accountant, has stated that he will comply with all requirements of the +Commission and the Public Company Accounting Oversight Board, including, but not limited to +all requirements relating to registration, inspections, concurring partner reviews and quality +control standards. In his capacity as a preparer or reviewer, or as a person responsible for the +preparation or review, of financial statements of a public company to be filed with the +Commission, other than as a member of an audit committee, Beamish attests that he will +undertake to have his work reviewed by the independent audit committee of any company for +which he works, or in some other manner acceptable to the Commission, while practicing before +the Commission in this capacity. + +Beamish is not, at this time, seeking to appear or practice before the Commission as a +preparer or reviewer, or a person responsible for the preparation or review, of any public +company’s financial statements that are filed with the Commission as a member of an audit +committee, as that term is defined in Section 3(a)(58) of the Exchange Act. If he should wish to +resume appearing and practicing before the Commission in this role, he will be required to +submit an application to the Commission showing that he has complied and will comply with the +terms of the original suspension order in this regard. Therefore, Beamish’s suspension from +practice before the Commission as a preparer or reviewer, or a person responsible for the +preparation or review, of any public company’s financial statements that are filed with the +Commission as a member of an audit committee continues in effect until the Commission +determines that a sufficient showing has been made in this regard in accordance with the terms of +the original suspension order. + + Beamish is currently subject to probation under the California State Board of +Accountancy. Failure to abide by the terms of his probation could result in the suspension of +Beamish’s CPA license. Beamish has attested that he will notify the Commission if he is found +to have violated the terms of the probation. He also has attested that he understands that the +suspension of his CPA license could result in the revocation of the reinstatement of his privilege +to appear or practice before the Commission as an accountant. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). +On the basis of the information supplied, representations made, and undertakings agreed +to by Beamish, it appears that he has complied with the terms of the September 7, 2017 order +denying him the privilege of appearing or practicing before the Commission as an accountant, +that no information has come to the attention of the Commission relating to his character, +integrity, professional conduct, or qualifications to practice before the Commission that would be +a basis for adverse action against him pursuant to Rule 102(e) of the Commission’s Rules of +Practice, and that Beamish, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, and that Beamish, by undertaking to +comply with all requirements of the Commission and the Public Company Accounting Oversight +Board, including, but not limited to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards, in his practice before the Commission +as an independent accountant has shown good cause for reinstatement. Therefore, it is +accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Adrian D. Beamish, CPA is hereby reinstated to appear and practice before the Commission as +an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission, other than as a member of an audit committee, and as an independent +accountant. + +By the Commission. + + +Vanessa A. Countryman +Secretary + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4073.pdf b/raw/aaer/2019/AAER-4073.pdf new file mode 100644 index 0000000000000000000000000000000000000000..de9a74d2b98107dea38ef828a6bc864671584cb1 Binary files /dev/null and b/raw/aaer/2019/AAER-4073.pdf differ diff --git a/raw/aaer/2019/AAER-4073.txt b/raw/aaer/2019/AAER-4073.txt new file mode 100644 index 0000000000000000000000000000000000000000..e62b814476f7c629e16415efb5ab2e16911b2df4 --- /dev/null +++ b/raw/aaer/2019/AAER-4073.txt @@ -0,0 +1,91 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86924 / September 11, 2019 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4073 / September 11, 2019 +ADMINISTRATIVE PROCEEDING +File No. 3-17214 + +In the Matter of +Robert D. Hesselgesser, +CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION AND AS AN +INDEPENDENT ACCOUNTANT + +On April 19, 2016, Robert D. Hesselgesser, CPA (“Hesselgesser”) was denied the +privilege of appearing or practicing before the Commission as an accountant as a result of settled +public administrative proceedings instituted by the Commission against Hesselgesser pursuant to +Rule 102(e)(1) of the Commission’s Rules of Practice.1 This order is issued in response to +Hesselgesser’s application for reinstatement to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission and as an independent accountant. + +The Commission’s order found that Hesselgesser engaged in improper professional +conduct while serving as the engagement partner on PricewaterhouseCoopers LLP’s audit of +Ener1, Inc.’s (“Ener1”) 2010 financial statements. Hesselgesser violated Public Company +Accounting Oversight Board Standards relating to Due Professional Care and Skepticism, +Competent Evidential Matter, Management Representations, Documentation, and Planning and +Supervision by not performing sufficient procedures to support his audit conclusions that Ener1 +management had appropriately accounted for certain assets and revenue. + +Hesselgesser has met all of the conditions set forth in the original order and, in his +capacity as an independent accountant, has stated that he will comply with all requirements of +the Commission and the Public Company Accounting Oversight Board, including, but not + +1 See Accounting and Auditing Enforcement Release No. 3767 dated April 19, 2016. Hesselgesser was permitted, +pursuant to the order, to apply for reinstatement after two years upon making certain showings. +limited to all requirements relating to registration, inspections, concurring partner reviews and +quality control standards. In his capacity as a preparer or reviewer, or as a person responsible for +the preparation or review, of financial statements of a public company to be filed with the +Commission, other than as a member of an audit committee, Hesselgesser attests that he will +undertake to have his work reviewed by the independent audit committee of any company for +which he works, or in some other manner acceptable to the Commission, while practicing before +the Commission in this capacity. +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.” This “good cause” determination is +necessarily highly fact specific. +On the basis of the information supplied, representations made, and undertakings agreed +to by Hesselgesser, it appears that he has complied with the terms of the April 19, 2016 order +denying him the privilege of appearing or practicing before the Commission as an accountant, +that no information has come to the attention of the Commission relating to his character, +integrity, professional conduct, or qualifications to practice before the Commission that would be +a basis for adverse action against him pursuant to Rule 102(e) of the Commission’s Rules of +Practice, and that Hesselgesser, by undertaking to have his work reviewed by the independent +audit committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, and that Hesselgesser, by undertaking to +comply with all requirements of the Commission and the Public Company Accounting Oversight +Board, including, but not limited to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards, in his practice before the Commission +as an independent accountant has shown good cause for reinstatement. Therefore, it is +accordingly, +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Robert D. Hesselgesser, CPA is hereby reinstated to appear and practice before the Commission +as an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission and as an independent accountant. +By the Commission. + + + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4074.txt b/raw/aaer/2019/AAER-4074.txt new file mode 100644 index 0000000000000000000000000000000000000000..83ba6dc5f3be50bee1ded3705484df14cfe825a0 --- /dev/null +++ b/raw/aaer/2019/AAER-4074.txt @@ -0,0 +1,339 @@ + + + UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86963 / September 13, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4074 / September 13, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19446 + + +In the Matter of + +SRIDHAR THIRUVENGADAM, + +Respondent. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against Sridhar Thiruvengadam (“Thiruvengadam” or +“Respondent”). + +II + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Cease-And-Desist Proceedings Pursuant to Section 21C of the +Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-And-Desist Order +(“Order”), as set forth below. + + + + +2 +III + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. Thiruvengadam, the chief operating officer of Cognizant Technology Solutions +Corporation (“Cognizant”) participated in a scheme with three other Cognizant executives to +authorize the payment of a $2 million bribe on behalf of the company to a government official in +India. The payment was made in response to the official’s demand to secure the issuance of a +planning permit that was necessary for the construction of a commercial office facility in Chennai, +India. The scheme required that Cognizant’s books and records be falsified in order to conceal the +nature of the payment. Thiruvengadam further contributed to the concealment by signing false +subcertifications to the company’s management representation letters. Thiruvengadam thereby +caused Cognizant’s violations of Exchange Act Sections 13(b)(2)(A) and 13(b)(2)(B), and violated +Exchange Act Section 13(b)(5) and Rules 13b2-1 and 13b2-2 thereunder. + +Respondent + +2. Sridhar Thiruvengadam, age 55, an Indian national and resident, served as +Cognizant’s chief operating officer from late 2013 until he was placed on administrative leave in +late 2016. Cognizant accepted Thiruvengadam’s resignation in late 2018. +Related Entities and Individuals + +3. Cognizant is a New Jersey corporation headquartered in Teaneck. Throughout the +relevant period its common stock was registered with the Commission under Exchange Act +Section 12(b) and publicly traded on NASDAQ (symbol: CTSH). Cognizant files annual and +quarterly reports under Exchange Act Section 13. Although it operates in several countries, the +majority of Cognizant’s operations are conducted in India through its largest subsidiary Cognizant +India. +4. Cognizant India is an Indian corporation and a wholly-owned subsidiary of +Cognizant. Cognizant India’s books, records, and financial accounts were consolidated into +Cognizant’s books and records and reported on its financial statements during the relevant period. +5. Senior Executive-1 served in several senior executive positions at Cognizant in the +United States until his resignation in 2016. +6. Senior Legal Executive-1 served in Cognizant’s legal function in the United States +until his resignation in 2016. +7. Real Estate Officer-1 served in Cognizant India’s corporate workplace function. + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + +3 +8. Contracting Firm-1 is a multinational engineering and construction firm based in +India. It is publicly traded on exchanges in India but its securities are not registered with the +Commission. +Facts +Bribe Payments in Chennai, Tamil Nadu +9. Cognizant’s construction project in Chennai, referred to as the KITS campus, +represents the company’s largest owned facility in India, encompassing 2.7 million square feet +with a capacity for approximately 17,500 employees. Cognizant engaged Contracting Firm-1 to +build the facility and obtain all necessary government permits. Construction began in 2011 prior to +the issuance of a required planning permit. +10. In 2014, during the course of construction, Real Estate Officer-1 was made aware +that an Indian government official had made a $2 million bribe demand to Contracting Firm-1 as a +condition for issuing the planning permit. Real Estate Officer-1 passed the information along to +his supervisor Thiruvengadam. On April 21 and 22, 2014, the demand was discussed by video +conference among Senior Executive-1, Senior Legal Executive-1, Real Estate Officer-1, and +Thiruvengadam. Senior Executive-1 and Senior Legal Executive-1 participated in the conference +from the United States, while Real Estate Officer-1 and Thiruvengadam participated from India. +Real Estate Officer-1 described the bribe demand in detail, asked Senior Executive-1 and Senior +Legal Executive-1 for guidance on how to proceed, and suggested that Contracting Firm-1 could +be reimbursed for the payment through a series of sham change order requests to its contract. +Senior Legal Executive-1 approved the method of reimbursement and Senior Executive-1 +authorized both the bribe payment and the suggested method for disguising it. Real Estate +Officer-1 was given the task of executing the scheme. Thiruvengadam raised no objection to the +proposed scheme during the two video conferences. +11. In addition to discussing the bribe demand and the suggested method of disguising +the reimbursement during the videoconferences, Senior Executive-1 directed his subordinates to +withhold future payments to Contracting Firm-1 if it resisted paying the bribe on Cognizant’s +behalf. Contracting Firm-1, which had been urging Cognizant to make the payment, ultimately +yielded to Senior Executive-1’s pressure and made the payment in late May or early June 2014. +Cognizant received the planning permit in November of that year. + +12. Following Real Estate Officer-1’s suggestion, Cognizant concealed the $2.5 million +reimbursement to Contracting Firm-1, including both the $2 million bribe and a $500,000 +commission for paying it, through a series of falsified contract change orders. Real Estate +Officer-1 selected change order requests from Contracting Firm-1 invoices that Cognizant had +previously rejected and retroactively “accepted” them, adjusting the cost amounts so that they +would total $2.5 million. The falsified invoices and supporting Excel spreadsheets were forwarded +to Senior Executive-1 for approval, with copies provided to Thiruvengadam based on his position +as chief operating officer. Senior Executive-1 approved payments in February and March 2015, +and the payments were made to Contracting Firm-1 in installments between March 2015 and +January 2016. + + +4 + +13. Thiruvengadam helped conceal the payment scheme by signing false management +representation subcertifications in connection with Cognizant’s 2014 through 2016 audits. The +subcertifications falsely denied that Thiruvengadam was aware of any fraud involving senior +management. The subcertifications were relied upon by Cognizant’s chief executive officer and +chief financial officer in signing management representation letters given to Cognizant’s outside +auditor. The outside auditor relied on management’s representations in opining on Cognizant’s +financial statements. + +Legal Standards and Violations + +14. Under Exchange Act Section 21C(a), the Commission may impose a cease-and- +desist order upon any person who is violating, has violated, or is about to violate any provision of +the Exchange Act, or any rule or regulation thereunder, and upon any other person that is, was, or +would be a cause of the violation due to an act or omission the person knew or should have known +would contribute to such violation. + +15. Exchange Act Section 13(b)(2)(A) requires every issuer with a class of securities +registered pursuant to Exchange Act Section 12 to make and keep books, records, and accounts, +which, in reasonable detail, accurately and fairly reflect the transactions and disposition of the +assets of the issuer. [15 U.S.C. § 78m(b)(2)(A).] + +16. Exchange Act Rule 13b2-1 prohibits any person, directly or indirectly, from +falsifying or causing to be falsified, any book, record or account subject to Section 13(b)(2)(A). +[17 C.F.R. § 240.13b2-1.] + +17. Exchange Act Rule 13b2-2(a) prohibits any director or officer of an issuer from +directly or indirectly making or causing to be made a materially false or misleading statement to an +accountant; or omitting to state or causing another person to omit to state, any material fact +necessary in order to make statements made not misleading to an accountant in connection with +any audit, review, or examination of the financial statements of the issuer, or the preparation or +filing of any document required to be filed with the Commission. [17 C.F.R. § 240.13b2-2.] + +18. As described above, Cognizant paid bribes to an Indian government official to +induce that official to direct that a permit be issued to facilitate the completion of a construction +project. Cognizant committed violations of Exchange Act Section 13(b)(2)(A) by falsely +characterizing illicit payments to the government official as legitimate business expenses in its +books and records. + +19. Thiruvengadam caused Cognizant’s Section 13(b)(2)(A) violations and directly +violated Rule 13b2-1 by participating in the two video conferences in which the bribe payment and +its concealment, which necessarily entailed deliberately falsifying Cognizant’s books and records, +were authorized. + +20. Thiruvengadam committed violations of Exchange Act Rule 13b2-2 by signing +false subcertifications to Cognizant’s management representation letters, all of which + + +5 +misrepresented that management was not aware of fraud related to the company’s financial +statements. + +21. Exchange Act Section 13(b)(2)(B) requires issuers with securities registered +under Section 12 to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that transactions are executed in accordance with management’s +general or specific authorization, transactions are recorded as necessary to permit preparation of +financial statements in conformity with generally accepted accounting principles, and to maintain +accountability for assets. [15 U.S.C. § 78m(b)(2)(B).] + +22. Exchange Act Section 13(b)(5) prohibits any person from knowingly circumventing +or failing to implement a system of internal accounting controls or knowingly falsifying any book, +record, or account described in Section 13(b)(2). [15 U.S.C. § 78m(b)(5).] +23. Cognizant committed violations of Exchange Act Section 13(b)(2)(B) by failing to +devise and maintain a sufficient system of internal accounting controls at its corporate headquarters +and at Cognizant India. Cognizant’s system for handling contractor change orders in India +permitted managers to conceal bribe payments through the creation of nonexistent charges without +any independent verification. +24. Thiruvengadam caused Cognizant’s violations of Exchange Act Section +13(b)(2)(B) because, as chief operating officer, he was made aware of weaknesses in Cognizant’s +accounting controls environment and, rather than taking steps to remediate those weaknesses, he +participated in a scheme that exploited them. Thiruvengadam also directly violated Section +13(b)(5) by participating in a scheme to falsify the company’s books and records and by knowingly +signing false subcertifications to management representation letters that contributed to concealing +the scheme. +Undertakings + + Respondent Thiruvengadam has undertaken to: + +25. Cooperate fully with the Commission in any and all investigations, litigations or +other proceedings relating to or arising from the matters described in the Order. Thiruvengadam +agrees that cooperation includes the following: + +a. On an ongoing basis, producing, without service of a notice or subpoena, to +the Commission nonprivileged documents and other materials, wherever +located, in Respondent’s possession, custody, or control, and appropriate +privilege logs, as requested by the Division of Enforcement’s (“Division”) +staff and within 14 days of request unless otherwise agreed to in writing by +the Division’s staff; + +b. Providing his full, truthful, and continuing cooperation, including making +himself available for interviews and the provision of testimony in any and +all investigations, litigation or other proceedings relating to or arising from + + +6 +matters described in the Order when requested to do so by the Division’s +staff; + +c. Responding to all inquiries related to any and all investigations, litigation or +other proceedings relating to or arising from the matters described in the +Order and any related proceedings when requested to do so by the +Division’s staff; and + +d. Testifying at trial and other judicial or administrative proceedings when +requested to do so by the Division’s staff. + +26. In determining whether to accept the Offer, the Commission has considered these +undertakings. + +IV + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Thiruvengadam’s Offer. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 21C of the Exchange Act, Respondent Thiruvengadam cease +and desist from committing or causing any violations and any future violations of Sections +13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of the Exchange Act and Rules 13b2-1 and 13b2-2 +thereunder. + B. Respondent shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $50,000 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 + + +7 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Sridhar Thiruvengadam as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Charles E. Cain, +Chief, FCPA Unit, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5631. + +C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount +of the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +D. Respondent acknowledges that the Commission is not imposing a civil penalty in +excess of $50,000 based upon his agreement to cooperate in a Commission investigation and +related enforcement action. If at any time following the entry of the Order, the Division of +Enforcement (“Division”) obtains information indicating that Respondent knowingly provided +materially false or misleading information or materials to the Commission, or in a related +proceeding, the Division may, at its sole discretion and with prior notice to the Respondent, +petition the Commission to reopen this matter and seek an order directing that the Respondent pay +an additional civil penalty. Respondent may contest by way of defense in any resulting +administrative proceeding whether it knowingly provided materially false or misleading +information, but may not: (1) contest the findings in the Order; or (2) assert any defense to liability +or remedy, including, but not limited to, any statute of limitations defense. + + + + +8 +V + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + By the Commission. + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4075.txt b/raw/aaer/2019/AAER-4075.txt new file mode 100644 index 0000000000000000000000000000000000000000..9bab980f50e0ef13b45b4bd8b1c679699773fc1a --- /dev/null +++ b/raw/aaer/2019/AAER-4075.txt @@ -0,0 +1,273 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +INVESTMENT ADVISERS ACT OF 1940 +Release No. 5344 / September 13, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4075 / September 13, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19448 + + +In the Matter of + +ED CAPITAL MANAGEMENT, +LLC d/b/a DANILOFF CAPITAL +MANAGEMENT, LLC +and ELLIOT DANILOFF a/k/a +ILYA OLEGOVICH DANILOV, + +Respondents. + +ORDER INSTITUTING +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 203(e) AND 203(k) OF THE +INVESTMENT ADVISERS ACT OF 1940, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE- +AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative and cease-and-desist proceedings be, and hereby are, +instituted pursuant to Sections 203(e) and 203(k) of the Investment Advisers Act of 1940 +(“Advisers Act”) against ED Capital Management, LLC d/b/a Daniloff Capital Management, LLC +(“ED Capital”), and Elliot Daniloff a/k/a Ilya Olegovich Danilov (“Daniloff”) (collectively, +“Respondents”). + +II. + + In anticipation of the institution of these proceedings, the Respondents have submitted +Offers of Settlement (“Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, the Respondents consent to the entry of this Order Instituting +Administrative and Cease-and-Desist Proceedings Pursuant to Sections 203(e) and 203(k) of the +Investment Advisers Act of 1940, Making Findings, and Imposing Remedial Sanctions and a +Cease-and-Desist Order (“Order”), as set forth below. +2 +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds that: + +Summary + +1. ED Capital, which was registered with the Commission as an investment adviser +from 2012 through 2017, has failed to distribute annual audited financial statements prepared in +accordance with Generally Accepted Accounting Principles (“GAAP”) to the investors in the +largest private fund that it advised in each fiscal year from 2012 through 2016, in violation of +Section 206(4) of the Advisers Act and Rule 206(4)-2 thereunder, commonly referred to as the +“custody rule.” In addition, the related sections of ED Capital’s Forms ADV, signed and +submitted on its behalf by Daniloff, were inaccurate starting with the 2013 fiscal year filing, +resulting in violations of Section 207 of the Advisers Act. + + 2. ED Capital also failed to adopt and implement written policies and procedures +reasonably designed to prevent violations of the Advisers Act and the rules thereunder, and failed +to conduct the requisite annual reviews of its written policies and procedures to ensure that its +written policies and procedures were adequate and effective, a violation of Section 206(4) of the +Advisers Act and Rule 206(4)-7 thereunder. + +3. Daniloff, ED Capital’s managing member and sole owner, was responsible for the +foregoing violations by ED Capital. + +Respondents + +4. ED Capital is a Delaware limited liability company with its principal place of +business in New York, New York. ED Capital was registered with the Commission as an +investment adviser under the Advisers Act from March 2012 until September 2017, when it filed a +Form ADV-W. During the relevant period, ED Capital managed and served as investment adviser +to five private funds organized under master-feeder structures. +5. Daniloff is ED Capital’s managing member and sole owner and, beginning in late +2013, also served as its chief compliance officer. He previously held Series 7, 31, 55, 63 and 65 +licenses. Daniloff is 42 years old, maintains dual Russian and United States citizenship and +currently resides in Brooklyn, New York. +Facts + +6. ED Capital’s largest private fund is Synergy Hybrid Fund Ltd, which, along with its +feeder fund, Synergy Hybrid Feeder Fund Ltd (collectively “Synergy”), accounted for +approximately 85% of the reported assets under ED Capital’s management during the relevant +period. As of December 31, 2016, ED Capital reported approximately $51 million in assets under +management. Synergy’s stated investment strategy focuses on private agricultural investments in +Russia. +3 +7. The custody rule is designed to protect investment advisory clients from the misuse +or misappropriation of their funds and securities. It requires that registered advisers who have +custody of client funds or securities implement an enumerated set of requirements to prevent loss, +misuse, or misappropriation of those assets. + + 8. An investment adviser has custody of client assets if it holds, directly or indirectly, +client funds or securities, or if it has the ability to obtain possession of those assets. See Rule +206(4)-2(d)(2). + + 9. ED Capital had custody of Synergy’s assets as defined in Rule 206(4)-2. An +investment adviser who has custody of client assets must, among other things: (i) ensure that a +qualified custodian maintains the client assets; (ii) notify the client in writing of accounts opened +by the adviser at a qualified custodian on the client’s behalf; (iii) have a reasonable basis for +believing that the qualified custodian sends account statements at least quarterly to clients, except +if the client is a limited partnership for which the adviser or a related person is a general partner, +the account statements must be sent to each limited partner; and (iv) ensure that client funds and +securities are verified by actual examination each year by an independent public accountant at a +time chosen by the accountant without prior notice or announcement to the adviser. See Rule +206(4)-2(a)(1) - (5). + + 10. The custody rule provides an alternative to complying with the requirements of +Rule 206(4)-2(a)(2), (3) and (4) for investment advisers to limited partnerships or other types of +pooled investment vehicles, such as Synergy. The custody rule provides that an investment adviser +“shall be deemed to have complied with” the independent verification requirement and is not +required to satisfy the notification and accounts statements delivery requirements with respect to a +fund if the fund is subject to audit at least annually and the adviser “distributes [the fund’s] audited +financial statements prepared in accordance with generally accepted accounting principles to all +limited partners . . . within 120 days of the end of [the fund’s] fiscal year” (“Audited Financials +Alternative”). See Rule 206(4)-2(b)(4). The accountant performing the audit must be an +independent public accountant that is registered with, and subject to regular inspection by, the +Public Company Accounting Oversight Board (“PCAOB”). See Rule 206(4)-2(b)(4)(ii). An +investment adviser to a limited partnership that fails to meet the requirements of the Audited +Financials Alternative to timely distribute audited financial statements prepared in accordance with +GAAP would need to satisfy all of the requirements of Rule 206(4)-2(a) in order to avoid violating +the custody rule. + +11. With respect to Synergy, ED Capital relied on the Audited Financials Alternative +to attempt to comply with the custody rule during the relevant period but did not do so, as ED +Capital failed to distribute the requisite audited financial statements to investors, either within +120 days of the fiscal year’s end or at any time thereafter. ED Capital engaged a PCAOB- +registered firm to conduct an annual audit of Synergy’s financial statements for its fiscal years +2012 through 2015, as well as a third-party valuation firm to assist with the audit. However, for +each of those years, the audit firm was never able to complete the audit and express an opinion +on whether Synergy’s financial statements were prepared in accordance with GAAP. For each +of those years, the firm issued a report well after 120 days following the end of the fiscal year, +4 +ranging from 321 to 420 days thereafter, in which the firm stated that it was “not able to obtain +sufficient appropriate audit evidence to provide a basis for an audit opinion” and therefore did +“not express an opinion” on whether Synergy’s financial statements were prepared in accordance +with GAAP. A disclaimer of opinion does not constitute the performance of an audit in +accordance with Generally Accepted Auditing Standards and therefore, even if timely, cannot be +used to satisfy the Audited Financials Alternative requirement that audited financial statements +prepared in accordance with GAAP be distributed to all limited partners within the requisite time +period. For the fiscal year 2016, ED Capital was unable to engage an accountant to audit +Synergy’s financial statements. Accordingly, ED Capital did not satisfy the requirements of the +Audited Financials Alternative in Rule 206(4)-2(b)(4) for Synergy for each fiscal year beginning +in 2012 and was therefore obligated to comply with Rule 206(4)-2(a)(2), (3) and (4), which it also +failed to do. + +12. During the relevant period, Daniloff was aware of the foregoing circumstances and +did not take timely corrective action to ensure that ED Capital complied with the custody rule. + +13. During the relevant period, Daniloff, on behalf of ED Capital, signed and filed +annual Forms ADV that contained untrue statements of material facts with respect to Synergy’s +financial statements. In the Forms ADV for 2013 through 2016, which were filed from March 28, +2014 through March 31, 2017, ED Capital and Daniloff stated that audited financial statements +prepared in accordance with GAAP are distributed to Synergy’s investors. Due to the +circumstances described above, those statements were inaccurate. In the same Forms ADV, ED +Capital and Daniloff also stated “Report Not Yet Received” in response to the question “Does the +report prepared by the auditing firm contain an unqualified opinion?” and failed to file, as was +required, an amended Form ADV updating the response to “No” after the reports disclaiming an +audit opinion were received. + + 14. ED Capital also failed to comply with the requirement that every investment +adviser registered with the Commission adopt and implement written policies and procedures +reasonably designed to prevent the violations of the Advisers Act and the rules thereunder +discussed above, and to conduct the required annual review of the adequacy and effectiveness of +the adviser’s policies and procedures. See Rule 206(4)-7(a) and (b). Among other things, ED +Capital lacked written policies and procedures reasonably designed to prevent violations of the +custody rule. In addition, from the time ED Capital registered with the Commission through 2017, +ED Capital failed to conduct at least annually the requisite review of its written policies and +procedures to ensure that its policies and procedures were adequate and effective. + +Violations + + 15. Section 206(4) of the Advisers Act prohibits an investment adviser from engaging +in acts, practices or courses of business that are fraudulent, deceptive, or manipulative, as defined +by the Commission in rules and regulations promulgated under the statute. Proof of scienter is not +required to establish a violation of Section 206(4) of the Advisers Act and the rules thereunder. +See SEC v. Steadman, 967 F.2d 636, 647 (D.C. Cir. 1992). Among other things, Rule 206(4)-2 +requires registered investment advisers with custody of client assets to have independent public +5 +accountants conduct surprise examinations of those client funds or securities, or to have private fund +clients timely distribute to their investors annual audited financial statements prepared in accordance +with GAAP. Rule 206(4)-7 requires, among other things, that an investment adviser registered +with the Commission adopt and implement written policies and procedures reasonably designed to +prevent violation of the Advisers Act and rules thereunder, and to review, no less frequently than +annually, the adequacy of such policies and procedures and the effectiveness of their +implementation. Section 207 of the Advisers Act makes it “unlawful for any person willfully to +make any untrue statement of a material fact in any registration application or report filed with the +Commission . . . or willfully to omit to state in any such application or report any material fact +which is required to be stated therein.” + + 16. As a result of the conduct described above, ED Capital willfully violated, and +Daniloff was a cause of ED Capital’s violations of, Sections 206(4) and 207 of the Advisers Act +and Rules 206(4)-2 and 206(4)-7. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanctions agreed to in Respondents’ Offers. + + Accordingly, pursuant Sections 203(e) and 203(k) of the Advisers Act, it is hereby +ORDERED that: + + A. Respondents cease and desist from committing or causing any violations and any +future violations of Sections 206(4) and 207 of the Advisers Act and Rules 206(4)-2 and 206(4)-7. + +B. ED Capital is censured. + +C. Within 21 days of the entry of this Order, ED Capital shall pay a civil monetary +penalty in the amount of $75,000 and Daniloff shall pay a civil monetary penalty in the amount of +$25,000 to the Securities and Exchange Commission for transfer to the general fund of the United +States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +6 +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying ED +Capital Management, LLC d/b/a Daniloff Capital Management, LLC and Elliot Daniloff a/k/a Ilya +Olegovich Danilov, as Respondents in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Sanjay Wadhwa, Senior +Associate Director, Securities and Exchange Commission, New York Regional Office, 200 Vesey +Street, Suite 400, New York, NY 10281. + + E. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor +Action, Respondents shall not argue that it is entitled to, nor shall it benefit by, offset or reduction +of any award of compensatory damages by the amount of any part of Respondents’ payment of a +civil penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants +such a Penalty Offset, Respondents agree that it shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondents by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + By the Commission. + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4076.txt b/raw/aaer/2019/AAER-4076.txt new file mode 100644 index 0000000000000000000000000000000000000000..3c81578c0ef146dc37121ff5b2d665af74faf2b5 --- /dev/null +++ b/raw/aaer/2019/AAER-4076.txt @@ -0,0 +1,533 @@ + +1 + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT of 1933 +Release No. 10684 / September 16, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 86971 / September 16, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4076 / September 16, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19454 + + + +In the Matter of + +Marvell Technology Group, Ltd., + +Respondent. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS AND IMPOSING A +CEASE-AND-DESIST-ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”) against Marvell Technology Group, Ltd. (“Marvell” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of + +2 + +the Securities Exchange Act of 1934, Making Findings and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +A. Introduction + +1. This matter concerns an undisclosed revenue management scheme by Marvell +Technology Group. Faced with a substantial decline in customer demand in its core product +markets, and concerned about the adverse consequences that would result from missing its public +guidance, Marvell orchestrated a plan to accelerate, or pull-in, sales that had originally been +scheduled for future quarters to the current quarter in order to close the gap between actual and +forecasted revenue, meet publicly-issued guidance, and mask declining sales. As a result, Marvell +made materially misleading public statements and omitted to disclose certain facts regarding its +financial results for the fourth quarter of fiscal year 2015 (Q4 FY2015) and first quarter of fiscal +year 2016 (Q1 FY2016). In particular, Marvell made positive statements regarding its Q4 FY2015 +results and met its revised public revenue guidance in Q1 FY2016 without disclosing the +significant impact on revenues from its use of pull-ins. Marvell also failed to disclose that the pull- +ins reduced future sales, thereby making it exceedingly difficult for Marvell to meet its revenue +guidance in future quarters, particularly in a declining market. +2. From approximately January 2015 through July 2015 (the “Relevant Period”), +Marvell’s senior management directed the effort to pull-in sales for the purpose of meeting public +revenue guidance. Marvell’s senior management placed significant pressure on its sales employees +to push customers to agree to accept products earlier than scheduled, and it closely tracked the gap +between actual and forecasted revenue, and the use of pull-ins to bridge that gap. Marvell used +the pull-ins despite internal concerns that the pull-ins were masking declining market conditions +and also obfuscating the company’s deteriorating financial results, thereby misleading investors. +Senior management, however, refused to abandon its use of pull-ins, and those who raised +concerns were ignored. Marvell’s senior management also failed to inform the company’s Board of +Directors or its independent auditor of its pull-in scheme. +3. As a result of such conduct, Marvell violated Sections 17(a)(2) and 17(a)(3) of the +Securities Act and Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 +thereunder. +B. Respondent + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + +3 + +4. Marvell Technology Group Ltd. is incorporated in Hamilton, Bermuda, and is +principally headquartered in Santa Clara, California. Marvell is a producer of semiconductor +components used in, among other things, data storage/hard drives, mobile phones, and network +devices. A significant portion of Marvell’s revenue comes from certain key customers. During the +Relevant Period, Marvell operated primarily through two divisions – Datacom and Storage. +Marvell’s securities (ticker: MRVL), which are registered with the Commission pursuant to +Section 12(b) of the Exchange Act, are listed on the NASDAQ. Marvell’s fiscal year ends on the +Saturday nearest January 31. In May 2008, Marvell entered into a settlement with the Commission +for its violation of antifraud, internal controls, books and records, and financial reporting +provisions of the federal securities laws pertaining to improperly backdating stock options and paid +a $10 million penalty. SEC v. Marvell Technology Group, Ltd. and Weili Dai, Case No. CV 08- +2367-HRL (N.D. Cal. filed May 8, 2008). +C. Facts + +1. Marvell Engaged in a Pull-in Scheme to Meet Publicly-Disclosed Guidance + +5. In late 2014, Marvell’s senior management had grown frustrated with the +company’s recent revenue performance. Marvell had missed publicly-disclosed revenue guidance +in the second and third quarters of fiscal year 2015 and was headed toward another potential miss +in the fourth quarter. Senior management perceived that the sales teams were not aggressive +enough in generating sales in the company’s two main divisions of Datacom and Storage. +Historically, revenue and sales targets had been set from the bottom-up, where sales teams +influenced the process by providing forecasts of their sales projections based on their +understanding of customers’ needs. However, in an effort to exert more control over the sales +force, senior management, in late 2014, imposed top-down revenue and sales targets, which were +reflected in the company’s Annual Operating Plan (AOP) for FY 2016. Sales staff protested the +top-down targets set by senior management, believing they were not realistic and had been +developed without proper consideration of customers’ needs. The pressure to meet the targets set in +the AOP became the impetus for Marvell’s pull-in effort. + +6. Around the same time, Marvell began to experience a substantial decline in +customer demand. The decline was initially felt in the company’s China mobile market +(Datacom), where the company had made significant investments in recent years, and eventually +spread to the storage segment, Marvell’s flagship business unit. By January 2015, the last month of +Q4 FY2015, Marvell’s senior management was aware of a growing gap between actual revenue +and forecasted revenue for the quarter. + +7. In response to this growing gap, Marvell’s senior management resorted to the use of +pull-ins.2 Marvell’s senior management made this decision no later than mid-January 2015, +approximately two weeks prior to the end of the company’s Q4 FY2015, at which time Marvell + +2 Marvell’s revenue recognition policy contained a section pertaining to pull-ins, which was not publicly +disclosed, that defined a pull-in as “a transaction where Marvell initiates and obtains agreement from customer to +modify an existing sales order scheduled shipment date from a subsequent quarter into the current quarter.” The policy +required formal tracking of pull-in transactions. + +4 + +was facing a revenue shortfall of approximately $50 million against forecasted revenue guidance of +$880 to $900 million. Internally, Marvell referred to the effort as the “pull-in plan.” A primary +motivation for the pull-in effort was concern that missing revenue guidance would adversely +impact the company’s stock price. + +8. The pull-in effort was orchestrated and directed at the highest levels of Marvell. +Senior management, including executives in sales, finance, and sales operations, were aware of the +pull-in effort and tracked the company’s progress in meeting its revenue targets through the use of +pull-ins. Senior management also routinely pressured sales managers to obtain additional revenue +through pull-ins to meet their targets. In carrying out the plan, senior management was assisted by +the Financial Planning and Analysis unit (FP&A), which tracked the gap between the actual +revenue (referred to internally as organic or natural revenue) and forecasted revenue, as well as the +amount of pull-ins being used to close the gap. FP&A also tracked “backlog,” which was the +amount of predicted revenue in a given quarter based on customer orders, as well as the “backlog +percentage,” which was the ratio between customer orders and revenue targets for the quarter and +used to determine whether revenue targets were supported by anticipated sales. + +9. Marvell frequently offered various financial incentives to persuade its customers to +agree to pull-ins. As a general matter, Marvell relied on certain key customers to generate a +significant portion of its revenue, and those customers provided periodic forecasts of product they +intended to purchase from Marvell in a given quarter. Marvell’s pull-in plan, however, required its +customers to accept product earlier than they had requested, and Marvell, with the approval of +senior management, sought to incentivize its customers to agree to the pull-ins. Among other +things, Marvell obtained pull-in sales by offering price rebates, discounted prices, free products, +and extended payment terms, at times inconsistent with its revenue recognition policy. Yet, even +with these incentives, Marvell’s customers were at times reluctant to agree to pull-in sales. As one +Marvell employee remarked in reporting on a successful pull-in, Marvell had to “beg” the +customer to agree to a multi-million dollar pull-in in exchange for $75,000 in free parts. + +10. Marvell used pull-ins in the following three quarters: + +a. Fourth Quarter of Fiscal Year 2015 (ended January 31, 2015) + +11. Communications between FP&A and the sales managers in the final days of Q4 +FY2015 (January 2015) reflected the substantial pressure on the company to meet its revenue +targets and the use of pull-ins as part of that effort. For example, when a sales manager expressed +concern at his ability to meet his revenue target, even with the use of pull-ins, the head of FP&A at +that time (and future interim CFO) simply ignored the concern, explaining to a subordinate: “We +are aware of this, [but he (the sales manager)] has a target given to him by [senior management].” +The same sales manager warned that the pull-ins were overstating what the actual demand was for +Marvell’s products: “We are pulling teeth to get to $430 [million] in Q4, with [the] natural number +at $400 [million].” During this time period, Marvell also began to receive information indicating +that the company could be losing market share in the declining market. In particular, the former +senior FP&A official observed that although Marvell was struggling to meet its Q4 revenue goals, +it appeared that industry peers were meeting their guidance. The same official closely monitored + +5 + +Marvell’s share of the total available market (“TAM”) for the storage segment and how Marvell’s +revenues compared to this metric. + +12. In Marvell’s Q4 FY2015, which ended January 31, 2015, Marvell pulled-in $24 +million of sales originally scheduled for future quarters, of which $20 million came from the +storage segment. + +13. On February 19, 2015, Marvell announced revenues of $857 million for Q4 +FY2015 and a non-GAAP EPS of $0.25. Marvell missed its low-end revenue guidance of $880 +million but beat its EPS guidance by one penny. Marvell characterized the financial results as +“overall on target” and during its earnings call touted an increase of both sales and market share +gains in the largest component of the storage business, hard drives (HDD). On March 26, 2015, +Marvell also filed its Form 10-K for Fiscal Year 2015 that contained materially misleading +information about the company’s fourth quarter revenue performance. + +14. Marvell did not disclose that 3% of its total Q4 FY2015 revenues (approximately +$24 million), and 5% of its storage revenues (approximately $20 million), were derived from pull- +ins. Notwithstanding its public comments touting its gains in its HDD business, without the benefit +of the pull-ins, Marvell’s HDD sales actually decreased. In addition, without the pull-ins, Marvell +would have missed the low-end of its revenue guidance by the far greater margin of approximately +$50 million, thereby preventing the company from characterizing its financial results as “overall on +target.” + +b. First Quarter of Fiscal Year 2016 (ended May 2, 2015) + +15. The pressure to engage in pull-ins steadily increased throughout 2015, particularly +as the gap between revenue guidance and actual revenues grew. The pressure became especially +acute in Q1 FY2016. Early in Q1 FY2016, even as the backlog percentage for the quarter was +extraordinarily low, Marvell’s senior management indicated that the forecasted numbers needed to +be met and emphasized that “everything and anything needed to be shipped.” + +16. By mid-April, several weeks before quarter end, FP&A raised alarm at the growing +gap between actual revenue and forecasted revenue. As one FP&A employee warned, first quarter +revenues would be “way off” guidance of $810-$830 million and were likely to be in the $641- +$669 million range, or almost $200 million short of the upper-level guidance. In order to close the +gap, Marvell again resorted to the use of pull-ins of sales originally scheduled for subsequent +quarters. The vast majority of the pull-ins were used in the company’s storage segment. + +17. Less than two weeks before the quarter ended, Marvell, in the face of the large gap +between actual and forecasted revenue, made a public announcement reducing its revenue +guidance for Q1 FY2016. In particular, on April 24, 2015, Marvell announced a revised quarterly +revenue guidance of $710-$740 million. Internal documents at the time, however, indicated that +Marvell would need approximately $50 million of pulled-in revenue to meet this reduced public +revenue guidance. Marvell did not disclose that it would need to pull-in a significant amount of +revenue from future quarters in order to meet its revised revenue guidance. By not disclosing the + +6 + +pull-ins, Marvell also was able to mask the significant decline in sales and market share it was +experiencing. + +18. In Marvell’s Q1 FY2016, which ended May 2, 2015, Marvell pulled-in $64 million +of sales scheduled for future quarters, of which $55 million came from the storage segment. + +19. On May 21, 2015, Marvell announced it had met its publicly-disclosed guidance, +with $724 million in total revenues, of which $348 million was storage revenue. Marvell did not +disclose that it used pull-ins totaling 9% of total revenues and 16% of storage revenues for the +purpose of meeting the revenue guidance. The large number of pull-ins masked what would have +been Marvell missing the low end of its revenue guidance by approximately $30 million and a +market share loss. On June 4, 2015, Marvell also filed its Form 10-Q for the First Quarter of Fiscal +Year 2016 that contained materially misleading information about the company’s first quarter +revenue performance. + +c. Second Quarter of Fiscal Year 2016 (ended August 1, 2015) + +20. Several weeks into Q2 FY2016, Marvell’s senior management renewed its pressure +on its sales managers to pull-in as much revenue as possible to meet the quarter’s revenue targets. +Internal FP&A analyses reflected that the combination of declining market demand coupled with +the effects of the prior quarter pull-ins had left the company almost $100 million short of its public +revenue guidance of $710-$740 million. Again, senior management’s response was that the +company could simply not afford to miss its revenue guidance. As one Marvell employee +explained: “[W]e need to pull into this QTR, we are still short, we will worry about next QTR +later.” + +21. In Marvell’s Q2 FY2016, which ended August 1, 2015, Marvell pulled-in a record +amount of $77 million of sales originally scheduled for future quarters. The pull-ins totaled 11% of +total revenue for the quarter. + +22. Shortly after the end of the quarter, in August 2015, Marvell’s Board of Directors +first became aware of senior management’s use of pull-ins to meet public revenue guidance. On +September 11, 2015, Marvell announced a delay in filing its Form 10-Q for Q2 FY2016 and the +commencement of an internal investigation to examine, among other things, the company’s use of +pull-ins. Shortly thereafter, Marvell’s independent auditor resigned. + +2. The Use of Pull-ins Adversely Impacted Marvell’s Future Revenue + +23. Within Marvell, it was understood that pull-ins negatively impacted Marvell’s +revenue prospects in future quarters. Because Marvell’s customers provided quarterly forecasts, on +a periodic basis, of how much product they intended to purchase from Marvell, if Marvell +requested a customer to accept shipment of product earlier than forecast, Marvell could record the +sale as occurring in the earlier quarter but, all things being equal, would lose that sale in the later +quarter (when it was previously scheduled). The adverse impact of pull-ins on future quarter +revenue was particularly pronounced in the declining market during the Relevant Period, as +Marvell had little hope of generating additional sales in future quarters. + +7 + + +24. From the outset of the pull-in effort, Marvell’s senior management was warned of +the consequences of pull-ins on future revenue. In the final days of Q4 FY2015, a senior sales +manager, who was being pressed to pull-in revenue, warned that the pull-ins would make it all the +more difficult to meet—in his words, pull-ins would “destroy”— revenue targets for Q1 FY2016. +Days after the end of the quarter, another senior operations manager warned that the pull-ins “did a +lot of damage in Q4 and [Marvell could not] be as aggressive [in Q1].” Sales managers also alerted +senior management that the pull-ins were masking the real cause of Marvell’s revenue problems, +i.e., declining market conditions. One manager tried to explain that he could not reasonably be +expected to meet the Q1 FY2016 AOP target set by senior management given the “really weak” +market conditions. + +25. In Q1 FY2016, as FP&A continued to track the growing gap between actual and +forecasted revenue, at the direction of senior management it pressed sales teams to meet their +targets. Again, sales teams pushed back, warning that the effects of the Q4 pull-ins plus the +declining market demand made it all but impossible for the company to meet its revenue targets. +One senior operations manager noted, approximately mid-way through the quarter: “based on the +damage we had to create in Q4 in regards to pulls, we started Q1 in the hole with the cabinets left +pretty bare . . . . We did not empty the cabinets the first month for Q1 of last year like we did this +time.” When that same senior operations manager pressed for more pull-ins, a sales employee +responded: “We have tried our best to pull in. I think it’s not realistic to expect such a huge +increase of revenue after [huge Q4] pull in . . . . And I strongly suggest not [to] keep pulling in like +this. It’s too risky.” + +26. Even within FP&A, which performed a critical role in assisting senior management +in implementing the pull-in plan, there came to be a realization that the pull-ins were having +adverse impacts on future quarter revenue. One mid-level FP&A manager, in considering a sales +manager’s ability to meet his revenue targets, noted to the head of FP&A: “I personally think it’s a +miracle that he’s not de-committing on the revenue target given how much we pulled in [in] Q4.” + +27. Marvell’s senior management ultimately ignored the warnings and pressed ahead +with the pull-in effort. Half way through Q1 FY2016, a senior operations manager reported that +senior management had “ordered full speed ahead and is pushing everyone to achieve their +[revenue targets]” and that senior management “is not going to budge from the target” set for Q1. +The solution, according to the same manager, was to keep pulling-in: “[W]e have to ship anything +and everything possible.” + +28. By the end of Q1 FY2016, and into Q2 FY 2016, Marvell’s continuous pull-in +effort met increased resistance from its customers, who were starting to carry excess inventory of +Marvell’s products as a result of the repeated requests to accept early shipments. A senior +operations manager was told that customers “did not like the snowball effect of the pull-ins and +holding huge inventories.” Internal analyses within Marvell indicated that the cumulative effects of +the pull-ins on its customers’ inventory presented risks to Marvell’s future revenue. + +3. Marvell Ignored Those who Expressed Concern with the Pull-in Scheme + + +8 + +29. Several company employees pushed back on Marvell’s reliance on the use of pull- +ins to bridge the gap between actual revenue and publicly-disclosed guidance. These persons, +however, were ignored. + +30. A principal source of opposition to the pull-in plan came from sales managers, who +were most familiar with their customers’ needs as well as market conditions. Marvell’s senior +management was warned that the company was facing a substantial decline in market demand that +rendered the company’s revenue targets unrealistic. As one sales manager explained to a senior +Marvell executive in the final month of Q1 FY 2016: “Data has been published this morning that +Q1 shipments [were] down to the lowest level since [. . .] 2001 . . . . There is really weakness in the +storage industry.” However, when sales managers cautioned that pull-ins were masking declining +market demand, the response from Marvell’s senior management was to conduct more, not less, +pull-ins. + +31. Additional opposition to Marvell’s pull-in plan came from a senior level Marvell +employee with responsibilities related to Marvell’s accounting and financial disclosures. During +April 2015, the employee cautioned certain members of senior management, including the +president, the CFO, and the head of FP&A, that Marvell’s use of pull-ins could trigger disclosure +obligations because they could be masking a downturn in the company’s financial results. The +employee cited prior SEC actions against public companies that had distorted their financial results +through unusual sales practices. Rather than heed the employee’s warnings, Marvell’s senior +management did the opposite—the warnings were ignored, and they misled the employee by +falsely asserting that the pull-ins were not being used primarily or solely to meet revenue guidance. +At the conclusion of one of the aforementioned discussions, the employee was directed to send an +e-mail to senior management indicating that there were no issues with the pull-ins. The employee +sent the e-mail as requested. + +4. Marvell Misled Investors by Failing to Disclose the Purpose, Scope, and Effect of the +Pull-in Transactions + +32. As noted above, Marvell reported its financial results for Q4 FY2015 and Q1 +FY2016 in earnings calls and in reports filed with the Commission, without disclosing that a +significant portion of its revenue had resulted from the use of pull-ins intended to meet the +company’s public revenue guidance. + +33. By failing to disclose this information, Marvell misled investors in the following +ways. First, investors were left with the misleading impression that Marvell was able to meet its +public guidance organically, through normal customer demand for its products. Internally, +however, Marvell closely tracked what it considered to be its natural or organic revenue (without +the use of pull-ins). Senior management was aware that its natural revenue was far below the +company’s public guidance, and that this was primarily because of a significant decline in +customer demand caused by changing market conditions. Without the same information, investors +lacked an ability to evaluate financial results in context and compare results across periods. + +34. In addition, investors were unaware of the adverse impact that pull-ins were having +on revenue and sales in future quarters. Internally, senior management was fully aware that the + +9 + +pull-ins were simply shifting revenue from one quarter to another, and sales professionals +repeatedly warned senior management of the “cannibalization” of future revenue, particularly in +the company’s key storage segment. Senior management was also aware that, in light of the +deteriorating market conditions, it was highly unlikely that customers would agree to purchase +products beyond what they had earlier forecasted. Without such information, investors lacked an +ability to evaluate Marvell’s future revenue and sales prospects and judge the company’s ability to +meet future guidance. And finally, investors were unaware that the pull-ins were masking declining +sales and market share. + +35. Marvell’s internal disclosure process failed to ensure that it adequately considered +its disclosure obligations surrounding its use of pull-ins. A key part of the disclosure process was +the Disclosure Committee. The Disclosure Committee was responsible for, among other things, +assisting Marvell’s senior management in ensuring the accuracy and timeliness of the company’s +financial disclosures. During the Relevant Period, the Disclosure Committee met several times, +including to review and approve the company’s disclosures for Q4 FY2015 and Q1 FY2016. The +Disclosure Committee was not made aware of, nor did it consider, whether the company’s use of +pull-ins needed to be disclosed publicly. + +36. Marvell’s senior management during the Relevant Period, including its then +president, CFO and head of FP&A, did not consider or discuss the issue of whether the company +needed to disclose its use of pull-ins other than during the aforementioned April 2015 meetings +where they ignored the cautions of a senior level employee. Senior management also failed to +ensure that the Disclosure Committee adequately considered the issue. It failed to do so even after +at least one employee cautioned senior management that Marvell’s use of pull-ins implicated +disclosure obligations because they were masking declining financial results. + +37. Marvell’s Board of Directors was not informed of senior management’s efforts to +meet publicly-disclosed revenue guidance through the use of pull-ins. On at least two occasions, in +documents that were to be provided to the Board, references to pull-ins that had existed in earlier +drafts were deleted. Marvell also did not disclose to its independent auditor that the company had +attempted to meet its public revenue guidance through the use of pull-ins. + +38. Marvell’s misleading statements were material. A reasonable investor, in +considering whether to purchase or sell Marvell securities, would have found it important that +Marvell was using pull-ins to generate sales for the purpose of meeting publicly-disclosed revenue +targets and mask a significant downturn in sales, and that the pull-ins would adversely impact +future revenue. + +5. Marvell’s Employee Stock Purchase Plan + +39. As part of its employee compensation, Marvell offered an Employee Stock +Purchase Plan which allowed certain employees to purchase stock at a discounted price. During the +Relevant Period, Marvell employees purchased company stock at a cost of approximately $11.88 +per share. + +D. Violations + +10 + + +40. Section 17(a)(2) proscribes obtaining “money or property by means of any untrue +statement of a material fact or any omission to state a material fact necessary in order to make the +statements made, in light of the circumstances under which they were made, not misleading.” +Section 17(a)(3) proscribes engaging “in any transaction, practice, or course of business which +operates or would operate as a fraud or deceit upon the purchaser.” A violation of these provisions +does not require scienter and may rest on a finding of negligence. See Aaron v. SEC, 446 U.S. 680, +685, 701-02 (1980). Marvell violated the foregoing provisions when it made materially misleading +public statements and omitted to disclose certain facts regarding its financial results for Q4 +FY2015 and Q1 FY2016, and further engaged in an undisclosed effort to meet public revenue +guidance through the use of pull-ins. + +41. Section 13(a) of the Exchange Act requires issuers such as Marvell to file periodic +reports with the Commission containing such information as the Commission prescribes by rule. +Form 10-K and Form 10-Q requires registrants to comply with Regulation S-K Item 303, which +required Marvell to describe in the MD&A sections of the required periodic filings “any known +trends or uncertainties that have had or that the registrant reasonably expects will have a material +… unfavorable impact on net sales or revenues or income from continuing operations.” The +failure to provide the information required by Regulation S-K constitutes a violation under Section +13(a) of the Exchange Act. Marvell used pull-ins to mask declining sales and markets, a trend, +event, or uncertainty that was known to Marvell and was reasonably likely to have material effects +on the registrant’s financial condition or results of operations. Contrary to the requirements of +Regulation S-K, Marvell failed to disclose the material impact of this known trend, event, or +uncertainty on current and future revenues within its required MD&A sections of its Form 10-K for +the fiscal year 2015 and its Form 10-Q for the first quarter of fiscal year 2016. As a consequence, +Marvell violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-13, and 12b-20 +thereunder. +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +Accordingly, pursuant to Section 8A of the Securities Act and Section 21C of the Exchange +Act, it is hereby ORDERED that: + +A. Marvell shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act and Section 13(a) of the +Exchange Act and Rules 13a-1, 13a-13, and 12b-20 thereunder. + +B. Marvell shall, within 10 days of the entry of this Order, pay a civil penalty in the +amount of $5,500,000 to the Securities and Exchange Commission for transfer to the general fund +of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is +not made, additional interest shall accrue pursuant to SEC Rule of Practice 600 and 31 U.S.C. +§3717. Payment must be made in one of the following ways: + + +11 + +(1) Respondent may transmit payment electronically to the Commission, which will +provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov through the +SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United States +postal money order, made payable to the Securities and Exchange Commission and +hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying Marvell as +the Respondent in these proceedings, and the file number of these proceedings; a copy of the cover +letter and check or money order must be sent to Anita Bandy, Associate Director, Division of +Enforcement, Securities and Exchange Commission, 100 F Street N.E., Washington, DC 20549- +6561A. + + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4077.txt b/raw/aaer/2019/AAER-4077.txt new file mode 100644 index 0000000000000000000000000000000000000000..3aa89f0f9a149543dfda6ccac50ea3df0ac4dfa6 --- /dev/null +++ b/raw/aaer/2019/AAER-4077.txt @@ -0,0 +1,1404 @@ + + + + + + + + + + + + + + + + SEC.gov | Tom Simeo + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/523491","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Tom Simeo , No. 1:19-cv-08621 (S.D.N.Y. filed September 17, 2019) + + + + + + + + + The Securities and Exchange Commission today announced fraud charges against Tom Simeo, the former Chairman and Chief Executive Officer of Viking Energy Group, Inc., for making materially misleading disclosures in Viking's publicly filed reports regarding Viking's purported Chief Financial Officer. + + The SEC alleges that Tom Simeo, a resident of New York City, New York, created the false impression to the public that Viking had an experienced financial professional involved in its operations and financial reporting as its CFO, when in reality, the Company had no CFO. According to the complaint, between November 2014 and May 2016, Viking's public filings falsely disclosed that Guangfang "Cecile" Yang was Viking's CFO. In addition, as alleged, certain SOX certifications accompanying these filings falsely represented that Yang, as Viking's CFO, had performed an evaluation of the Company's internal controls over financial reporting and reviewed Viking's annual and quarterly reports. The SEC alleges that Simeo created the false appearance that Yang served as CFO by repeatedly affixing Yang's signature to Viking's periodic reports and SOX certifications. The SEC alleges that, aside from Yang's purported signatures on Viking's filings, there is no evidence that Yang functioned as the Company's CFO from at least November 2014 through Yang's purported resignation in July 2016. + + The SEC previously filed a subpoena enforcement action against Simeo, compelling him to testify and produce, among other things, communications relating to Yang. The U.S. District Court for the District of Columbia entered an order on January 30, 2018, directing Simeo to comply with subpoenas issued to him by SEC staff in connection with its investigation. + + The SEC's complaint charges Simeo with violating the antifraud provisions of Sections 17(a)(1) and (3) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The SEC seeks a permanent injunction against future violations, a penny stock bar, and a civil monetary penalty. The SEC also seeks an order barring Simeo from serving as an officer and director of a public company. + + The SEC's investigation was conducted by Laura D'Allaird and Jeffrey Anderson, and supervised by Peter Rosario, Yuri B. Zelinsky, and Antonia Chion. The SEC's litigation will be led by John Worland and Stephan Schlegelmilch. + + See also: Litigation Release No. 24002 (Dec. 5, 2017); Litigation Release No. 24040 (Feb. 2, 2018) + + + + + + + + SEC Complaint + + + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2019/AAER-4078.txt b/raw/aaer/2019/AAER-4078.txt new file mode 100644 index 0000000000000000000000000000000000000000..76a2bc578daae70b137e3898e0a103014194f410 --- /dev/null +++ b/raw/aaer/2019/AAER-4078.txt @@ -0,0 +1,115 @@ + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87007 / September 19, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4078 / September 19, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19470 + +In the Matter of +Kevyn N. Rakowski, CPA +Respondent. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS + PURSUANT TO RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE, +MAKING FINDINGS, AND IMPOSING +REMEDIAL SANCTIONS + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against Kevyn +N. Rakowski (“Respondent”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice.1 + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, Respondent admits the Commission’s +jurisdiction over her and the subject matter of these proceedings, and the findings contained in +Sections III.3. and III.5. below, and consents to the entry of this Order Instituting Public + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + + 2 +Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. Respondent, age 65, was previously licensed as a CPA in Pennsylvania and +Oklahoma. Those licenses have expired and been revoked, respectively. She served as Controller +of Wilmington Trust Corporation (“Wilmington”) from 2006 until 2011. + + 2. Wilmington was, at all relevant times, a bank holding company based in +Wilmington, Delaware and incorporated under the laws of the State of Delaware. Its securities +were registered with the Commission pursuant to Section 12(b) of the Securities Exchange Act of +1934 (“Exchange Act”), and its common stock traded on the New York Stock Exchange under the +symbol “WL.” + + 3. On May 6, 2015, the Commission filed a complaint against Respondent and +others in SEC v. Gibson, et al., 15-cv-363 (RGA) (D. Del.). On September 17, 2019, the Court +entered an order permanently enjoining Respondent, by consent, from future violations of Section +17(a) of the Securities Act of 1933 [15 U.S.C. § 77q(a)]; and Sections 10(b) and 13(b)(5) of the +Exchange Act, and Rules 10b-5and 13b2-1 thereunder [15 U.S.C. §§ 78j(b) and 78m(b)(5), and 17 +C.F.R. §§ 240.10b-5 and 240.13b2-1]; and from aiding and abetting future violations of Sections +13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and +13a-13 thereunder [ 15 U.S.C. §§ 78(m)(a), 78m(b)(2)(A), and 78m(b)(2)(B), and 17 C.F.R. §§ +240.12b-20, 240.13a-1, 240.13a-11, and 240.13a-13]. Respondent also was also ordered, by +consent, to pay disgorgement of alleged ill-gotten gains in the amount of $37,617, and $6,719 in +prejudgment interest thereon. + + 4. The Commission’s complaint alleges, among other things, that Respondent +knowingly made, and/or substantially participated in making, material false disclosures concerning +the Wilmington’s accruing loans 90 days or more past due – a key credit quality metric. More +specifically, the complaint alleges that, from the third quarter of 2009 through the second quarter of +2010, Rakowski and others at Wilmington knowingly engaged in conduct that fraudulently misled +investors concerning the extent of past due, matured and extended loans in the Wilmington’s +commercial loan portfolio. The Complaint alleges that Defendants’ conduct resulted in a series of +materially false and misleading public disclosures in Wilmington’s public filings concerning its +accruing loans 90 days or more past due, including disclosures that understated the amount of such +loans by over $300 million. + +5. In a related criminal proceeding, United States v. Kevyn Rakowski, 15-CR- +23 (D. Del.), Respondent was convicted of, inter alia, securities fraud and conspiracy to commit +securities fraud, in violation of 18 U.S.C. §§ 1348 and 2; and 15 U.S.C. §§ 78m(a) and 78ff, which +conviction is pending appeal. + + 3 +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +Pursuant to Rule 102(e)(3)(i) of the Commission’s Rules of Practice, Kevyn N. +Rakowski is suspended from appearing or practicing before the Commission as an +accountant. + + By the Commission. + + + +Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4080.txt b/raw/aaer/2019/AAER-4080.txt new file mode 100644 index 0000000000000000000000000000000000000000..57e206a055289def3db87d498906d6a1f0bf30b0 --- /dev/null +++ b/raw/aaer/2019/AAER-4080.txt @@ -0,0 +1,1682 @@ + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87033 / September 20, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4080 / September 20, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-18292 + +In the Matter of + +Anton & Chia, LLP, +Gregory A. Wahl, CPA, +Michael Deutchman, CPA, +Georgia Chung, CPA, +and Tommy Shek, CPA, + +Respondents. + + + + +ORDER MAKING FINDINGS, AND +IMPOSING REMEDIAL SANCTIONS AND A +CEASE-AND-DESIST ORDER AGAINST +ANTON & CHIA, LLP PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE + + +I. + + On December 4, 2017, the Securities and Exchange Commission (“Commission”) +instituted public administrative and cease-and-desist proceedings against Anton & Chia, LLP +(“A&C” or “Respondent”), Gregory A. Wahl, CPA (“Wahl”), and Michael Deutchman, CPA +(“Deutchman”), pursuant to Sections 4C1 and 21C of the Securities Exchange Act of 1934 +(“Exchange Act”) and Rule 102(e)(1)(ii) and (iii) of the Commission’s Rules of Practice,2 and + +1 Section 4C(a)(2) and (3) provide, in pertinent part, that the Commission may censure any +person, or deny, temporarily or permanently, to any person the privilege of appearing or +practicing before the Commission in any way, if that person is found . . . to have engaged in +unethical or improper professional conduct; or to have willfully violated, or willfully aided +and abetted the violation of, any provision of the securities laws or the rules and regulations +issued thereunder. + +2 Rule 102(e)(1)(ii) and (iii) provide, in pertinent part, that the Commission may censure a +person or deny, temporarily or permanently, the privilege of appearing or practicing before +it in any way to any person who is found . . . to have engaged in unethical or improper + 2 +against Georgia Chung, CPA (“Chung”) and Tommy Shek, CPA (“Shek”) pursuant to Section 4C +of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +II. + +A&C has submitted, by and through Jeffrey I. Golden, of Weiland Golden Goodrich LLP, +solely in his capacity as A&C’s Chapter 7 bankruptcy trustee (the “Trustee”) appointed in A&C’s +bankruptcy case before the United States Bankruptcy Court for the Central District of California, +Case No. 8:18-bk-12565-TA (the “Bankruptcy Court”), an Offer of Settlement (the “Offer”), +which the Commission has determined to accept. Solely for the purpose of these proceedings and +any other proceedings brought by or on behalf of the Commission, or to which the Commission is +a party, and without admitting or denying the findings herein, except as to the Commission’s +jurisdiction over A&C and the subject matter of these proceedings, which are admitted, A&C, by +and through the Trustee, consents to the entry of this Order Making Findings, and Imposing +Remedial Sanctions and a Cease-and-Desist Order Against Anton & Chia, LLP Pursuant to +Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s +Rules of Practice (the “Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. These proceedings involve serial violations of the federal securities laws and +improper professional conduct by public accounting firm A&C, related to the audit and/or interim +review engagements for three separate microcap company clients: Accelera Innovations, Inc. +(“Accelera”), Premier Holding Corporation (“Premier”), and CannaVEST Corp. (“CannaVEST”) +(together, the “Reporting Companies”). In performing the audits and interim reviews of the +Reporting Companies’ financial statements, A&C egregiously deviated from multiple standards of +the Public Company Accounting Oversight Board (“PCAOB”) and ignored numerous red flags that +indicated the Reporting Companies’ financial statements and public filings contained material +misstatements. + +2. In the Accelera matter, Accelera inflated its financial position and results by +treating another company’s revenues, assets, and liabilities as its own. Accelera’s public filings for +year-end 2013 through year-end 2015 included revenue from an entirely separate company – a + +professional conduct; or to have willfully violated, or willfully aided and abetted the +violation of any provision of the Federal securities laws or the rules and regulations +thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + 3 +putative subsidiary that Accelera did not own or control. As a result of this improper +consolidation, Accelera’s financial statements overstated its revenue by 69% to 90% during the +relevant period. Yet A&C audited Accelera’s financials and opined that they fairly represented +Accelera’s financial condition and results and complied with generally accepted accounting +principles. + +3. In Premier’s 2013 year-end audit, A&C accepted Premier management’s grossly +inflated and wholly unsupported valuation of the company’s largest tangible asset: an unsecured +promissory note (“Note”) issued in January 2013 by a new company that had essentially taken over +a business that had generated a $756,000 loss for Premier for 2012, and which had defaulted on its +first payment obligation under the Note. A&C also improperly accepted management’s accounting +for the company’s largest intangible asset – goodwill reportedly derived from Premier’s acquisition +of a controlling interest in a private company. Although the stake in the private company had been +acquired over a year earlier, management still allocated the entire purported value of the asset to +goodwill, because the valuation of the identifiable assets and liabilities acquired had not been +completed. In addition, management failed to adequately assess that goodwill for impairment. +Together, the Note and the goodwill associated with the controlling interest in the private company +represented 75% of the company’s reported assets on December 31, 2013. The receipt of the Note +had also purportedly generated almost a million dollars in income. In performing its audit of +Premier’s FY 2013 financial statements, A&C failed to adhere to multiple auditing standards, by +failing to, among other things, obtain sufficient appropriate audit evidence and failing to exercise +due care and professional skepticism. In addition, A&C ignored red flags indicating that the Note +was part of a round-trip exchange between related parties of essentially worthless assets for stock. + +4. A&C disregarded red flags and violated professional standards in the audits of +Accelera from 2013 to 2015, and also in the audit of Premier in 2013. The process was +fundamentally flawed. A&C then issued reports on the financial statements of Accelera and +Premier, claiming that A&C had conducted the audits in accordance with the standards of the +PCAOB. The reports, in turn, opined that the financial statements fairly presented the financial +positions and results of Accelera and Premier, respectively, and followed Generally Accepted +Accounting Principles (“GAAP”). A&C knew, or was reckless in not knowing, that the statements +in A&C’s reports for Accelera and Premier were false and misleading. + +5. In the CannaVEST matter, CannaVEST’s assets were materially overstated on its +2013 first and second quarter balance sheets filed in its Forms 10-Q. The overstatements related to +CannaVEST’s acquisition of PhytoSphere Systems, LLC (“PhytoSphere”) on January 29, 2013 for +a purported purchase price of $35 million. CannaVEST knew it was paying substantially less than +$35 million to acquire PhytoSphere because it was mainly paying with CannaVEST stock that had +little value. CannaVEST, however, recorded $35 million in assets on its balance sheet related to the +acquisition. A&C did not identify the overstatements during the first and second quarter interim +reviews because, among other things, A&C failed to make adequate inquiries of management +regarding the fair value of the consideration that CannaVEST paid for PhytoSphere, i.e., the fair +value of CannaVEST’s stock as of January 29, 2013. In the third quarter of 2013, CannaVEST +wrote down the value of the assets related to the PhytoSphere acquisition to $8 million after +obtaining a third-party valuation report that valued PhytoSphere at $8 million as of January 29, + 4 +2013. During the third quarter interim review, however, A&C failed to consider whether a +restatement of CannaVEST’s first and second quarter balance sheets was necessary. In April 2014, +CannaVEST restated all three quarters to reflect $8 million in assets related to the PhytoSphere +acquisition on CannaVEST’s balance sheet. During CannaVEST’s interim reviews, A&C engaged +in improper professional conduct by failing to adhere to PCAOB standards and ignoring a number +of red flags that indicated that CannaVEST’s financial information contained material +misstatements. + +6. As described below, in connection with A&C’s audits and interim reviews of +Accelera’s FY 2013 through FY 2015 financial statements: + +a. A&C willfully violated Exchange Act Section 10(b) and Rule 10b-5(b) +thereunder, and Rule 2-02(b) of Regulation S-X; + +b. A&C willfully aided and abetted and was a cause of Accelera’s violation of +Section 13(a) of the Exchange Act, and Rules 13a-1 and 13a-13 thereunder; +and + +c. A&C willfully violated and willfully aided and abetted violations of the +federal securities laws or the rules and regulations thereunder for the +purposes of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice, and engaged in improper professional +conduct within the meaning of Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +7. As described below, in connection with A&C’s audit of Premier’s FY 2013 financial +statements: + +a. A&C willfully violated Exchange Act Section 10(b) and Rule 10b-5(b) +thereunder, and Rule 2-02(b) of Regulation S-X; + +b. A&C willfully aided and abetted and was a cause of Premier’s violation of +Section 13(a) of the Exchange Act, and Rule 13a-1 thereunder; and + +c. A&C willfully violated and willfully aided and abetted violations of the +federal securities laws or the rules and regulations thereunder for the +purposes of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of +the Commission’s Rules of Practice, and engaged in improper professional +conduct within the meaning of Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + +8. As described below, in connection with CannaVEST’s 2013 interim reviews, A&C +engaged in improper professional conduct within the meaning of Section 4C(a)(2) of the Exchange +Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. + + 5 +RESPONDENT + +9. Anton & Chia, LLP, a PCAOB registered audit firm since 2009, is a California +limited liability partnership that was headquartered in Newport Beach, California, with additional +offices in San Diego and Westlake Village, California. A&C was founded in 2009 by Chung, and +is co-owned by Chung and her husband, Wahl, who is A&C’s managing partner. On July 15, +2018, A&C filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code, Case No. +8:18-bk-12565-TA (Bankr. C.D. Cal.). On August 10, 2018, the bankruptcy court converted the +case to Chapter 7 of the Bankruptcy Code. On August 13, the Trustee was appointed Chapter 7 +trustee for A&C. As relevant here, A&C performed Accelera’s 2013 through 2015 year-end audits +and 2014 through 2015 interim reviews, Premier’s 2013 year-end audit, and CannaVEST’s 2013 +interim reviews. + +OTHER RELEVANT PERSONS AND ENTITIES + +Accelera-Related Entities + +10. Accelera Innovations, Inc. is a Delaware corporation with its principal place of +business in Frankfort, Illinois. It was formerly known as Accelerated Acquisition IV, Inc. and +was incorporated in April 2008 as a shell company. The company claimed to be “a healthcare +service company which is focused on acquiring companies primarily in the post-acute care +patient services and information technology services industries.” Its common stock was quoted +on OTC Link, operated by OTC Markets Group, Inc. and formerly known as the Pink Sheets +(“OTC Link”) under ticker ACNV beginning in January 2014. During the relevant time frame +(April 2014 through August 2016), Accelera filed periodic reports, including Forms 10-K and +10-Q, with the Commission pursuant to Section 13(a) of the Exchange Act and related rules +thereunder.4 + +11. Behavioral Health Care Associates, Ltd. (“BHCA”) is a health care provider +based in Schaumberg, Illinois specializing in psychiatry and substance abuse treatment. 100% of +its stock is owned by its founder, director, and sole owner. In or around October of 2012, the +owner placed BHCA for sale. Accelera entered into an agreement to acquire BHCA, but never +closed the deal. + +Premier-Related Entities + +12. Premier Holding Corporation is a Nevada corporation with its principal place of +business in Tustin, California. At all relevant times, Premier was a self-described provider of a + +4 On September 29, 2017, the Commission filed a civil injunctive action against Accelera, +its Chairman, and a related company in the United States District Court for the Northern +District of Illinois. (Case No. 17-cv-7052). On the same day, the Commission also filed +a civil injunctive action in that district against Accelera’s CFO, and later filed a motion +for entry of judgment based on a bifurcated settlement. (Case No. 17-cv-7057). + + 6 +large array of energy services through its subsidiary companies. Premier’s common stock is and +was at all relevant times registered with the Commission pursuant to Section 12(g) of the Exchange +Act and quoted on the OTC Link, under ticker PRHL. Premier files periodic reports, including +Forms 10-K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange Act and +related rules thereunder. Premier’s fiscal year ends on December 31. Throughout the relevant +period, Premier raised funds through purportedly private sales of stock. For most of the relevant +period, Premier was run, at least nominally, by Kevin Donovan and, from October 2012 on, by +Randall Letcavage.5 + +13. WePower Ecolutions, Inc. was a wholly-owned subsidiary of Premier formed in +November 2011 for the purpose of “offer[ing] renewable energy production and energy +efficiency products and services. ” In January 2013, Premier effectively sold the business and the +name. On February 26, 2013, WePower Ecolutions’ name was changed to Energy Efficient +Experts. + +14. WePower Eco Corp. (“New Eco”), a Delaware corporation located in Aliso Viejo, +California, effectively acquired WePower Ecolutions in January 2013. + +15. The Power Company USA, LLC (“TPC”) was a privately-owned deregulated +power broker that brokered power to both residential and commercial users in the twelve states that +allowed the distribution of deregulated power. Since February 28, 2013, TPC has been 80% +owned by Premier. + +CannaVEST-Related Persons and Entities + +16. CannaVEST Corp. is a Delaware corporation headquartered in Las Vegas, +Nevada. CannaVEST, originally a shell company named Foreclosure Solutions, Inc., changed its +name to CannaVEST Corp. (OTCBB, ticker: CANV) on January 29, 2013. CannaVEST entered +into the business of acquiring raw hemp product from suppliers in Europe and reselling it to third +parties and also developing, producing, and selling consumer products that contain Cannabidiol +(“CBD”) oil (a type of hemp oil). In early January 2016, CannaVEST changed its name to CV +Sciences, Inc. (OTCQB, ticker: CVSI), and claimed to develop pharmaceutical drugs that contain +CBD oil. CannaVEST’s common stock is registered with the Commission pursuant to Exchange +Act Section 12(g). + +17. Michael J. Mona, Jr., age 63, of Las Vegas, Nevada, was CannaVEST’s CEO and +a board member. Mona became CannaVEST’s CEO in November 2012, and a board member in +January 2013. Mona resigned as CEO and from the Board on May 31, 2018.6 + +5 On December 4, 2017, the Commission filed a civil injunctive action against Premier, +Letcavage, and another individual in the United States District Court for the Southern +District of New York. + +6 On June 15, 2017, the Commission filed a civil injunctive action against CannaVEST and +Mona in the United States District Court for Nevada (Case No. 2:17-CV-01681-APG- + 7 +FACTS + +2013-2015 ACCELERA AUDITS AND REVIEWS + +Background + +18. Accelera’s public filings were supposed to reflect Accelera’s financial condition +and results, but in reality, they included the revenues, assets, and liabilities of an entirely separate +company. Accelera inflated its financial position and results in its public filings by including the +revenues, assets, and liabilities of a company that it did not own or control. By including the +financial results of another company, Accelera painted a rosier picture of its finances than was +accurate, misleading the investing public about its true financial condition and results. + +19. A&C did not stand in the way of Accelera’s fraud. Instead, A&C facilitated it. + +20. A&C audited Accelera’s year-end financial statements for 2013, 2014, and 2015. +Accelera’s Forms 10-K for each of those years included audit reports containing unqualified +opinions from A&C. In addition, A&C performed the quarterly reviews of Accelera’s financial +statements throughout 2014 and 2015. + +21. A&C opined that Accelera’s financial statements fairly presented its financial +condition and results, and conformed with generally accepted accounting principles. + +22. A&C’s reports in Accelera’s 10-Ks provided: “In our opinion, the consolidated +financial statements referred to above present fairly, in all material respects, the consolidated +financial position of Accelera Innovations, Inc. as of [date], and the consolidated results of their +operations and their cash flows for each of the years then ended, in conformity with accounting +principles generally accepted in the United States of America.” A&C also represented that it had +“conducted our audits in accordance with the standards of the Public Company Accounting +Oversight Board (United States).” + +23. For the quarterly reviews, the Engagement Summary Memos stated that A&C +“review[ed] the financial statements of the Company” and performed “procedures to ensure that +there are no material misstatements in the financial statements.” + +24. In reality, most of Accelera’s purported revenues did not belong to Accelera at all. + +25. A&C facilitated Accelera’s fraud. A&C knew, or was reckless in not knowing, that +Accelera never acquired the purported subsidiary. A&C knew, or was reckless in not knowing, +that most of Accelera’s purported revenues came from a company that Accelera did not own or +control. + +PAL). CannaVEST and Mona consented to the entry of final judgments that included +permenant injunctions and civil penalties against them, and a five year officer and +director bar against Mona. On June 1, 2018, the court entered these final judgments. + 8 + +26. A&C’s audit and interim reviews played a significant role in Accelera’s +misrepresentations. Without audited financial statements, Accelera could have not have filed its +10-Ks. Without quarterly reviews, Accelera could not have filed its 10-Qs. A&C’s misconduct +enabled Accelera to file false financial statements and provide misinformation to the market about +its true financial condition and results. + +27. During the relevant time frame (April 2014 through August 2016), Accelera stock +was publicly traded through OTC Link. Accelera also issued approximately 8.8 million shares of +its common stock and sold at least 92,000 shares of common stock through an affiliated entity. + +Improper Consolidation of BHCA into Accelera’s Financial Statements + +28. Beginning with the year-end financial statements for 2013, Accelera consolidated +into its publicly-filed financial statements the financial condition and results of a purported +subsidiary, Behavioral Health Care Associates (“BHCA”). Accelera treated BHCA’s revenues, +assets, and liabilities as if they belonged to Accelera. Accelera continued to consolidate BHCA’s +financials with Accelera’s financial statements through the Form 10-K for the year ending +December 31, 2015, which was filed in August 2016. + +29. By consolidating BHCA, Accelera filed materially misstated consolidated financial +statements, including statements of operations, balance sheets, statements of cash flow, and +statements of changes in stockholders’ deficit. Accelera inflated its revenues, assets, and liabilities, +and included inaccurate related footnote disclosures. + +30. Consolidating BHCA’s financials with Accelera’s financials had a material impact +on Accelera’s financial statements. Accelera substantially overstated its true financial results. + +31. Before the Stock Purchase Agreement with BHCA in November 2013 (explained +below), Accelera was a shell company with little or no assets and revenues. In its Form 10-Q for +the quarter before the Stock Purchase Agreement, Accelera reported $0 of revenues and $50 of +assets. + +32. In 2013 – 2015, the vast majority of Accelera’s reported revenue was, in reality, the +revenue of BHCA. BHCA’s revenue comprised approximately 90% of Accelera’s purported +revenue in 2013 and 2014, and 69% in 2015. + +33. Accelera’s Form 10-K for 2013 reported revenues of $411,036. In reality, +approximately $375,882 of the $411,036 was the revenue of BHCA, not Accelera. Accelera’s +Form 10-K for 2014 reported revenues of $2,715,523. In reality, approximately $2,448,157 of the +$2,715,523 was the revenue of BHCA, not Accelera. Accelera’s Form 10-K for 2015 reported +revenues of $3,623,131. In reality, approximately $2,489,000 of the $3,623,131 was the revenue +of BHCA, not Accelera. + + 9 +34. Accelera never actually owned or controlled BHCA. Accelera agreed to buy +BHCA, but never consummated the acquisition of BHCA. + +35. On November 11, 2013, Accelera and BHCA entered into a Stock Purchase +Agreement (the “Stock Purchase Agreement”) whereby Accelera agreed to purchase 100% of the +shares of BHCA in exchange for a total of $4.55 million. Specifically, under the BHCA Stock +Purchase Agreement, Accelera promised to pay BHCA’s owner a total of $4.55 million. The first +$1 million was due within 90 days, and the remaining $3.55 million was to be paid in regular +installments pursuant to the terms of a promissory note. After the first payment (i.e., $1 million), +the shares of BHCA were to be placed into escrow pending the final payment. After the final +payment, the shares were to be transferred free and clear to Accelera. Before the first payment, the +shares were to remain with BHCA’s owner, and BHCA’s owner had the right to cancel the +transaction at any time. + +36. The BHCA Stock Purchase Agreement, the promissory note, and other documents +memorializing the transaction all made clear that any ownership interest in BHCA would pass only +after Accelera paid BHCA’s owner for the shares. For example: + +a. The Stock Purchase Agreement stated that 100% of the stock in BHCA +would change hands only “[u]pon payment of the purchase price set forth in +Section 1.1.1.1.” + +b. The promissory note indicated that it was only “effective upon the payment +of the purchase price set forth in Section 1.1.1.1.” + +c. The bill of sale stated that the owner of BHCA would sell to Accelera 100% +of the shares of BHCA “effective upon the payment of the purchase price +set forth in Section 1.1.1.1 of the Purchase Agreement.” + +37. A&C knew about the Stock Purchase Agreement. The Stock Purchase Agreement +was included among the work papers for A&C’s engagements with Accelera, including the 2013 +audit and some of the 2015 quarterly reviews. A&C knew, or was reckless in not knowing, that +Accelera would not acquire any shares of BHCA unless it paid for them. + +38. Accelera never made the initial $1 million payment referenced in Section 1.1.1.1 of +the Stock Purchase Agreement. In fact, Accelera never paid a single dollar for BHCA. + +39. Instead, Accelera and BHCA’s owner entered into a series of amendments to the +Stock Purchase Agreement, under which the timeline for payment was pushed back in exchange +for a certain number of shares of Accelera common stock. These amendments did not otherwise +alter the terms of the agreement. In other words, the terms of the agreement remained that +Accelera would not receive the shares of BHCA before payment. In addition, BHCA’s owner +could cancel the transaction at any time before payment. + + 10 +40. A&C knew about the amendments to the Stock Purchase Agreement. The +amendments to the Stock Purchase Agreement were among the work papers for the A&C +engagements with Accelera, including the 2014 audit. Members of the A&C engagement team +reviewed and signed off on those work papers. The amendments to the Stock Purchase Agreement +also were included among the work papers for the 2015 audit and the 2015 quarterly reviews. + +41. Accelera never acquired BHCA. BHCA was not Accelera’s subsidiary at any time. + +42. Accelera never acquired any shares of BHCA, let alone all of the shares of BHCA. +Accelera did not acquire any shares of BHCA because it never paid for them. + +43. A&C knew, or was reckless in not knowing, that Accelera never paid for any shares +of BHCA. + +44. Throughout the pendency of the Stock Purchase Agreement, Accelera never +controlled BHCA in any way. BHCA controlled its own business and affairs. BHCA kept the +revenue it earned, and never allocated any portion of its earnings to Accelera. Accelera did not +direct any hiring or firing or other managerial decisions at BHCA. Accelera did not exercise day- +to-day control over BHCA’s operations. BHCA’s management ran the business as it always had. + +45. On March 31, 2016, BHCA’s owner and Accelera entered into an agreement +officially terminating the Stock Purchase Agreement, effective retroactively to January 1, 2016. + +46. A&C knew, or was reckless in not knowing, that Accelera did not own or control +BHCA. A&C knew, or was reckless in not knowing, that Accelera could not claim as its own the +revenues of a separate company that Accelera did not own or control. + +47. Consolidating Accelera’s financials with BHCA’s financials – even though +Accelera did not own or control BHCA – violated GAAP. See ASC 805 and 810. + +48. By misstating its revenue in its publicly-filed financial statements, as described +above, Accelera violated Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder. + +49. Without A&C’s substantial assistance, Accelera would not have been able to file its +erroneous Form 10-Qs and Form 10-Ks. + +Red Flags Indicating BHCA Was Improperly Consolidated + +50. In addition to the clear language of the BHCA Stock Purchase Agreement and the +other agreements, A&C had other reasons to question the propriety of consolidating BHCA into +Accelera’s financial statements. There were multiple red flags indicating that the consolidation of +BHCA was inappropriate and that Accelera’s financial statements were therefore materially +inaccurate. A&C failed to identify, analyze, or document those red flags. + + 11 +51. For example, BHCA told A&C that Accelera had not acquired the company. +During field work in 2014, 2015, and 2016, BHCA’s owner told A&C staff that Accelera did not +own or control BHCA. BHCA’s owner also instructed A&C staff not to mention Accelera to any +BHCA staff. During the 2014 audit field work, BHCA’s owner told A&C staff not to disclose the +purpose of the audit to any BHCA employees, because those employees were not aware of any +deal with Accelera. + +52. For the 2014 and 2015 year-end audits, A&C requested that BHCA’s owner +execute confirmations of liability that made clear that the entire purchase price – all of the $4.55 +million owed by Accelera under the Stock Purchase Agreement – was unpaid. The “Original +amount of note” and the “Unpaid principal balance” were the same: “$4,550,000.” In each +instance, BHCA’s President and owner signed the confirmations, and thus made clear that +Accelera had not paid any of the purchase price for the BHCA shares. He added language +clarifying that, “[t]o the extent the terms of this letter conflict with the terms of the Parties’ Stock +Purchase Agreement, the terms of the Stock Purchase Agreement shall control.” + +53. A&C knew about the confirmations of liability. The confirmations of liability were +included among the work papers. + +54. During the fall of 2014 and the winter of 2015, Accelera’s newly-hired CFO raised +concerns to A&C about the consolidation of BHCA on several occasions. For example: + +a. In December 2014, the CFO wrote to A&C that he “thought these entities +were inappropriately consolidated.” He asked that A&C share its “research +and analysis” supporting consolidation. A&C never provided the CFO with +any research or analysis. + +b. In February 2015, the CFO wrote to A&C to set up a conference call among +himself, A&C, and Accelera’s counsel to discuss, among other things, “[t]o +consolidate or not consolidate [BHCA].” The CFO also wrote that +Accelera’s “subsidiary never controlled [BHCA] so it doesn’t sound to me +there should have been a consolidation.” + +c. During the conference call, which took place in February 2015 and was +attended by A&C, the CFO advocated that Accelera restate its financials to +remove BHCA. + +55. Accelera declined to heed the CFO’s advice regarding the propriety of past and +future consolidation of BHCA, and A&C did not object. The CFO ultimately resigned, shortly +before Accelera filed its Form 10-K for 2014. + +56. A&C knew, or was reckless in not knowing, that Accelera never filed an 8-K +containing BHCA’s financial statements. Items 2.01 and 9.01 of Form 8-K requires reporting +companies to file financial statements of acquired businesses. See also Exchange Act Rule 13a-11. +Here, if Accelera had, in fact, acquired BHCA, Accelera would have had the obligation to file a + 12 +Form 8-K with financial statements for BHCA. Accelera’s failure to file an 8-K with financial +statements for BHCA was a sign that Accelera never acquired BHCA at all. + +57. Accelera’s management took a different approach to accounting for other, similar +potential acquisitions. In late 2014 and early 2015, Accelera entered into three new purchase +agreements with other entities that contained substantially identical terms to the BHCA Stock +Purchase Agreement. As with BHCA, Accelera never made any payments toward these purchases. +Instead, as with BHCA, the parties entered into extension agreements. However, despite the +similarities, Accelera never consolidated those other companies into its financial statements. This +disparity did not prompt A&C to re-examine Accelera’s treatment of BHCA. + +58. As of October 1, 2015, Accelera was in default on the Stock Purchase Agreement +(the final extension entered into by the parties expired on September 30, 2015). + +59. In or around late-2015, Accelera’s Chief Strategic Officer contacted A&C. She +argued that Accelera should restate its financials to remove BHCA, and explained that Accelera +had never had control over BHCA. A&C said that restatement was unnecessary. + +60. In March of 2016, Accelera provided A&C with a draft termination agreement from +BHCA’s owner’s attorney. The draft required Accelera to “disclos[e] that [Accelera] did not own +an interest in [BHCA] and should not have recognized on its books and records the revenue and +expenses of [BHCA] for the years of 2012 [sic], 2013, 2014, and 2015.” In a cover email +transmitting the draft agreement, an Accelera officer wrote to A&C, “[t]his continues to be an issue +…. I need to know how we can remove the revenue and restate all those years.” In response to the +e-mail and draft, A&C asked if it was “possible to negotiate this section” of the termination +agreement. Ultimately, the final version of the termination agreement did not include a restatement +requirement. Later, A&C bragged to Accelera about its handling of this issue, writing to Accelera +that “[o]ur firm helped you, through my own guidance, to review and point out flaws in the legal +agreements related to the [BHCA] termination and avoid multiple years of restatements. Not just +any accounting firm would be able to provide this kind of value.” + +61. Notwithstanding the red flags described above, A&C signed the auditor reports for +the Form 10-Ks that Accelera filed in 2013, 2014, and 2015. In addition, A&C approved the +issuance of Accelera’s 2014 and 2015 interim reviews. + +Inadequate Procedures Regarding the BHCA Transaction + +62. A&C’s audits were fundamentally flawed. A&C performed inadequate audit +procedures to verify the propriety of consolidating BHCA, to the extent that A&C performed any +audit procedures at all. + +63. During the 2013 audit of Accelera, a newly-hired staff accountant with no audit +experience drafted a memorandum ostensibly analyzing the BHCA transaction (the “Acquisition +Memo”). The Acquisition Memo contains faulty, inadequate, conclusory, and incomplete analysis, +and it does not support the conclusion that Accelera had control over BHCA in 2013. + 13 + +64. For example, the Acquisition Memo states that a “key” question when determining +if a transaction constitutes a business combination is “did someone gain control.” But the memo +does not analyze whether Accelera, in fact, controlled BHCA. Instead, the memo states that +Accelera may control BHCA in the future: “Under the terms of the Agreement . . . the Acquirer +will obtained [sic] 100% ownership.” + +65. As a second example, the Acquisition Memo emphasizes that the “acquisition date” +is “the date the acquirer obtains control,” and is “not necessarily the date of an agreement or +reaching binding terms.” But the memo never actually identifies an acquisition date for the BHCA +transaction, and never analyzes whether Accelera had, in fact, obtained control over BHCA. + +66. As another example, the Acquisition Memo acknowledges that Accelera had not yet +paid for the BHCA shares. The memo states that the payment would take place sometime in the +future: “the Issuer will pay BHCA $4,550,000.” The memo does not analyze when Accelera +would pay for the shares, or whether Accelera would own the BHCA shares before paying for +them. + +67. The Acquisition Memo states that BHCA “would become” a “wholly owned +subsidiary of the Issuer” as a result of the payment of $4,550,000. + +68. As a final example, the Acquisition Memo uses the future tense when describing +Accelera’s control of BHCA. “Revenue will begin to accrue to the Issuer from Target operations +prospectively from the date the Issuer obtains control.” + +69. A&C prepared no other documentation analyzing whether Accelera had acquired or +controlled BHCA, or analyzing whether it was appropriate to consolidate their financials. + +70. Apart from drafting the Acquisition Memo and reviewing the Stock Purchase +Agreement and other agreements documenting the transaction, the engagement team did not +perform any procedures to analyze the propriety of consolidating BHCA into Accelera during the +2013 audit. + +71. Despite the fact that Accelera failed to make any payments toward the purchase of +BHCA during 2014, A&C did not perform any analysis of the propriety of consolidating BHCA +into Accelera’s financials in conducting Accelera’s quarterly reviews for the year 2014. By the +time A&C conducted those reviews, BHCA’s owner had already told A&C that Accelera did not +own or control BHCA. + +72. In auditing Accelera’s year-end financial statements for 2014, members of the A&C +engagement team never discussed the propriety of consolidating BHCA. Instead, the team +deferred, without analysis, to the audit team’s 2013 conclusion that consolidation was appropriate. + +73. Despite the multiple red flags raised during 2015 – including, but not limited to, +Accelera’s CFO advising that consolidation was inappropriate – A&C never addressed the + 14 +propriety of Accelera’s decision to consolidate BHCA into Accelera’s financial statements during +the quarterly reviews conducted during 2015. + +74. Although A&C personnel claim that the BHCA consolidation was discussed +internally during the 2015 year-end audit engagement, there is no documentation of those +discussions or analysis. In addition, key documents regarding the BHCA transaction – including +the Acquisition Memo, the Stock Purchase Agreement, and the promissory note – are not among +the 2015 audit work papers. + +Failure to Appropriately Staff the Engagements and to Properly Supervise Staff + +75. A&C violated professional auditing standards when it assigned staff to the Accelera +audits. A&C assigned staff who did not have the requisite experience and expertise, or the +requisite availability, to perform the audits. A&C also failed to adequately supervise the staff who +were assigned. In addition, the EQR for the 2014 audit, played an inappropriate role in that audit. + +76. Under PCAOB Standard AU § 210, Training and Proficiency of the Independent +Auditor, the auditor is required to have “adequate technical training and proficiency as an auditor.” +(AU § 210.01).7 In addition, under PCAOB Standard AU § 230, Due Professional Care in the +Performance of Work, an auditor “should possess ‘the degree of skill commonly possessed’ by +other auditors.” (AU § 230.05). + +77. PCAOB Standard AS No. 10, Supervision of the Audit Engagement, states that the +engagement partner “is responsible for proper supervision of the work of engagement team +members and for compliance with PCAOB standards.” To determine the extent of supervision +necessary, the engagement partner should take into account, among other things, “[t]he risks of +material misstatement” and “[t]he knowledge, skill, and ability of each engagement team member.” +(AS No. 10.6). In addition, under QC § 20, the amount of supervision required depends on the +ability and experience of the personnel. (QC § 20.11). + +78. PCAOB Standard AS No. 7, Engagement Quality Review, states that the EQR must +be independent of the company, perform the engagement quality review with integrity, and +maintain objectivity in performing the review. (AS No. 7.6). In particular, the EQR should not +“assume any of the responsibilities of the engagement team.” (AS No. 7.7). + +79. The 2013 audit of Accelera was staffed by: (a) a newly-hired staff accountant who +had no audit experience; (b) a second staff accountant with one year of experience; and (c) an +engagement partner, who was – at the time – allegedly working 80 to 100 hours a week and acting +as the engagement partner for half of the firm’s clients. There was no manager assigned to the +2013 audit. + + +7 References herein to the PCAOB standards are to the standards that were in effect at the +time of the relevant conduct. + 15 +80. The newly-hired staff accountant, who had no audit experience, and who had never +before analyzed or researched these topics, was tasked with preparing the Acquisition Memo. As +discussed above, the Acquisition Memo was flawed, did not support the conclusion that Accelera +had control over BHCA, and contained faulty, inadequate, conclusory, and incomplete analysis. +Although an engagement partner purportedly supervised this staff accountant’s work in drafting +the memorandum, these issues and errors were not resolved. + +81. The EQR that A&C had assigned on the 2014 audit and on the quarterly reviews +from the third quarter of 2014 through the second quarter of 2015 had been reprimanded twice by +A&C for failure to properly supervise staff accountants and for substandard job performance. + +82. Notwithstanding the EQR’s disciplinary issues, he was given responsibilities far +exceeding those typically or appropriately assigned to an EQR. The EQR fulfilled many of the +roles that should have been filled by the engagement partner. For example, the EQR handled +communications with Accelera and Accelera’s counsel and, according to audit staff, was more +actively involved than the engagement partner. This level of involvement compromised the EQR’s +ability to operate objectively, as required by AS No. 7. + +83. A&C did not staff any partner-level employees on the engagement for the third +quarter 2015 quarterly review of Accelera. + +Failure to Obtain Sufficient Appropriate Audit Evidence + +84. A&C did not support its audit opinion with sufficient appropriate audit evidence. +A&C did not gather sufficient evidence to support its opinion, including evidence that Accelera +owned or controlled BHCA. A&C also did not give sufficient weight to evidence that undermined +its opinion. + +85. PCAOB Standard AS No. 15, Audit Evidence, requires the auditor to “plan and +perform audit procedures to obtain sufficient appropriate audit evidence to provide a reasonable +basis for his or her opinion.” (AS No. 15.4). Further, “[i]f audit evidence obtained from one +source is inconsistent with that obtained from another … the auditor should perform the audit +procedures necessary to resolve the matter and should determine the effect, if any, on other aspects +of the audit.” (AS No. 15.29). Among other things, “[e]vidence obtained from a knowledgeable +source that is independent of the company is more reliable than evidence obtained only from +internal company sources.” (AS No. 15.8). Appropriate audit evidence must be “both relevant and +reliable in providing support for the conclusions on which the auditor’s opinion is based.” (AS No. +15.6-15.8). Similarly, for the interim reviews, A&C was required to perform “procedures to obtain +a basis for communicating whether he or she is aware of any material modifications that should be +made to the interim financial information for it to conform with generally accepted accounting +principles.” PCAOB Standard AU § 722, Interim Financial Information at AU § 722.15. If, in +performing its review of interim financial information, A&C became aware of information +indicating that that information may not be in conformity with GAAP in all material respects, +A&C was required to “make additional inquiries or perform other procedures” that it considered + 16 +“appropriate to provide a basis for communicating whether [it was] aware of any material +modifications that should be made to the interim financial information.” (AU § 722.22). + +86. PCAOB Standard AU § 333, Management Representations, states that +representations from a company’s management “are part of the evidential matter the independent +auditor obtains, but they are not a substitute for the application of those auditing procedures +necessary to afford a reasonable basis for an opinion regarding the financial statements under +audit.” (AU § 333.02). AU § 333 also states that “[i]f a representation made by management is +contradicted by other audit evidence, the auditor should investigate the circumstances and consider +the reliability of the representation made. Based on the circumstances, the auditor should consider +whether his or her reliance on management’s representations relating to other aspects of the +financial statements is appropriate and justified.” (AU § 333.04). PCAOB Standard AS No. 3, +Audit Documentation, states that “audit documentation must include information the auditor has +identified relating to significant findings or issues that is inconsistent with or contradicts the +auditor’s final conclusions.” (AS No. 3.8). + +87. AS No. 7 required the EQR to evaluate whether appropriate consultations took +place on any “difficult or contentious matters.” (AS No. 7.10(h), 7.15(f)). + +88. A&C issued audit reports containing unqualified opinions. However, A&C failed +to obtain sufficient appropriate audit evidence to provide a reasonable basis for its opinions, to +understand the highly material transaction with BHCA, or to resolve inconsistencies. + +89. A&C knew that Accelera had material weaknesses in its internal control over +financial reporting. In its Forms 10-K, Accelera reported that its internal control over financial +reporting was ineffective as of December 31, 2014 and 2015. A&C noted in its 2014 and 2015 +audit planning memoranda that it had “determined not to rely on the internal control of the +company based on past audit experience.” + +90. In addition, as of July of 2015, A&C became aware that Accelera was under an +SEC investigation relating to its financial reporting, and specifically relating to the consolidation of +BHCA. + +91. A&C also improperly relied on Accelera management’s representations in the face +of contrary evidence. Among other things, Accelera’s agreements with BHCA contradicted +management’s representations regarding ownership of BHCA. Also, the draft termination +agreement from BHCA’s owner, which indicated that Accelera had never controlled BHCA, +contradicted Accelera’s accounting treatment of BHCA. Moreover, the representations from some +Accelera officers (that consolidation was inappropriate and that Accelera did not control BHCA) +contradicted the representations from other Accelera officers (that consolidation was appropriate). +However, A&C did not perform audit procedures necessary to resolve these conflicts. + +92. In addition, the EQR on the 2014 audit engagement failed to properly evaluate the +engagement team’s audit work and conclusions regarding the BHCA consolidation. The EQR +knew that Accelera’s agreements with BHCA indicated that Accelera would not own BHCA until + 17 +it had paid, and the EQR knew Accelera had not paid for BHCA. Also, Accelera’s CFO had +repeatedly called into question the accounting treatment of the BHCA transaction. However, the +EQR did nothing to determine whether the engagement team had appropriately considered that +transaction. + +Failure to Document Significant Findings or Issues + +93. A&C did not properly document its significant findings or issues about +consolidating Accelera’s financials with BHCA. + +94. PCAOB standards require accountants to document the procedures performed, +evidence obtained, and conclusions reached. (AS No. 3.6). In particular, auditors are required to +document any significant findings or issues, such as the results of procedures that indicate financial +statements could be materially misstated, as well as the actions taken to address those findings. +(AU § 722.52; AS No. 3.12). Audit documentation must contain, among other things, information +sufficient to allow an experienced auditor with no connection to the work to understand the +procedures performed, evidence obtained, and conclusions reached and to determine who +performed the work, when the work was completed, the person who reviewed the work, and the +date of the review. (AS No. 3.6). + +95. A&C failed to document communications that called into question the BHCA +consolidation, including the communications raising the issue of restatement from BHCA’s owner, +Accelera’s former CFO, and Accelera’s Chief Strategic Officer, as discussed above. + +96. Apart from the Acquisition Memo, A&C did not document any procedures that it +performed, if any, to address the issue of BHCA’s consolidation. + +Failure to Exercise Due Professional Care + +97. A&C did not exercise due professional care during the Accelera audits. + +98. PCAOB Standard AU § 230, Due Professional Care in the Performance of Work, +requires auditors to exercise due professional care throughout the audit, including by “exercise of +professional skepticism.” Under this standard, “[p]rofessional skepticism is an attitude that +includes a questioning mind and a critical assessment of audit evidence” (at AU § 230.07), and +auditors “consider the competency and sufficiency of the evidence” (at AU § 230.08) and “neither +assume[] that management is dishonest nor assume[] unquestioned honesty” (at AU § +230.09). (See also AU § 722.01). + +99. For the reasons outlined above, A&C failed to meet AU § 230. + + + + + + 18 +Failure to Maintain an Adequate System of Quality Control for Audits and Interim +Reviews + +100. PCAOB Standard QC § 20, System of Quality Control for a CPA Firm's +Accounting and Auditing Practice, provides that a CPA firm shall have a system of quality control +for its accounting and auditing practice. (QC § 20.01). Quality control includes adopting policies +and establishing procedures to provide the firm with reasonable assurance of complying with +professional standards. (QC § 20.04). Policies and procedures should be established to encompass +all phases of the design and execution of the engagement. (QC § 20.17-.18). Policies and +procedures should also address engagement quality reviews pursuant to PCAOB Standard AS No. +7, Engagement Quality Review. (QC § 20.18). + +101. A&C failed to design and maintain an adequate system of quality control for audit +and interim review engagements and engagement quality reviews because A&C’s quality control +policies and procedures manual failed to adequately address all phases of the design and execution +of these engagements. The policies and procedures covering audits were deficient because they +did not discuss, for example: (1) how the assessment of inherent risk, control risk, and fraud risk +affects the audit procedures performed; (2) a description of the test of controls and substantive +audit procedures, and how the test of controls affects the substantive audit procedures performed; +(3) the purpose of audit work papers and what should be included in the work papers; (4) +evaluating the audit evidence obtained to determine whether the evidence is sufficient and +appropriate to support the conclusions reached; and (5) evaluating misstatements identified by the +accountant or brought to the accountant’s attention. + +102. With regard to interim reviews, A&C’s manual included interim review procedures +for privately held companies, but did not include interim review procedures for publicly-held +companies. Even if the manual’s interim review procedures for privately held companies were +applied to publicly-held companies, the procedures would be deficient. For example, the +procedures did not discuss: (1) the objective of a review; (2) inquiring of a predecessor auditor +when conducting an initial review; (3) obtaining an understanding of a company’s internal control +as it relates to the preparation of financial information; (4) a description of inquiry and analytical +procedures, and when and how to apply these procedures; (5) the purpose of interim review work +papers and what should be included in the work papers; and (6) evaluating misstatements identified +by the accountant or brought to the accountant’s attention. + +103. With regard to engagement quality reviews, A&C’s policies and procedures manual +was deficient because the procedures did not discuss, for example: (1) the objective of an +engagement quality review; and (2) the EQR evaluating the engagement team’s significant +judgments and related conclusions by holding discussions with the engagement partner and other +team members and reviewing documentation. + + + + + 19 +A&C’s False Reports + +104. By virtue of the conduct described above, A&C failed to adhere to numerous +PCAOB standards in auditing Accelera’s 2013, 2014, and 2015 financial statements. + +105. Despite the multiple egregious deviations from PCAOB standards, A&C issued +reports on Accelera’s 2013 through 2015 financial statements. + +106. A&C knew these reports would be filed with the Commission on Accelera’s Forms +10-K. Those reports contained A&C’s representation that the audits were conducted in accordance +with PCAOB standards and its opinion, based on those audits, that Accelera’s financial statements +fairly presented, in all material respects, the Company’s financial position and results of operations +in accordance with GAAP. A&C knew, or was reckless in not knowing, that those reports were +false. + +2013 PREMIER AUDIT + +Background + +Premier’s Fraudulent Valuation of the Note and Gain on the Sale of Discontinued Operations + +107. In December 2011, Randall Letcavage and an associate (“Associate A”) acquired +approximately 50% of Premier’s outstanding shares, paying $175,000 in cash to the Company’s +then-CEO and majority shareholder, and caused Premier to acquire certain assets from green +energy companies owned entirely or in large part by either Letcavage or Associate A (“related +party green energy companies”) in exchange for additional Premier stock (the “Stock-for-Related- +Party-Assets Swap”). Using these assets, and through a new wholly-owned subsidiary, WePower +Ecolutions, Premier’s business changed from selling low-priced caskets to providing clean energy +products and services. Letcavage and Associate A installed Kevin Donovan as CEO of WePower +Ecolutions and as president and CEO of Premier itself. + +108. Premier valued the assets obtained from the related party green energy companies +at zero, noting in its FY 2011 and FY 2012 financial statements that the assets had been obtained +from the two related party green energy companies and that the equipment obtained, originally +valued at approximately $16,000, had proven to be defective, and thus its value had been reduced +to zero. + +109. Premier’s performance following the change in business model remained poor, +however, and its share price declined throughout 2012. In the fourth quarter of 2012, Letcavage +and Associate A arranged for a management shake-up in which, among other changes, Letcavage +joined the board of directors and replaced Donovan as Premier’s and WePower Ecolutions’ +president and CEO and several board members were replaced. Under Letcavage’s management, +Premier then decided to discontinue the operations of WePower Ecolutions and report a roughly +$750,000 loss on the discontinued operations. + + 20 +The Discontinued-Operations-for-Note Swap + +110. In January 2013, after protracted negotiations with Donovan over his exit package, +Premier effectively sold WePower Ecolutions to a newly-formed company (WePower Eco Corp. +(“New Eco”)), to be run by Donovan. In exchange, New Eco gave Premier an unsecured note with +a $5 million face value (the “Note”), and purportedly assumed certain Premier liabilities (the +“Discontinued-Operations-for-Note Swap”). + +111. The terms of the Note were extremely generous to New Eco. Among other things, +the Note was unsecured and secondary to all other debt New Eco might incur, the interest rate was +below market at 2%, and repayment was scheduled over twenty years, with no principal payments +due for five years and no interest due for eleven months. Neither the face amount nor the terms of +the Note were based on a valuation, independent or otherwise, of the assets transferred to New +Eco. + +112. Given that the Note was received in exchange for assets and not cash, under GAAP, +upon receipt the Note should have been “recorded at the fair value of the property, goods, or +services or at the amount that reasonably approximates the fair value of the note [receivable], +whichever is the more clearly determinable.” ASC 310-10-30-5, Receivables. + +113. Premier management’s estimate of the fair value of the Note at the time of receipt +was $869,000 – a figure that was inconsistent with GAAP but rather was chosen to achieve the +desired accounting result. See ASC 820-10-30, Fair Value Measurement. The $869,000 figure +was the largest of three fair value figures that appeared on a document provided to Premier by an +independent valuation firm the company had engaged to value the Note (“Valuation Firm”). This +document, which Premier later characterized as a “preliminary valuation,” consisted solely of +Excel spreadsheets illustrating the Valuation Firm’s valuation models, as applied to outdated and +unsupported revenue projections for New Eco.8 The Valuation Firm sought updated revenue +projections and support for such projections from New Eco, and sought Premier’s help in getting +such information, but never received it.9 + +8 The Valuation Firm needed current revenue projections for New Eco and support for the +projections in order to value New Eco, the borrower. The Firm was trying to value the +borrower, because the collectability of the Note was entirely dependent on the borrower’s +(New Eco’s) ability to pay because the Note was unsecured and not guaranteed. The +$869,000 figure was one of the two – unsupported – figures for the fair value of New Eco +that appeared on the spreadsheets; the third was an unsupported figure for the fair value +of the Note. + +9 The Valuation Firm ultimately completed its work without the requested information, +valuing the Note at zero and New Eco at less than $10,000. The Firm’s findings and +analysis were set forth in a draft valuation report, which the Firm sent to Premier +management on or about April 9, 2014. As explained in the report, the Firm’s valuations +were primarily based on the 2012 performance of WePower Ecolutions, which had not +been known to the Firm when it generated the “preliminary valuation” and the terms of + 21 + +114. In its financial statements for the first quarter of 2013, Premier reported a loss +before non-controlling interest and discontinued operations of $519,601 and a gain of $985,138 on +discontinued operations, based on the $869,000 “preliminary valuation” of the Note and New +Eco’s purported assumption of $116,000 of WePower Ecolutions’ debt. (Premier treated the entire +value of the Note as a gain on the sale of WePower Ecolutions because, as described above, it had +valued those assets at zero when it acquired them in the Stock-for-Related Party-Assets Swap.) +The reported $869,000 value of the Note, along with the purported elimination of debt, thus +converted a quarterly loss to net income for the quarter of $466,147. Premier also reported the +Note as an asset worth $869,000 on its balance sheet. + +115. On each reporting date in 2013, Premier failed to evaluate the Note for impairment +as required by GAAP. See ASC 310-10-35, Receivables. Instead Premier reported the value of the +Note as $869,000, making the Note Premier’s largest tangible asset, constituting at least 12% of the +company’s total assets. + +The Note-for-Stock Swap + +116. The first payment on the Note – an interest payment of $50,000 – was due on +December 7, 2013. New Eco failed to make the payment and the Note went into default on +December 22, 2013. Without assessing the Note for impairment or collectability, Premier +continued to report the Note as an asset valued at $869,000 on its December 31, 2013 balance +sheet. + +117. The company made no effort to collect on the Note. Instead, on or about February +27, 2014, Premier exchanged the Note with WePower LLC for the return of 2.5 million shares of +Premier common stock held by WePower LLC (the “Note-for-Stock Swap”). WePower LLC was +a related party;10 it was also the source of most of the worthless related party green energy assets +upon which New Eco’s business was based (and the discontinued WePower Ecolution’s operations +had been based). + +118. Premier disclosed the Note-for-Stock swap in a Subsequent Events note to its 2013 +financial statements. The company failed to disclose, however, that the Note was in default on +December 31, 2013. + + +the Note. All of that information was known, recklessly disregarded, or should have been +known, to A&C during the audit. + +10 Related parties include owners of record or known beneficial owners of more than 10% +of the voting interests of the entity and their immediate families. ASC 850-10-20. +WePower LLC, which was owned by Associate A, was a related party because it was an +owner of record or beneficial owner of more than 10% of Premier’s voting stock, directly +and/or through another company purportedly controlled by Associate A’s son. + + 22 +Premier’s Improper Accounting for the TPC Stake + +119. On February 28, 2013, Premier acquired an 80% interest in The Power Company +USA, LLC TPC (“TPC”), a privately-held deregulated power broker, along with an option to +purchase the remaining 20% interest within 120 days, in exchange for 30 million shares of Premier +common stock. + +120. In its financial statements for the first three quarters of 2013 and its audited FY +2013 financial statements, Premier valued its interest in TPC at $4.5 million – the purported value +of the 30 million shares issued to the sellers as consideration for the acquisition – and allocated the +entire amount to goodwill, which then constituted a majority of the company’s assets. The +company explained that it had allocated the $4.5 million amount to goodwill because an +independent valuation of the identifiable assets and liabilities it had acquired had not yet been +completed. + +121. Premier’s accounting for its stake in TPC did not conform to GAAP in several +respects. First, according to ASC 805, Business Combinations, before recognizing goodwill from +an acquisition, all identifiable assets and liabilities acquired (including identifiable intangible +assets) must be assigned a portion of the purchase price based on their fair values. Only after this +valuation of, and allocation to, identifiable assets is performed can the remaining unallocated +purchase price be recorded as goodwill. If, as the company represented in public statements +around the time it purchased TPC, Premier had acquired certain customer contracts and receivables +that purportedly had value, to comply with GAAP, the company should have assigned a portion of +the purported purchase price to such assets.11 + +122. Second, after recording the $4.5 million in goodwill for its stake in TPC, Premier +later failed to adequately assess that goodwill for impairment, in accordance with ASC 350-20, +Goodwill, Subsequent Measurement. Premier determined, incorrectly, that as of December 31, +2013, the $4.5 million of goodwill attributable to its TPC stake – which constituted approximately +99% of its goodwill and 65% of its total assets reported as of December 31, 2013 – was not +impaired. It was not until the fourth quarter of 2014 that Premier recognized any impairment to its +TPC-related goodwill. + + +11 Premier engaged the Valuation Firm to prepare a purchase price allocation report, which +would have assigned fair value estimates to the identifiable assets and liabilities the +company had acquired with its acquisition of its stake in TPC, but failed to provide the +Firm with the information it needed to perform its analysis. As a result, by the time of +the 2013 audit, and to this day, the Valuation Firm prepared neither a report nor an +underlying analysis. + + 23 +A&C Failed to Audit Premier’s FY 2013 Financial Statements in Accordance with +Applicable Professional Standards and Ignored Multiple Indications of Fraud + +123. The auditor has a responsibility to plan and perform the audit to obtain reasonable +assurance about whether the financial statements are free of material misstatement, whether caused +by fraud or error. PCAOB Standard AU § 316.01, Consideration of Fraud in a Financial +Statement Audit, citing AU §110. + +124. A&C audited Premier’s FY 2013 financial statements. + +125. In planning the 2013 audit, A&C identified as significant risks relating to the +financial statements and fraud risks: (a) the weakness in the company’s control environment, (b) +significant transactions between related parties, and (c) revenue recognition. A&C also identified +the following additional significant risks: (d) the overstatement of assets, (e) the Note, and (f) +goodwill, and planned for the audit to focus on accounts receivable and sales confirmation and +substantive testing in commercial and residential customers for TPC, the collectability of the Note +and related party transactions and disclosures. + +126. A&C identified several risks associated with the company’s control environment +with respect to financial reporting and disclosures, including the inexperience with financial +reporting of the board and CEO, the absence of an audit committee or a full-time CFO who was +sufficiently competent to achieve financial reporting objectives, and the lack of sufficient internal +control to achieve the financial reporting and disclosures control. + +127. Despite the significant risks, including fraud risks, that A&C knew were present, +A&C failed to exercise the appropriate level of due professional care and professional skepticism +in gathering and evaluating audit evidence related to the collectability and valuation of the Note +and the allocation and impairment of goodwill purportedly arising from the TPC acquisition, in +accordance with PCAOB Standard AU § 316.13, Consideration of Fraud in a Financial Statement +Audit, The Importance of Exercising Professional Skepticism. + +128. Specifically, A&C failed to (a) perform audit procedures in a manner that addressed +the assessed risk of material misstatement due to error or fraud as required by PCAOB Standard +AS No. 13, The Auditor’s Responses to the Risks of Material Misstatement, and (b) obtain +sufficient appropriate audit evidence, as required by PCAOB Standard AS No. 15, to support +A&C’s conclusion that Premier management’s estimate of the fair value of the Note and Premier’s +stake in TPC was fairly presented in conformity with GAAP. + +A&C’s Failures in Auditing Management’s $869,000 Valuation of the Note + +129. A&C failed to obtain sufficient appropriate audit evidence, as required by PCAOB +Standards AS No. 14, Evaluating Audit Results, and AS No. 15, Audit Evidence, of the status and +collectability of the Note. The audit team sent a confirmation request to New Eco but received no +response and failed to perform alternative procedures, as required by PCAOB Standard AU § 330, +The Confirmation Process, Alternative Procedures, at .31 -.32. Had the team reviewed Premier’s + 24 +cash receipts for payments due on the Note, see AU § 330.32, for example, it would have +discovered that the Note was in default. The work papers do not document any alternative +procedures to obtain evidence regarding the status of the Note and do not reflect the default. + +130. A&C also failed to obtain sufficient appropriate audit evidence, as required by AS +No. 14 and AS No. 15 of the estimated $869,000 fair value of the Note. The team asked the +Valuation Firm for a copy of a valuation report but was told by the Firm that it had prepared only +spreadsheets and had not drafted a report. The team sought Premier’s assistance in obtaining a +valuation report but was told, incorrectly, that there was no need for one because the valuation of +the Note had been addressed during the 2012 audit. Nonetheless, according to the work papers, the +team concluded that the estimated fair value of the Note was fairly stated based on the Valuation +Firm’s spreadsheets –– the spreadsheets the Valuation Firm had prepared to demonstrate its +models, using outdated and unsupported revenue projections. + +131. Although the engagement team had not obtained the requested valuation report, or +any other form of findings by the Valuation Firm, the audit work papers indicate that the team +treated the spreadsheets as findings by a specialist and tried – but failed – to adhere to the standard +for the use of the work of a specialist set forth in PCAOB Standard AU § 336, Using the Work of a +Specialist.12 For example, the team failed to obtain an understanding of the assumptions used by +the Valuation Firm to arrive at the $869,000 fair value figure shown on the spreadsheets, as +required by AU § 336.12. Had they done so, they would have learned, among other things, that (a) +the assumptions underlying that figure were based on revenue projections that were outdated and +unsupported, (b) the data supporting the projections had not been tested, (c) the Firm had been +unable to obtain current revenue projections and support for such projections from New Eco, and +(d) even if the Valuation Firm had been able to complete its work and arrive at a fair value estimate +for New Eco, the fair value of the Note would have to be lower, just as the Firm’s initial fair value +figure for the Note shown on the “preliminary valuation” was lower than the initial, unsupported, +fair value figures for New Eco shown there.13 + + +12 To use the work of a specialist, the “auditor should (a) obtain an understanding of the +methods and assumptions used by the specialist, (b) make appropriate tests of data +provided to the specialist, taking into account the auditor's assessment of control risk, and +(c) evaluate whether the specialist's findings support the related assertions in the financial +statements.” AU § 336.12, Using the Work of Specialist. + +13 In addition, the work papers failed to document, as required by AS No. 3, Audit +Documentation, important aspects of the audit team’s work and analysis that ostensibly +supported A&C’s conclusion that the value of the Note was properly stated. For +example, the work papers did not document the assumptions underlying the Valuation +Firm’s $869,000 fair value figure for New Eco or the reasons that the team purportedly +concluded that those assumptions were reasonable. Nor do they document any testing of +the data provided to the Valuation Firm, as required by AU § 336. + 25 +A&C’s Failures in Auditing Premier’s Accounting for its TPC Stake + +132. During the 2013 audit, A&C also failed to audit Premier’s accounting for its +interest in TPC in accordance with PCAOB standards. A&C failed to obtain sufficient appropriate +audit evidence, as required by AS No. 15 to support the analysis it performed that resulted in its +conclusion that goodwill with respect to TPC was not impaired as of December 31, 2013. + +133. Furthermore, A&C failed to exercise due professional care and professional +skepticism, in accordance with PCAOB Standard AU § 230, Due Professional Care in the +Performance of Work, by failing to reconcile Premier’s allocation of the entire $4.5 million +purported TPC value to goodwill with the company’s repeated public statements that as part of the +TPC acquisition it would be acquiring significant identifiable assets (including sales contracts and +receivables). A&C knew of, recklessly disregarded, or should have known of, those statements, +which were filed on Forms 8-K. + +134. Instead, according to the work papers, based on discussions with management, +A&C accepted management’s assertion that the initial accounting for the TPC acquisition was not +complete and the provisional amounts recorded by Premier with respect to the acquisition were still +subject to revision because the necessary fair value evaluations were still in progress – more than a +year after the transaction had closed. At no point did A&C resolve to obtain evidence of a fair +value analysis or question whether the provisional amounts recorded by Premier with respect to +TPC were supportable by sufficient appropriate audit evidence. + +A&C Failed to Obtain Sufficient Appropriate Audit Evidence + +135. A&C knew that the Valuation Firm had not issued a final fair value estimate or a +valuation report or other form of findings in support of its valuation of the Note. But A&C did not +insist upon a valuation report and supporting findings by the Valuation Firm or by another +independent expert. Nor did A&C direct the engagement team to obtain a written statement from +the Valuation Firm of its estimate of the fair value of the Note as of December 31, 2013. Had the +team sought such a written statement they would have learned that the Valuation Firm did not +agree that $869,000 was a reasonable estimate of the fair value of the Note or even of New Eco. + +136. Instead of requiring a valuation report by the Valuation Firm or another +independent valuation expert or even a written statement by the Valuation Firm of the Note’s fair +value, A&C ceased work on the Note valuation, reasoning that the $869,000 value of the Note at +December 31, 2013 was supported by the value Premier had supposedly obtained for it in the +subsequent Note-for-Stock swap described above. + + + + + + + 26 +137. Had A&C exercised the requisite due care and professional skepticism however, +A&C would have seen numerous indications that at December 31, 2013, if not before, the +$869,000 Note valuation was materially overstated. For example, A&C knew, recklessly +disregarded, or should have known, that: + + The Note was unsecured and secondary to all other debt New Eco might +incur; + + The interest rate was below market at 2%; + + Repayment was scheduled over twenty years, with no principal payments +due for five years and no interest due for eleven months; and + + The face amount and terms of the Note were not based on a valuation, +independent or otherwise, of the assets transferred to the borrower (New +Eco). + +138. Additionally, A&C knew, recklessly disregarded, or should have known, that: + + The discontinued operations that were to be the basis of the borrower’s +business had generated over $750,000 in losses for 2012; + + The borrower was a newly-formed, start-up company to be run by the same +individual who had run the discontinued operation at a loss; + + The borrower had refused to provide the Valuation Firm with any +information; + + Although the Note was the largest tangible asset on its balance sheet, and its +second largest asset overall, management had not recorded on Premier’s +year-end income statement any accrued interest or any gain or loss as a +result of change in the Note’s fair value; + + The borrower had failed to make the first required payment and Premier had +made no attempt to collect or even evaluate the Note for impairment or +measure it for its current fair value; and + + WePower LLC, the entity with which Premier exchanged the Note for the +return of stock, was a related party and the party from whom Premier had +originally acquired the assets, in exchange for stock. + +139. All of these facts, which A&C knew, recklessly disregarded, or should have known, +called into question the reasonableness of management’s $869,000 estimate of the Note’s fair +value, for which the engagement team had little, if any, appropriate audit evidence. + + 27 +140. A&C’s audit of Premier’s accounting for its stake in TPC was also deficient. First, +A&C did not question Premier’s allocation of the entire purported purchase price to goodwill on +the grounds that Premier still had not received an independent valuation of any of the identifiable +assets acquired, even though more than a year had passed since the acquisition. Second, the audit +team relied entirely on management’s representations that goodwill based on the TPC acquisition +had not been impaired since the acquisition. Thus, A&C failed to exercise due professional care +and professional skepticism in reviewing management’s accounting for the TPC stake – which +accounted for a majority of Premier’s reported assets and had been obtained in a cashless +transaction. + +A&C Ignored Multiple Indications of Fraud + +141. A&C was required to exercise due professional care, including professional +skepticism, in planning and performing the audits. “Professional skepticism is an attitude that +includes a questioning mind and a critical assessment of audit evidence” (PCAOB Standard AU § +230.07, Due Professional Care in the Performance of Work), and requires auditors to “neither +assume[] that management is dishonest nor assume[] unquestioned honesty” (AU § 230.09). +Because A&C failed to exercise the requisite professional skepticism, A&C failed to view the three +swaps14 and management’s accounting for the TPC stake as indications of fraud and specifically +indications of material misstatement in Premier’s financial statements. Thus, A&C failed to fulfill +their responsibilities to perform their audit of Premier’s FY 2013 financial statements “to obtain +reasonable assurance about whether the financial statements [were] free from material +misstatement, whether caused by error or fraud,” as required by PCAOB Standard AU § 316, +Consideration of Fraud in a Financial Statement Audit. + +142. The three swaps and the TPC acquisition were significant unusual transactions +within the meaning of AU § 316.66. The Stock-for-Related Party-Assets Swap occurred towards +the end of the fiscal year (2011), was a related party transaction whose terms were not based on an +appraisal of the assets or the stock, and involved no exchange of cash. The Discontinued-Assets- +for-Note swap occurred barely a week after the end of the fiscal year (2012), and its purported +$869,000 value was greater than the $750,000 loss on the discontinued operations that Premier had +to declare for that year. The terms of the Note were not based on an appraisal of the assets +exchanged for it, the transaction involved no exchange of cash, and the terms of the Note were +highly advantageous to the borrower. Moreover, management had recorded no interest or gain or +loss on the Note and its asserted value of the Note was unchanged from the date of acquisition +through each reporting date in 2013. + +143. Similarly, the Note-for-Stock swap also occurred soon after the end of the fiscal +year, the terms of the transaction were not based upon an independent appraisal of the Note and no +cash changed hands. Moreover, the counter-party to the transaction, WePower LLC, was a related + +14 The three swaps are (1) the Stock-for-Related Party-Assets Swap, which occurred in late +2011, (2) the Discontinued-Operations-for-Note Swap that occurred in January 2013, and +(3) the Note-for-Stock Swap that occurred in February 2014. + + 28 +party, and the party from whom Premier had acquired the bulk of WePower Ecolutions’ assets – +the assets upon which the payments promised under the Note – was based. + +144. Confronted with those significant unusual transactions, A&C should have “gain[ed] +an understanding of the business rationale for such transactions and whether that rationale (or the +lack thereof) suggests that the transactions may have been entered into to engage in fraudulent +financial reporting. . .” (AU § 316.66). + +145. Had A&C sought to gain an understanding of the three swaps, A&C would have +seen that they were in substance a round-trip of essentially worthless related party assets, effected +for their financial statement impact. By inserting the Discontinued-Operations-for-Note Swap +between the late 2011 Stock-for-Related Party-Assets Swap and the early 2014 Note-for-Stock +Swap, Premier management was able to inflate the Company’s assets and manufacture a gain of +almost one million dollars, while concealing or obscuring the fact that the assets obtained from the +related parties that controlled the company were essentially worthless. + +146. The TPC Acquisition was also a significant unusual transaction within the meaning +of AU § 316.66. As with the three swaps, the TPC acquisition occurred soon after the end of the +fiscal year, the terms of the transaction were arrived at without an independent valuation of the +assets acquired and liabilities assumed by Premier or of the stock given as consideration, no cash +was exchanged, and the valuation of the identifiable assets and liabilities acquired still had not +been completed more than a year after the transaction closed. + +Despite Its Egregious Deviations from Professional Standards, A&C Represented in A&C’s +Audit Report that A&C Had Audited Premier’s 2013 Financial Statements in Accordance with +Those Standards + +147. By virtue of the conduct described above, A&C failed to adhere to numerous +PCAOB standards in auditing Premier’s 2013 financial statements, as set forth above. + +148. Despite the audit team’s multiple egregious deviations from PCAOB standards, +A&C issued its report on Premier’s 2013 financial statements, which A&C knew would be filed +with the Commission on Form 10-K. Included in that report was A&C’s false representation that +the audit was conducted in accordance with PCAOB standards and its opinion, based on that audit, +that Premier’s financial statements fairly presented, in all material respects, the Company’s +financial position and results of operations in accordance with GAAP. A&C knew or recklessly +disregarded that the statement of audit compliance was false or did not believe the statement. +Accordingly, A&C’s report on Premier’s financial statements for the year 2013 was materially +false and misleading. + + + + + 29 +A&C Failed to Maintain an Adequate System of Quality Control for Audits + +149. PCAOB Standard QC § 20, System of Quality Control for a CPA Firm's +Accounting and Auditing Practice (“QC § 20”), provides that a CPA firm shall have a system of +quality control for its accounting and auditing practice. (QC § 20.01). Quality control includes +adopting policies and establishing procedures to provide the firm with reasonable assurance of +complying with professional standards. (QC § 20.04). Policies and procedures should be +established to encompass all phases of the design and execution of the engagement. (QC § 20.17- +.18). Policies and procedures should also address engagement quality reviews pursuant to PCAOB +Standard AS No. 7, Engagement Quality Review. (QC § 20.18). + +150. A&C failed to design and maintain an adequate system of quality control for audit +engagements and engagement quality reviews because A&C’s quality control policies and +procedures manual failed to adequately address all phases of the design and execution of these +engagements. The policies and procedures covering audits were deficient because they did not +discuss, for example: (1) how the assessment of inherent risk, control risk, and fraud risk affects +the audit procedures performed; (2) a description of the test of controls and substantive audit +procedures, and how the test of controls affects the substantive audit procedures performed; (3) the +purpose of audit work papers and what should be included in the work papers; (4) evaluating the +audit evidence obtained to determine whether the evidence is sufficient and appropriate to support +the conclusions reached; and (5) evaluating misstatements identified by the accountant or brought +to the accountant’s attention. + +151. With regard to engagement quality reviews, A&C’s policies and procedures manual +was deficient because the procedures did not discuss, for example: (1) the objective of an +engagement quality review; and (2) the EQR evaluating the engagement team’s significant +judgments and related conclusions by holding discussions with the engagement partner and other +team members and reviewing documentation. + +2013 CANNAVEST INTERIM REVIEWS + +Background + +152. CannaVEST was originally a shell company with no operations, no revenues, and +only $431 in assets at December 31, 2012. In December 2012, the company entered into an +agreement to buy PhytoSphere Systems, LLC (“PhytoSphere”) from Medical Marijuana, Inc. +(“MJNA”) for a stated purchase price of $35 million. On January 29, 2013, the PhytoSphere +acquisition closed, and the company was transformed from a shell company into a business +allegedly with over $35 million in assets and operations in the hemp business. + +153. In connection with this acquisition, on June 15, 2017, the Commission filed an +injunctive action against CannaVEST and its CEO Mona (Case No. 2:17-CV-01681-APG-PAL). +The Commission’s complaint alleges that CannaVEST and Mona made material +misrepresentations and/or misleading omissions on CannaVEST’s quarterly reports filed with the +SEC for its first three quarters of 2013. + 30 + +154. The Commission’s complaint alleges that in CannaVEST’s Forms 10-Q for the first +two quarters of 2013, CannaVEST and Mona overstated CannaVEST’s total assets. The +overstatements related to CannaVEST’s acquisition of PhytoSphere in the first quarter of 2013. +CannaVEST agreed to the purported $35 million purchase price only because CannaVEST could +pay it primarily with CannaVEST shares that had little or no trading volume at the time, and which +Mona believed had little value, and a small amount of cash. The Commission alleges that Mona +knew that CannaVEST was paying substantially less than $35 million to acquire the PhytoSphere +business, that PhytoSphere was not worth $35 million, and that CannaVEST would have never +agreed to the purported purchase price if CannaVEST were required to pay cash for PhytoSphere. + +155. The Commission’s complaint alleges that Mona, nevertheless, had CannaVEST +record $35 million worth of assets related to the PhytoSphere acquisition on CannaVEST’s balance +sheet in its Form 10-Q for the first quarter of 2013. As a result, CannaVEST materially overstated +its assets on its balance sheet for the first quarter of 2013. The Commission alleges that in +CannaVEST’s Form 10-Q for the second quarter of 2013, CannaVEST continued to report falsely +the value of its assets related to the PhytoSphere acquisition. + +156. The Commission’s complaint alleges that in CannaVEST’s Form 10-Q for the third +quarter of 2013, CannaVEST and Mona wrote down the value of the assets related to the +PhytoSphere acquisition to $8 million after obtaining a third-party valuation report that valued +PhytoSphere at $8 million as of January 29, 2013. CannaVEST, however, failed to disclose that it +had never paid $35 million for those assets, that the assets were never worth $35 million, and that +the balance sheets for the first and second quarters of 2013 were materially overstated. + +157. In April 2014, CannaVEST restated all three quarters to reflect $8 million in assets +related to the PhytoSphere acquisition on CannaVEST’s balance sheet. + +158. A&C conducted the interim reviews for CannaVEST’s Q1 through Q3 2013 +financial information. + +A&C Failed to Make Adequate Inquiries and Perform Appropriate Analytical Procedures +in CannaVEST’s Q1 and Q2 2013 Interim Reviews + +159. PCAOB Standard AU § 722, Interim Financial Information, provides that the +objective of an interim review is to provide the accountant with a basis for communicating +whether they are aware of any material modifications that should be made to the interim +financial information for it to conform with GAAP. (AU § 722.07). A review consists +principally of making inquiries of management and performing analytical procedures. +(AU §§ 722.07, 722.15). + +160. In the Q1 and Q2 2013 interim reviews, A&C failed to make adequate inquiries of +management. As a result, A&C failed to become aware that material modifications should be +made to the total asset value on CannaVEST’s balance sheet for those quarters. + + 31 +161. In the Q1 2013 interim review, A&C failed to make inquiries of Mona for the fair +value of the consideration, i.e., the fair value of CannaVEST’s shares as of January 29, 2013, that +CannaVEST would pay to MJNA. CannaVEST and Mona treated the PhytoSphere acquisition +as a business combination. See ASC 805, Business Combinations, and ASC 820, Fair Value +Measurement. Under ASC 805 and 820, CannaVEST and Mona should have determined the fair +value of CannaVEST’s stock (i.e., the fair value of the consideration) as of the acquisition date, +January 29, 2013, and used this fair value to determine how much CannaVEST was paying to +acquire PhytoSphere. CannaVEST and Mona, however, never determined the fair value of +CannaVEST’s shares as of January 29, 2013, and A&C failed to make inquiries of Mona for the +fair value. + +162. Instead, A&C reviewed and relied on the PhytoSphere purchase agreement as the +sole support for the $35 million total asset value recorded on CannaVEST’s balance sheet. The +purchase agreement stated that CannaVEST would pay for PhytoSphere with CannaVEST shares +and/or cash, and that CannaVEST would make these payments in five installments over the +course of fiscal year 2013. Mona intended to pay the five installments primarily with +CannaVEST shares and only a small amount of cash. In addition, the purchase agreement stated +that CannaVEST’s shares would be valued at a minimum of $4.50 and a maximum of $6.00 per +share (the “collar”). Mona, however, had no basis for assigning a value of $4.50 to $6.00 per +share and Mona only came up with the collar in order to cap the number of shares provided to +MJNA. Mona did not know how much CannaVEST shares were worth because the shares were +either not trading or had very little trading on the OTC market. Mona believed that +CannaVEST’s shares had little value. + +163. In the Q1 2013 interim review, A&C also failed to make inquiries of Mona +regarding how he determined the collar. If A&C had inquired, it would have found that Mona +set the collar with no basis for the fair value of CannaVEST’s shares, that Mona never took any +steps to determine the fair value of CannaVEST’s shares (unrestricted or restricted) as of January +29, 2013, and that Mona did not know the fair value of the shares. A&C should have made +inquiries of Mona regarding what steps he planned to take to determine the fair value of the +shares, and based on the shares’ fair value, A&C would have become aware that material +modifications to the total asset value on CannaVEST’s balance sheet should have been made.15 + +164. In the Q2 2013 interim review, A&C failed to perform appropriate analytical +procedures and failed to make adequate inquiries of management. As a result, A&C again did +not become aware that material modifications to the total asset value on CannaVEST’s balance +sheet should have been made. + +15 CannaVEST ultimately provided a total of 5,825,000 restricted shares and paid $950,000 +in cash (borrowed from another entity) to MJNA during fiscal year 2013. CannaVEST +and Mona never determined the fair value of CannaVEST’s shares as of January 29, +2013. However, in September 2013, CannaVEST had an independent valuation done on +its shares (related to another transaction) that found CannaVEST’s unrestricted shares +were worth $1.13 per share and its restricted shares were worth $0.68, as of August 21, +2013. + 32 + +165. A&C failed to perform appropriate analytical procedures for the Q2 2013 interim +review because it failed to prepare balance sheet analytics that compared the Q1 2013 balance +sheet to the Q2 2013 balance sheet. See AU § 722.16, Analytical Procedures and Related +Inquiries, analytical procedures should include comparing the quarterly interim financial +information with comparable information from the immediately preceding interim period. +A&C’s Q2 2013 balance sheet analytics only compared the FYE 2012 balance sheet to the Q2 +2013 balance sheet. From Q1 to Q2 2013, CannaVEST made significant changes to the +allocation of the $35 million value among the individual assets related to the PhytoSphere +acquisition. For example, from Q1 to Q2, CannaVEST decreased the value of its rights to +purchase CBD oil from $11.5 million to $947,388, and increased the value of its goodwill from +$17,535,000 to $26,998,125. An appropriate balance sheet analytics would have shown these +substantial changes in allocation between Q1 and Q2. Instead, the balance sheet analytics only +listed the new asset values for Q2, e.g. $947,388 for rights to purchase CBD oil and $26,998,125 +for goodwill, and did not show how these asset values had changed significantly since Q1. + +166. The A&C engagement team reviewed the balance sheet analytics, but failed to +identify that the analytics did not compare Q1 to Q2. If these significant changes between Q1 +and Q2 had been documented in the analytics, the changes should have raised a red flag with +A&C regarding the accuracy of the $35 million total asset value for PhytoSphere. This should +have then prompted A&C to make inquiries of management related to the fair value of the +consideration paid by CannaVEST for PhytoSphere. If A&C had made such inquiries related to +the fair value of the consideration, it would have become aware that material modifications to the +total asset value on CannaVEST’s balance sheet should have been made. + +A&C Failed to Consider Whether a Restatement of CannaVEST’s Q1 and Q2 2013 +Financial Information Was Necessary During the Q3 2013 Interim Review + +167. Under PCAOB Standard AU § 722, Interim Financial Information, misstatements +identified by the accountant, or brought to the accountant’s attention, should be evaluated to +determine whether material modification should be made to the interim financial information for +it to conform to GAAP, and the accountant should consider the nature, cause (if known), and +amount of the misstatements, and whether the misstatements originated in the preceding year or +interim periods of the current year. (AU § 722.26). + +168. During the Q3 2013 interim review, A&C failed to consider whether a +restatement of CannaVEST’s Q1 and Q2 2013 financial information was necessary. + +169. In October 2013, CannaVEST obtained a valuation report from a third-party +valuation firm that reported PhytoSphere was worth $8 million as of January 29, 2013. The +A&C engagement team reviewed this valuation report. As a result of the report, the engagement +team prepared a memo that discussed impairing CannaVEST’s goodwill in Q3 by $26,998,125. +The memo did not consider whether a restatement of CannaVEST’s Q1 and Q2 financial +information was necessary. + + 33 +170. In addition, the A&C engagement partner on the interim review sent CannaVEST +an email that included a proposed modification for goodwill impairment of $26,998,125 on its +Q3 balance sheet and income statement based on the $8 million valuation report. CannaVEST +recorded this impairment. The engagement partner even admitted in a follow-up email to +CannaVEST, “…looks like this should have been booked originally at $8.0MM, not the +approximately $35MM.” A&C, however, did not take any action to consider whether a +restatement was necessary. + +171. The valuation report should have been a red flag for A&C that the original $35 +million total asset value reported on CannaVEST’s Q1 and Q2 2013 balance sheet may be +incorrect. This should have prompted A&C to make inquiries into the fair value of the +consideration as of January 29, 2013 and consider whether a restatement of CannaVEST’s +financial statements included in its Q1 and Q2 2013 Forms 10-Q was necessary. + +A&C Failed to Consider and Update its Knowledge of CannaVEST’s Internal Controls +and Lack of Personnel with Appropriate Accounting Qualifications When Planning the Q1 +through Q3 2013 Interim Reviews + +172. Under PCAOB Standard AU § 722, Interim Financial Information, in planning a +review of interim financial information, the accountant should perform procedures to update +their knowledge of the entity’s business and its internal controls to: (a) aid in the determination +of inquiries to be made and the analytical procedures to be performed, and (b) identify particular +events, transactions, or assertions to which the inquiries may be directed or analytical procedures +applied. (AU §§ 722.10-722.13). + +173. A&C failed to consider and update its knowledge of CannaVEST’s internal +controls and lack of personnel with appropriate accounting qualifications when planning the Q1 +through Q3 2013 interim reviews. + +174. With regards to CannaVEST’s internal controls, CannaVEST and Mona failed to +devise a sufficient system of internal accounting controls, such that transactions (like the +PhytoSphere acquisition) were properly recorded to permit preparation of financial statements in +accordance with GAAP and to maintain accountability of assets. In addition, CannaVEST +lacked personnel with appropriate accounting qualifications. CannaVEST did not have a CFO +from Q1 through Q3 2013, and its Forms 10-Q for those quarters stated that management had +identified a material weakness in the effectiveness of internal control over financial reporting +related to CannaVEST’s lack of personnel with appropriate accounting qualifications. + +175. When planning the Q1 through Q3 2013 interim reviews, A&C failed to consider +and update its knowledge of CannaVEST’s internal controls and lack of accounting personnel, +did not assess whether these matters increased the risk of material misstatement, and did not plan +their interim review procedures accordingly to address that risk. + + + 34 +176. Moreover, when planning the Q2 and Q3 interim reviews, A&C did not have a +sufficient understanding of CannaVEST’s internal controls. A&C’s inquiries checklist for the +Q2 and Q3 interim reviews indicated that CannaVEST did not have any significant deficiencies +or material weaknesses in internal control over financial reporting. This directly contradicted +CannaVEST’s disclosure in its Forms 10-Q, which stated that management had identified a +material weakness in internal control over financial reporting related to CannaVEST’s lack of +personnel with appropriate accounting qualifications. + +A&C Failed to Identify that the Engagement Team Did Not Prepare Adequate +Documentation for CannaVEST’s Q1 through Q3 2013 Interim Reviews + +177. Under PCAOB Standard AS No. 3, Audit Documentation, an accountant’s interim +review documentation is the written record of the basis for the accountant’s conclusions that +provides the support for the accountant’s representations. The documentation also facilitates the +planning, performance, and supervision of the engagement, and is the basis for the review of the +quality of the work because it provides the reviewer with written documentation of the evidence +supporting the accountant’s significant conclusions. Among other things, the documentation +includes records of the planning and performance of the work, the procedures performed, +evidence obtained, and conclusions reached by the accountant. (AS No. 3.2). + +178. Under PCAOB Standard AU § 722, Interim Financial Information, an +accountant’s interim review documentation should include any findings or issues that in the +accountant’s judgment are significant, for example, the results of review procedures that indicate +that the interim financial information could be materially misstated, including actions taken to +address such findings, and the basis for the final conclusions reached. In addition, the +documentation should: (a) enable members of the engagement team with supervision and review +responsibilities to understand the nature, timing, extent, and results of the review procedures +performed; (b) identify the engagement team member(s) who performed and reviewed the work; +and (c) identify the evidence the accountant obtained in support of the conclusion that the interim +financial information being reviewed agreed or reconciled with the accounting records. +(AU §§ 722.51-722.52). + +179. A&C failed to identify that the engagement team did not prepare adequate +documentation for CannaVEST’s Q1 through Q3 2013 interim reviews. For example, for the Q1 +interim review, A&C should have made inquiries of Mona for the fair value of the consideration +related to the PhytoSphere acquisition, and had this amount documented in the work papers. For +the Q2 interim review, A&C should have included a balance sheet analytics that compared Q1 to +Q2 in the work papers. For the Q3 interim review, A&C should have considered whether a +restatement was necessary and had this restatement analysis documented in the work papers. In +addition, for the Q1 through Q3 interim reviews, A&C should have documented in the planning +memo A&C’s knowledge of CannaVEST’s internal controls, including how the material +weakness that related to the lack of accounting personnel increased the risk of material +misstatement, and how the engagement team planned to address that risk through interim review +procedures. + + 35 +A&C Failed to Exercise Due Professional Care in CannaVEST’s Q1 through Q3 2013 +Interim Reviews + +180. PCAOB Standard AU § 722, Interim Financial Information, requires that an +accountant exercise due professional care, as provided in AU § 150.02, Generally Accepted +Auditing Standards, in the performance of an interim review. (AU § 722.01). Under PCAOB +Standard AU § 230, Due Professional Care in the Performance of Work, due professional care +requires that an accountant exercise professional skepticism, which is an attitude that includes a +questioning mind and a critical assessment of the evidence. (AU § 230.07). + +181. A&C failed to exercise due professional care and failed to exercise a sufficient +level of professional skepticism when performing CannaVEST’s Q1 through Q3 2013 interim +reviews. A&C failed to properly plan the interim reviews, properly assess the risk of material +misstatement, consider how to address that risk through interim review procedures, make +appropriate inquiries of management, perform appropriate analytics, and adequately document +the interim reviews. + +A&C Failed to Maintain an Adequate System of Quality Control for Interim Reviews + +182. PCAOB Standard QC § 20, System of Quality Control for a CPA Firm's +Accounting and Auditing Practice, provides that a CPA firm shall have a system of quality control +for its accounting and auditing practice. (QC § 20.01). Quality control includes adopting policies +and establishing procedures to provide the firm with reasonable assurance of complying with +professional standards. (QC § 20.04). Policies and procedures should be established to encompass +all phases of the design and execution of the engagement. (QC § 20.17-.18). Policies and +procedures should also address engagement quality reviews pursuant to PCAOB Standard AS No. +7, Engagement Quality Review. (QC § 20.18). + +183. A&C failed to design and maintain an adequate system of quality control for +interim review engagements and engagement quality reviews because A&C’s quality control +policies and procedures manual failed to adequately address all phases of the design and execution +of these engagements. A&C’s manual included interim review procedures for privately held +companies, but did not include interim review procedures for publicly-held companies. + +184. Even if the manual’s interim review procedures for privately held companies were +applied to publicly-held companies, the procedures would be deficient. For example, the +procedures did not discuss: (1) the objective of a review; (2) inquiring of a predecessor auditor +when conducting an initial review; (3) obtaining an understanding of a company’s internal control +as it relates to the preparation of financial information; (4) a description of inquiry and analytical +procedures, and when and how to apply these procedures; (5) the purpose of interim review work +papers and what should be included in the work papers; and (6) evaluating misstatements identified +by the accountant or brought to the accountant’s attention. + + + + 36 +185. With regard to engagement quality reviews, A&C’s policies and procedures manual +was deficient because the procedures did not discuss, for example: (1) the objective of an +engagement quality review; and (2) the EQR evaluating the engagement team’s significant +judgments and related conclusions by holding discussions with the engagement partner and other +team members and reviewing documentation. + +Violations + +186. As a result of the conduct described above in the Accelera and Premier +engagements, A&C willfully violated Exchange Act Section 10(b) and Rule 10b-5(b) thereunder, +which prohibit, in connection with the purchase or sale of securities, the use of any means or +instrumentality of interstate commerce, or of the mails, or of any facility of any national securities +exchange, to make any untrue statement of a material fact or to omit to state a material fact +necessary in order to make the statements made, in the light of the circumstances under which they +were made, not misleading. + +187. As a result of the conduct described above in the Accelera engagement, A&C +willfully aided and abetted and was a cause of Accelera’s violation of Section 13(a) of the +Exchange Act and Rules 13a-1 and 13a-13 thereunder, which require an issuer to file with the +Commission accurate annual and quarterly reports. + +188. As a result of the conduct described above in the Premier engagement, A&C +willfully aided and abetted and was a cause of Premier’s violation of Section 13(a) of the Exchange +Act and Rule 13a-1 thereunder, which require an issuer to file with the Commission accurate +annual reports. + +189. As a result of the conduct described above in the Accelera and Premier +engagements, A&C willfully violated Rule 2-02(b) of Regulation S-X, which requires an +accountant’s report to accurately state whether the audit was made in accordance with generally +accepted auditing standards.16 + +190. As a result of the conduct described above in the Accelera and Premier +engagements, A&C willfully violated and willfully aided and abetted violations of the federal +securities laws or the rules and regulations thereunder for the purposes of Section 4C(a)(3) of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + +191. As a result of the conduct described above in the Accelera, Premier, and +CannaVEST engagements, A&C engaged in improper professional conduct within the meaning of +Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice by engaging in, as provided under Rule 102(e)(1)(iv): (A) intentional or knowing conduct, +including reckless conduct, that results in a violation of applicable professional standards; and (B) + +16 Pursuant to Commission interpretive guidance, GAAS, as used in Regulation S-X, means +the standards of the PCAOB and any applicable Commission rules. Securities Act Rel. +No. 8422 (May 14, 2004). + 37 +either of the following two types of negligent conduct: (1) a single instance of highly unreasonable +conduct that results in a violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted; or (2) repeated instances +of unreasonable conduct, each resulting in a violation of applicable professional standards, that +indicate a lack of competence to practice before the Commission. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in A&C’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. A&C shall cease and desist from committing or causing any violations and any +future violations of Sections 10(b) and 13(a) of the Exchange Act and Rules 10b-5, 13a-1, and 13a- +13 thereunder, and Rule 2-02(b) of Regulation S-X. + +B. A&C is hereby denied the privilege of appearing or practicing before the +Commission as an accountant. + + + By the Commission. + + + +Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4084.txt b/raw/aaer/2019/AAER-4084.txt new file mode 100644 index 0000000000000000000000000000000000000000..33839db1f6028ec544fbbdc8e99f90d555f401d5 --- /dev/null +++ b/raw/aaer/2019/AAER-4084.txt @@ -0,0 +1,805 @@ + + + + + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87052 / September 23, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4084 / September 23, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19490 + + +In the Matter of + +PRICEWATERHOUSECOOPERS +LLP, + +Respondent. +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted against +PricewaterhouseCoopers LLP (“PwC” or “Respondent”) pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . . (1) not to possess the requisite qualifications to represent others; (2) +to be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations issued +thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + + + + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as +set forth below. +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + +1. This matter involves improper professional conduct by PwC, a public accounting +firm, from 2013 through 2016, in connection with nineteen engagements for fifteen SEC- +registrant issuers. For one audit client, Issuer A, PwC violated the auditor independence rules of +the Commission and the Public Company Accounting Oversight Board (“PCAOB”) by +performing prohibited non-audit services, including exercising decision-making authority in the +design and implementation of software relating to the company’s financial reporting and +engaging in management functions for the company during the 2014 audit and professional +engagement period. +2. In addition, in connection with performing non-audit services for these fifteen +SEC-registrant audit clients, PwC violated PCAOB Rule 3525, which requires an auditor to +describe in writing to the audit committee the scope of the work, discuss with the audit +committee the potential effects of the work on independence, and document the substance of the +independence discussion. PwC failed to comply with the requirements of Rule 3525 and, on +several engagements, PwC mischaracterized non-audit services as audit work, even though the +services involved financial software systems that were planned to be implemented in a +subsequent audit period and providing feedback to management on those systems—areas outside +the realm of audit work. PwC’s failure to comply with Rule 3525 prevented the audit +committees of numerous issuers from evaluating the potential effects of the non-audit services on + + +The Commission may… deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + + + + +auditor independence, including whether the services could cause PwC to lack independence. +This resulted in PwC being engaged to provide non-audit services that were improperly +characterized to the audit committees of numerous issuers as audit services. +3. PwC engaged in the improper professional conduct for each of these clients when +those clients were subject to PCAOB audits and reviews by PwC. PwC’s violations were, in +part, the result of breakdowns in its system of quality control to provide reasonable assurance +that PwC maintained independence. In particular, in operating its system of quality controls +related to auditor independence as described in the instances discussed below, PwC did not: 1) +adequately evaluate the nature and scope of proposed non-audit service engagements for +permissibility; 2) properly characterize work as audit or non-audit services; 3) review and +monitor non-audit work being performed for audit clients to confirm the services were +permissible; and 4) properly describe to audit committees of SEC-registrant clients the nature of +the audit and non-audit services to be provided. +4. PwC represented that it was “independent” in an audit report issued on the 2014 +financial statements for Issuer A, which was included or incorporated by reference in public +filings with the Commission. By doing so, PwC violated Rule 2-02(b) of Regulation S-X and +caused Issuer A to violate Section 13(a) of the Exchange Act and Rules 13a-1 and 13a-13 +thereunder. For Issuer A and the other fourteen SEC-registrant audit clients, PwC’s acts and +omissions also constituted improper professional conduct pursuant to Section 4C of the +Exchange Act and Rule 102(e) of the Commission’s Rules of Practice. +Respondent +5. PricewaterhouseCoopers LLP (“PwC”) is an audit firm headquartered in New +York, New York. Since 2004, PwC has been registered with the PCAOB, pursuant to the +Sarbanes-Oxley Act of 2002, to prepare and issue audit reports. During the relevant period, PwC +was the independent accountant for Issuer A and the other fourteen SEC-registrant issuers. +Other Relevant Entity and Individual +6. Issuer A is a multi-national technology company with substantial operations in +the United States, and which trades on the Nasdaq Stock Market. During the relevant period, +Issuer A had a reporting obligation under Section 13(a) of the Exchange Act. +7. Brandon Sprankle (“Sprankle”), age 42, is a resident of San Jose, California, +and has been a partner of PwC from July 1, 2014 to the present. Sprankle is a Certified Public +Accountant, licensed in California, Pennsylvania, and Virginia. +Facts + +Independence Violations from Providing Prohibited Non-Audit Services + +8. Under the Commission’s auditor independence rules, external accountants are +required to be independent—in fact and in appearance—of their audit clients. The +Commission’s auditor independence rules set forth a general standard of independence in Rule 2- + + + + + +01(b) of Regulation S-X which, among other things, states that, in determining whether an +accountant is independent, the Commission will consider “all relevant circumstances, including +all relationships between the accountant and the audit client . . .” Rule 2-01(c) of Regulation S-X +then sets forth a non-exclusive list of circumstances, including certain relationships, that are +inconsistent with the general standard in Rule 2-01(b), including where the auditors provide +certain specified non-audit services to their audit clients. Subject to certain enumerated +exceptions, independent auditors are prohibited from engaging in the design or implementation +of systems that are significant to the audit client’s financial statements or other financial +information systems taken as a whole, to perform any internal audit service related to the internal +control over financial reporting, or to perform management functions for audit clients. Set forth +below is a description of the non-audit services PwC provided for Issuer A, which included the +provision of prohibited services that violated the independence rules. +9. In 2014, PwC performed non-audit services for Issuer A concerning Governance +Risk and Compliance (“GRC”) software. GRC systems are used by companies to coordinate and +to monitor controls over financial reporting, including employee access to critical financial +functions. Issuer A intended to use the GRC software to generate information as part of the +company’s control environment and to provide data to assist personnel in forming conclusions +regarding the effectiveness of internal controls related to financial information systems. As such, +at the time the GRC system was being implemented, it was intended to be subject to the internal +control over financial reporting audit procedures. +10. The Commission’s independence rules prohibit independent auditors from +designing and implementing systems such as GRC where the software aggregates source data, or +generates information significant to the clients’ financial statements or other financial systems as +a whole.4 Designing, implementing, or operating systems affecting the financial statements may +also place the accountant in a management role, or result in the accountant auditing his or her +own work or attesting to the effectiveness of internal control systems designed or implemented +by that accountant. The independence rules also prohibit an independent auditor from +performing management functions.5 +11. As early as April 2014, Issuer A placed PwC on notice that the company was +seeking help for an implementation project. At that time, in connection with Issuer A’s pursuing +proposals for implementing a module of GRC software, the company’s then-Head of Internal +Audit asked Sprankle whether PwC could provide an implementation proposal and inquired +about auditor independence. Sprankle responded that “we are absolutely permitted to implement +so there will be no issues . . . .” Sprankle, however, was aware that PwC’s independence +policies did not allow the firm or him to implement the GRC system at Issuer A. +12. In or around early May 2014, Sprankle forwarded a proposal to Issuer A for +“assistance with implementing” the GRC module. The proposal contained numerous tasks that, +taken as a whole, would not be consistent with independence rules and PwC’s policies, e.g., +performing integration testing and working closely with Issuer A’s personnel to resolve + +4 See Rule 2-01(c)(4)(ii) of Regulation S-X. +5 See Rule 2-01(c)(4)(vi) of Regulation S-X. + + + + + +integration problems, working with management to determine security configurations, and +providing continuous hands-on training on how to use the software. +13. As Sprankle and his team understood, Issuer A did not have the internal +capabilities or expertise to design and implement the GRC module itself and, thus, required an +outside party to perform these functions. In late May 2014, for example, PwC knew that Issuer +A had elicited multiple competitive bids from third parties to design and implement the GRC +module. +14. In early June 2014, Issuer A selected PwC for the GRC project. Although Issuer +A did not utilize GRC in connection with the preparation of its fiscal year 2014 financial +statements, at this time PwC was auditing Issuer A’s financial statements and internal control +over financial reporting for fiscal year 2014. Sprankle, who negotiated and oversaw the GRC +project, also participated in PwC’s audit of Issuer A as an information technology specialist on +the audit engagement team. +15. In seeking internal authorization to perform the non-audit GRC work, Sprankle +drafted an engagement letter for approval by PwC’s Risk Assurance Independence (“RAI”) +group, an independence-reviewer within his business unit. In the draft engagement letter, +Sprankle described the proposed services as assessing multiple areas, and providing observations +and recommendations, as opposed to designing and implementing the GRC project. This +description was inconsistent with Issuer A’s expectation that PwC would conduct a design and +implementation project as previously communicated to PwC. +16. In early June 2014, Issuer A again put PwC on notice that it expected PwC to +design and implement a GRC solution for Issuer A and to manage the project. After PwC sent +the draft engagement letter, Issuer A’s then-Head of Internal Audit objected to the description of +the services contained in the draft engagement letter. In the email, he informed PwC that the +proposed work was an “implementation project that’s been outsourced” to PwC. +17. Sprankle thereafter met with the then-Head of Internal Audit of Issuer A, who +understood from speaking with Sprankle that PwC would substantially design and implement the +GRC module, and would perform project management functions. At this time, PwC was +continuing its audit of Issuer A for fiscal year 2014 and, due to Issuer A’s prior accounting +errors, performing additional audit work for fiscal years 2011 and 2012. +18. The final engagement letter for the GRC project described the work as performing +assessments and high-level recommendations. However, as internal PwC communications +reflect, certain PwC employees characterized the engagement as a design and implementation +project. For example, in a July 2014 email, a PwC manager communicated his view that the +project involved the implementation of a financial information system. The email stated: “We +will now implement GRC on 11i to support the production year end and audit.” Another PwC +manager responded, in part: “We’ll need to get . . . scripts for the client to run on 11i so we can +grab the data and then can leverage that for implementing GRC.” In response, the manager +suggested additional items, including a “straw-man of a PwC 11i GRC implementation plan or +task list.” + + + + + +19. In August 2014, PwC began the GRC work with a kick-off presentation that was +explicit about the goal to “Implement an Oracle Advanced Controls solution for [Issuer A].” +Thereafter, PwC prepared a project plan and milestones, and provided regular status reports. +20. To start the work, another PwC manager instructed a PwC associate to prepare a +design document: “I need you to immediately begin working on creating a design document for +how [the GRC module] will be built for the [GRC] rules we already know about. Below are the +SOD [Segregation of Duties, an internal control concept allocating duties amongst employees] +rules we know we need to build . . . .” +21. From August through mid-October 2014, PwC managed the project, performed +substantial design work, configured the design on a non-production server, and provided +oversight and direction for the implementation to a live environment. According to the senior +manager for IT Internal Audit: Issuer A had little involvement in the assessment and design +phase of the project; further, Issuer A lacked the technical expertise to configure the system; and, +although Issuer A ultimately had to approve the work, PwC exercised decision-making authority +in designing and configuring the GRC module. +22. As the project progressed in September 2014, the PwC manager emailed the +senior manager for IT Internal Audit at Issuer A, who had oversight of the project, about +problems with the GRC server and application that needed to be addressed before PwC could +perform development work: “We identified some critical issues that need to be resolved before +we can get in there and do the development.” +23. Throughout the course of the GRC engagement, Issuer A considered PwC to be +the system implementer and deferred to PwC on best practices for settings that needed to be +included in the system. Further, according to the senior manager for IT Internal Audit: Issuer A +allowed PwC “to make those decisions for us” and, although an Issuer A employee would +technically have his hands on the keyboard, a PwC employee managed the process and directed +the Issuer A employee on what actions to take. +24. In early November 2014, after the PCAOB notified PwC regarding concerns with +regard to the firm’s independence on the Issuer A audit engagement, but before the issuance of +the 10-K and the incorporated audit opinion therein for fiscal year 2014, Issuer A and PwC +provided written notification seeking to consult with the Commission’s Office of Chief +Accountant about these concerns. +25. On another project for Issuer A, occurring around the same time in 2014 as the +GRC project, PwC provided services, which Sprankle negotiated and subsequently supervised, +related to Issuer A’s upgrade of its enterprise software and related programs (“the R12 project”). +26. Companies use enterprise software to manage their overall businesses, including a +wide array of day-to-day activities such as accounting, procurement, and manufacturing. PwC +performed services on the R12 project with Issuer A’s Internal Audit group. +27. In early 2014, PwC marketed pre- and post-implementation assessment services +to Issuer A, which ultimately became the R12 project. Pre-implementation services are + + + + + +performed prior to a system going “live,” or actually being used by the company in its business +or financial operations. By contrast, post-implementation work is performed after a system is in +use. In the documents PwC used to market the work, many of the proposed services were non- +audit work to be performed pre-implementation, i.e., assessments and reviews before the system +was in use, with PwC making recommendations and providing reports to Issuer A. +28. In late March 2014, the Audit Committee of the Board of Directors of Issuer A +approved an Internal Audit Plan, which included a “Pre Implementation Review” of R12 and of +financial and human resources software. This meant that Issuer A’s internal auditors were going +to perform a pre-implementation review of R12 and the other software programs. +29. In early May 2014, Sprankle sought internal approval from PwC’s RAI group for +the R12 project as a non-audit consulting engagement. The draft engagement letter (and two +subsequent drafts) described services for which Issuer A personnel would contribute 1000 hours +of work, and specifically stated that the work would be performed in accordance with the +Standards for Consulting Services established by the American Institute of Certified Public +Accountants (“AICPA”). +30. On June 5, 2014, Issuer A’s Audit Committee approved the R12 project as “non- +audit consulting” services. Specifically, the Audit Committee approved up to $290,000 for +services with respect to the pre-implementation review of the enterprise software upgrade. On +the same day, after the Audit Committee approval of the non-audit consulting project, RAI +received an updated statement of work, in which the project was again described as consulting +assessments to be performed under AICPA consulting standards. +31. By mid-June 2014, RAI had not approved the project. A PwC IT manager from +the audit team spoke with RAI. On June 16, 2014, the IT manager reported that RAI “was +asking: Why did we delegate 1000 hours to [Internal Audit]. It seemed a lot of hours. It could +[be] considered/viewed as an [internal audit] co-sourcing engagement, which is not allowed for +[an audit client].” Later that day, Sprankle forwarded another revised engagement letter, which +continued to describe the proposed work as a consulting engagement with the client providing +over 1000 hours of assistance. +32. On June 19, 2014, RAI responded in writing to the IT manager, raising concerns +that the proposed consulting services violated independence requirements because the services +constituted a prohibited arrangement with Issuer A’s internal audit department. RAI wrote: +The enlisting of the client’s internal audit department in assistance of our +assessment makes this engagement appear to be a prohibited internal audit co- +sourcing arrangement. The draft engagement letter states that the client’s internal +audit department will dedicate 1000 hours to assist in our assessment/engagement. +I believe we are at an impasse and believe you should either cease the +involvement of the client’s internal audit department in our assessment or if you +do not agree than [sic] you should submit a formal independence consultation +with the US Independence Office to obtain clearance that we can use the client’s +internal audit department in our assessment. + + + + + +33. After discussing the matter with RAI, Sprankle did not follow the instructions to +either remove Issuer A’s Internal Audit involvement or seek a formal independence consultation. +Instead, he changed the description of the services from a consulting project to audit procedures. +Sprankle then notified the IT manager that “if we switch the current [engagement letter] format +from a consultancy to an addendum to the audit engagement letter we will be fine.” On that +basis, RAI approved the R12 project without further questions, concerns or review despite +knowing that the description of the engagement had suddenly changed, without explanation, +from non-audit to audit services. +34. Because the R12 project was re-characterized as audit services, the work was not +subject to proper internal review to assess auditor independence prohibitions, including a review +to determine whether the R12 project constituted prohibited non-audit services or outsourced +internal audit work to be performed during an audit engagement for Issuer A. +35. On July 1, 2014, Sprankle forwarded the draft addendum to the audit engagement +letter to Issuer A’s then-Head of Internal Audit, indicating that PwC’s “risk management office +has asked that we have this engagement letter as an extension of the audit engagement letter +because of the assistance we are receiving from internal audit.” +36. Before beginning the R12 work, PwC did not provide the draft addendum to +Issuer A’s Audit Committee, which had to approve the audit engagement, nor did PwC otherwise +inform the Audit Committee that the R12 work was now being characterized as audit work. On +July 9, 2014, Issuer A’s then-Head of Internal Audit signed the amendment to the audit +engagement letter. +37. Issuer A’s Audit Committee did not authorize the R12-related services as part of +any audit. As a result of PwC’s mischaracterizing the project as audit services and not informing +the Audit Committee of this change, the Audit Committee was deprived of the opportunity to +perform its responsibilities, including having an understanding of the services that were proposed +and the purpose of that work, approving audit engagement fees and terms, reviewing the +auditor’s approach to and the scope of the audit, and overseeing the company’s compliance with +SEC requirements related to disclosure of the auditor’s services and fees. +38. In reality, the R12 project remained a non-audit services project related to +financial information systems design and implementation upon which PwC needed to directly +rely on Issuer A’s Internal Audit group. The engagement letter for the R12 project, for example, +demonstrates that the project was not intended as audit procedures. It did not describe how the +R12 project involved procedures required to audit Issuer A’s financial statements or internal +control over financial reporting. In fact, as set forth in the letter, Issuer A sought an +“independent reviewer” to “help management to understand the potential risks and quality of the +[R12] project” and to make assessments and provide recommendations. Based on the letter, +Issuer A would control “the scope of [PwC’s] assessment and designate each of the processes, +etc. that will be the subject of [PwC’s] assessment.” By contrast, in an audit, the independent +auditor determines the scope of the audit and the procedures to be performed. +39. On July 16, 2014, Issuer A informed PwC that the company would not go live +with R12 until fiscal year 2016—two years later from the fiscal year 2014 audit that PwC was + + + + + +performing at the time. As a result, R12 was not Issuer A’s system of record for fiscal year +2014, making it impossible for the R12 project to be a part of any audit for 2014 or even 2015, +for which the Audit Committee had not executed an engagement letter retaining PwC. +Accordingly, there was no basis for PwC to perform any audit procedures concerning R12. +40. In mid-July 2014, PwC started working on the R12 project, billing Issuer A over +$70,000 for work performed through September 2014. In late October 2014, PwC halted work +on the R12 project because of independence concerns raised by the PCAOB concerning the GRC +project. +41. Although PwC did not complete the full R12 project, PwC developed audit work +programs, which were not needed for any PwC audit work, but which were used by Issuer A’s +internal auditors for their fiscal year 2015 internal audit of R12 and the other software programs +(per the Internal Audit Plan approved in March 2014). +42. During the R12 project, PwC also provided its proprietary frameworks on settings +and configurations to Issuer A so that the company could incorporate the configurations and +controls into its design. +PwC’s Violations of PCAOB Rule 3525 +43. PCAOB Rule 3525 provides that, in seeking audit committee pre-approval to +perform non-audit services for an audit client related to internal control over financial reporting, +an auditor must describe in writing to the audit committee the scope of the work, discuss with the +audit committee the potential effects of the work on independence, and document the substance +of the independence discussion. +44. From 2013 through 2016, on nineteen engagements involving fifteen SEC- +registrant audit clients, PwC violated PCAOB Rule 3525 by failing to obtain proper audit +committee pre-approval pursuant to the requirements thereunder. On numerous engagements, +PwC mischaracterized non-audit services as audit work. For example, the non-audit services +involved PwC providing feedback and recommendations for management. PwC +mischaracterized non-audit services as audit work involving “pre-implementation” work +involving financial software systems before the software was even implemented and providing +recommendations to management on those systems. +45. By failing to comply with Rule 3525, PwC failed to discuss with the audit +committees for fifteen issuers the scope of the services and the implications of performing the +work on PwC’s independence, thereby depriving the committees of their responsibilities to +evaluate fully the provision of non-audit services, and to assess the potential effect of those +services on auditor independence. +46. For example, on the GRC engagement for Issuer A, PwC failed to describe the +non-audit services in writing and in sufficient detail such that the audit committee would +understand what was being sought to be approved. When PwC sought pre-approval from the +audit committee, the only written description that PwC conveyed to the committee was the title +for the project. This written description did not allow the committee to make an informed + + + + + +decision about the scope of the work and how the work might affect PwC’s independence, thus +depriving the committee of its oversight responsibilities. +47. In addition, from March 2014 through November 2014, PwC performed a similar +GRC engagement involving non-audit services for another audit client, Issuer B. During the +time period when the work was performed, PwC reviewed Issuer B’s financial statements for +three quarterly reports that Issuer B filed on Forms 10-Q in 2014. In connection with this +engagement, PwC failed to describe the proposed non-audit services in writing in sufficient +detail and to document sufficiently the required independence discussion with the issuer’s audit +committee. In late 2014, PwC halted its work on the GRC engagement because of its concerns +that the work may have violated the design-and-implementation prohibitions in the independence +rules. Given these concerns, PwC returned the fees associated with these non-audit services. +48. For another audit client, Issuer C, for instance, PwC provided non-audit services +concerning the company’s planned implementation of several software programs from 2013 +through 2015. The non-audit services involved internal control over financial reporting for +Issuer C. At the time of contracting, and when the services were performed, PwC had described +the work to the audit committee as audit services. For one of the non-audit services projects, as +PwC documented in its workpapers, the software system that was subject to its services would +not be operational during the fiscal year that PwC was auditing. Nevertheless, PwC included the +work as audit services for that fiscal year. As a result of PwC’s mischaracterizing the non-audit +services, PwC did not discuss with Issuer C’s audit committee, or document, the effect of +performing such work on PwC’s independence. As a result, PwC violated PCAOB Rule 3525 on +two separate projects for Issuer C in 2014 and 2015. +49. As another example, in 2015, PwC performed services concerning security +controls, including non-audit services, for another audit client, Issuer D. In January, 2015, PwC +began providing the non-audit services, even though PwC had not sought pre-approval from +Issuer D’s audit committee or described the services and the independence implications of the +non-audit services, which involved internal control over financial reporting. In May 2015, PwC +contracted with Issuer D for PwC to perform the audit of Issuer D for fiscal year 2015. Even +though PwC had been providing non-audit services since January 2015, PwC did not disclose +that to Issuer D’s audit committee. Instead, PwC included the non-audit work as audit services +in the audit engagement letter, and billed Issuer D for the services as part of the audit work. In +the audit plan, PwC represented that “[t]he scope of the work related [security controls] is strictly +limited to satisfy the requirements of the integrated audit.” +PwC’s Quality Control System + +50. PCAOB standards require auditors to be independent of SEC-registrant audit +clients. In addition, PCAOB quality control standards require audit firms to establish policies +and procedures “to provide the firm with reasonable assurance that personnel maintain +independence (in fact and in appearance) in all required circumstances.” (QC 20.09). Audit firms +are required to monitor on an ongoing basis whether personnel are complying with the +independence requirements. (QC 20.08). Such quality controls must be suitably designed in +relation to, among other factors, the firm’s size, number of offices, and nature and complexity of +the firm’s practice. (QC 20.04). + + + + + + +51. From 2014 through at least 2015, PwC’s quality control system did not effectively +provide reasonable assurance that the firm and its employees maintained independence from +their SEC-registrant audit clients in the instances described herein. Specifically, because of the +breakdowns in its controls, PwC’s quality control system did not operate effectively: a) for +evaluating permissibility of proposed non-audit services, including elevating proposed +engagements that had a higher risk of breaching the independence rules; b) for reviewing +proposed audit services to provide reasonable assurance that the proposed services were +appropriately characterized as such; c) for monitoring the performance of services by +engagement teams to provide reasonable assurance that the teams were not providing prohibited +non-audit services to audit clients and to provide reasonable assurance that those services were +consistent with the work contracted for; and d) for monitoring engagement teams for compliance +with PCAOB Rule 3525, such that services were accurately and fully described to audit +committees so that the committees could make informed decisions about the potential effects of +the non-audit services on the independence of the firm and about approving the services pursuant +to Rule 3525. +Violations +52. Rule 2-02(b)(1) of Regulation S-X provides that an accountant’s report must state +whether the audit was made in accordance with generally accepted auditing standards +(“GAAS”).6 PCAOB standards require that auditors maintain strict independence from SEC +audit clients. See PCAOB Auditing Standards, Independence, AU § 220.02.7 Rule 2-01 of +Regulation S-X sets forth the conditions under which “[t]he Commission will not recognize an +accountant as independent, with respect to an audit client.” Thus, and through the conduct +described above, PwC violated Rule 2-02(b)(1) of Regulation S-X when PwC issued its audit +report for Issuer A dated November 13, 2014, stating that PwC had conducted its audit in +accordance with PCAOB standards when it had not. +53. An issuer violates Section 13(a) of the Exchange Act and Rule 13a-1 thereunder +when such issuer files with the Commission annual reports that contain materially false or +misleading information or if they file annual reports that fail to include financial statements +audited by an independent public accountant. Scienter is not required for a violation of Section +13(a). Similarly, an issuer violates Section 13(a) of the Exchange Act and Rule 13a-13 +thereunder when such issuer files with the Commission quarterly reports that fail to include +interim financial statements reviewed by an independent public accountant. In administrative +proceedings, the Commission may impose sanctions upon any person that is, was, or would be a +cause of a violation, due to an act or omission the person knew or should have known would +contribute to such violation. In order to establish that a person caused a non-scienter based +violation, the Commission has specifically ruled that a showing of negligence will suffice. + +6 Pursuant to the Commission’s 2004 interpretive guidance in Securities Act Release No. 33 -8422, GAAS, as used +in Regulation S-X, means “the standards of the PCAOB plus any applicable Commission rules.” Audit reports dated +on or after May 24, 2004 – the effective date of PCAOB Auditing Standard 1 – are required to state that they were +performed in accordance with PCAOB standards. PCAOB rules and standards require auditors to be independent +from their audit clients. See, e.g., PCAOB Rule 3520, PCAOB Rule 3500T, and PCAOB AS 1005. + +7 References to PCAOB standards are to those that were in effect at the time of the relevant conduct. + + + + + + +54. PwC did not conduct the audit of Issuer A’s financial statements in accordance +with PCAOB standards, and then issued an audit report on November 13, 2014, stating that PwC +was independent when it was not. PwC also was not independent when it reviewed Issuer A’s +interim financial statements for the first quarter of fiscal year 2015, which Issuer A filed with the +Commission in its Form 10-Q on November 14, 2014. As a result, PwC was a cause of Issuer +A’s violations of Section 13(a) and Rules 13a-1 and 13a-13 thereunder. +55. Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice provide, in part, that the Commission may censure or deny, temporarily or +permanently, the privilege of appearing or practicing before the Commission to any person who +is found by the Commission to have engaged in improper professional conduct. With respect to +persons licensed to practice as accountants, “improper professional conduct” includes either of +the following two types of negligent conduct: (1) a single instance of highly unreasonable +conduct that results in a violation of applicable professional standards in circumstances in which +an accountant knows, or should know, that heightened scrutiny is warranted; or (2) repeated +instances of unreasonable conduct, each resulting in a violation of applicable professional +standards, that indicate a lack of competence to practice before the Commission. Commission +Rules of Practice, Rule 102(e)(1)(iv)(B). As a result of the conduct described above, PwC +engaged in “improper professional conduct” within the meaning of Exchange Act Section +4C(a)(2) and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +Findings +56. Based on the foregoing, the Commission finds that Respondent PwC (a) engaged +in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule +102(e)(1)(ii) of the Commission’s Rules of Practice; (b) violated Rule 2-02(b) of Regulation S-X +with respect to the annual report of Issuer A; and (c) caused Issuer A to violate Section 13(a) of +the Exchange Act, and Rules 13a-1 and 13a-13 thereunder. +Respondent’s Remedial Efforts +57. Since the time period at issue in this Order, Respondent has implemented +remedial measures to enhance its existing policies, procedures, systems, and training over time +regarding auditor independence including: (1) increasing training of all employees regarding +SEC and PCAOB independence rules; (2) disciplining employees who had supervisory +responsibility over the provision of prohibited services; and (3) developing an enhanced risk +assessment program with additional independence policies and procedures. +58. In determining to accept the Offer, the Commission considered the remedial acts +undertaken by Respondent and the cooperation afforded the Commission staff. +Undertakings +59. Respondent, PwC, undertakes to complete the following actions: +a. Notification. PwC shall provide all audit personnel a copy of this Order within +ten (10) business days after entry of the Order. + + + + + +b. PwC Implementation of Policies +i. Implement internal policies and procedures (the “Proposed Policies”) +to enhance PwC’s ability to comply with the independence +requirements under PCAOB standards and applicable Commission +rules concerning the provision of non-audit services (i.e., all services +other than those for an “audit” as defined in Regulation S-X) to SEC +audit clients by achieving the following goals of improving: +1. PwC’s review procedures for new service offerings for non- +audit services for SEC audit clients; +2. PwC’s independence policies, guidance, and training; +3. PwC’s policies and procedures for identifying and describing +to audit clients their non-audit services; +4. PwC’s clearance and compliance procedures for non-audit +services related to the independence rules; +5. PwC’s monitoring of non-audit services being performed for +audit clients, including policies and procedures for reviewing +work in progress to assess compliance with independence +rules; and +6. PwC’s policies and procedures for characterizing services as +“audit” or “non-audit.” +c. PwC Policies Report and Validation Plan +i. Within ninety (90) days after the entry of this Order, PwC shall submit +to the staff of the Division of Enforcement a report (the “PwC Policies +Report”) describing in reasonable detail its quality controls set forth in +its audit manual and audit- and quality-related guidance and policies, +relating to its policies and procedures set forth therein for PwC’s +quality management and audit procedures regarding the Proposed +Policies. The PwC Policies Report shall also describe in reasonable +detail PwC’s methodology and work plan to review, test, and assess +whether the Proposed Policies are designed to provide reasonable +assurance of compliance with the independence requirements under +PCAOB standards and applicable Commission rules concerning the +provision of non-audit services to SEC audit clients, i.e., all services +other than those for an “audit” as defined in Regulation S-X, to SEC +audit clients (the “Validation Plan”). The staff of the Division of +Enforcement may make reasonable requests for further evidence of the +quality controls and validation plan set forth in the PwC Policies +Report and Validation Plan, and PwC agrees to provide such evidence. + + + + + +The Validation Plan, not unacceptable to the staff of the Division of +Enforcement, shall include detailed review, testing, and assessment of +the Proposed Policies. +d. Initial Validation Report and Certification +i. Initial Validation Report. Within 180 days after the issuance of the +PwC Policies Report and Validation Plan, PwC shall submit to the +staff of the Division of Enforcement a written report setting forth a +complete description of the testing, analysis, and results of its +Validation Plan (“Initial Validation Report”). +ii. Initial Validation Certification. The Initial Validation Report shall +include a certification executed by: (a) PwC’s Regulatory Risk and +Quality Control Leader; and (b) PwC’s Partner Responsible for +Independence (collectively “the PwC Signatories”) that the PwC +Proposed Policies are designed to provide reasonable assurance of +compliance with the independence requirements under PCAOB +standards and applicable Commission rules concerning the provision +of non-audit services to SEC audit clients, and if deficiencies in the +design or operation of the Proposed Policies are identified, shall report +such deficiencies to the staff of the Division of Enforcement (“Initial +Validation Certification”). The staff may make reasonable requests for +further evidence of compliance, including the testing results, and PwC +agrees to provide such evidence. If deficiencies in the firm’s system of +quality control are identified, PwC shall report such deficiencies to the +staff and state that it cannot certify compliance. +e. Second Validation Plan. Within one-hundred-eighty (180) days after the +issuance of the Initial Validation Report, PwC shall submit to the staff of the +Division of Enforcement an updated validation plan not unacceptable to the +staff: (a) to review, test, and assess whether the Proposed PwC Policies are +designed to provide reasonable assurance of compliance with the +independence requirements under PCAOB standards and applicable +Commission rules concerning the provision of non-audit services to SEC audit +clients; and (b) a remediation plan that contains a description of any +deficiencies identified, and a schedule of remedial measures to correct +significant deficiencies (collectively, the “Second Validation Plan”). +f. Second and Final Validation Report and Certification. +i. Second Validation Report. Within nineteen (19) months after the +institution of this Order, PwC shall submit to the staff of the Division +of Enforcement a written report setting forth a complete description of +the testing, analysis, and results of its Second Validation Plan +(“Second Validation Report”). + + + + + +g. Final Validation Certification. The Second Validation Report shall include a +certification executed by the PwC Signatories that the Proposed Policies are +designed to provide reasonable assurance of compliance with the +independence requirements under PCAOB standards and applicable +Commission rules concerning the provision of non-audit services, and if +deficiencies in the design or operation of Proposed Policies are identified, +shall report such deficiencies to the staff of the Division of Enforcement +(“Second Validation Certification”). The staff may make reasonable requests +for further evidence of compliance, including the testing results, and PwC +agrees to provide such evidence. If significant deficiencies are identified, PwC +shall report such deficiencies to the staff and state that it cannot certify +compliance. +h. Submissions to the Staff of the Division of Enforcement. The staff of the +Division of Enforcement may request access to documents, internal review, +training materials, PwC personnel, and/or meetings with PwC, within thirty +(30) days of receipt of any Report, Plan, or certification. Unless otherwise +directed by the staff, all Reports, Plans, Certifications, and other documents +required to be provided to the staff shall be sent to: Anita B. Bandy, +Associate Director, Division of Enforcement, Securities and Exchange +Commission, 100 F Street, NE, Washington, DC 20549-5631, or such other +address as the Commission may provide, with a copy to the Office of Chief +Counsel of the Enforcement Division (the “Designees”). PwC will make all +Reports, Plans, and Certifications available to PCAOB staff upon request. +i. Unless otherwise notified by the Division of Enforcement, these undertakings +are deemed satisfied upon the later of: (a) nineteen (19) months after the entry +of this Order; or (b) written confirmation by the staff of the Division of +Enforcement that they have received a Final Validation Certification free from +significant deficiencies. +j. Recordkeeping. PwC shall preserve and retain all documentation regarding +all certifications and reports for seven (7) years and will make it available to +the staffs of the Commission or the PCAOB upon request. +k. Petition to Reopen Matter. In determining whether to accept PwC’s Offer, the +Commission has considered these undertakings. PwC agrees that if the +Division of Enforcement believes that PwC has not satisfied these +undertakings, it may petition the Commission to reopen the matter to +determine whether additional sanctions are appropriate. +l. Deadlines. For good cause shown, the staff of the Division of Enforcement +may in its sole discretion extend any of the procedural dates relating to the +undertakings. Deadlines for procedural dates shall be counted in calendar +days, unless otherwise specified. If the last calendar day falls on a weekend or +a federal holiday, the next business day shall be considered to be the last day. + + + + + +60. These undertakings shall be binding upon any acquirer or successor-in-interest to +PwC’s, or substantially all of PwC’s, audit practice for SEC audit clients. +61. All reports or other written communications by PwC directed to the staff of the +Division of Enforcement shall be transmitted to Anita B. Bandy, Associate Director, Division of +Enforcement, U.S. Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. +20549. +62. For good cause shown, the staff of the Division of Enforcement may extend any +of the procedural dates set forth above. +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent PwC shall cease and desist from committing or causing any +violations and any future violations of Rule 2-02 of Regulation S-X. + +B. Respondent PwC shall cease and desist from committing or causing any +violations and any future violations of Section 13(a) of the Exchange Act, and Rules 13a-1 and +13a-13 thereunder. + +C. Respondent PwC is censured. + +D. Respondent shall comply with the undertakings enumerated in paragraphs 58(a) +through (k), above. + +E. Respondent shall, within ten (10) days of the entry of this Order, pay (i) +disgorgement of $3,830,213, plus prejudgment interest of $613,842, and (ii) a civil money +penalty in the amount of $3,500,000, to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment of disgorgement and prejudgment interest is not made, additional interest shall +accrue pursuant to SEC Rule of Practice 600. If timely payment of the civil penalty is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +F. All payments required by this Order must be made in one of the following ways: + +1. Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +2. Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + + + + + + +3. Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying PwC as the Respondent in these proceedings, and the file number of +these proceedings. A copy of the cover letter and check or money order, or +documentation of whatever other form of payment is used, must be +simultaneously sent to Anita Bandy, Associate Director, Division of Enforcement, +Securities and Exchange Commission, 100 F St., N.E., Washington, DC 20549. + +G. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + + + + + + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. +§523(a)(19). + + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4085.txt b/raw/aaer/2019/AAER-4085.txt new file mode 100644 index 0000000000000000000000000000000000000000..f45acccd26ab3eb7869a6e9ba1b3e1130d1a5eca --- /dev/null +++ b/raw/aaer/2019/AAER-4085.txt @@ -0,0 +1,605 @@ + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87053 / September 23, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4085 / September 23, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19491 + + +In the Matter of + +BRANDON SPRANKLE, CPA, + +Respondent. +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934 +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + +I. + +The Securities and Exchange Commission (“Commission”) deems it appropriate that +public administrative and cease-and-desist proceedings be, and hereby are, instituted against +Brandon Sprankle, CPA (“Sprankle” or “Respondent”) pursuant to Sections 4C1 and 21C of the +Securities Exchange Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any +person the privilege of appearing or practicing before the Commission in any way, if that +person is found . . . (1) not to possess the requisite qualifications to represent others; (2) +to be lacking in character or integrity, or to have engaged in unethical or improper +professional conduct; or (3) to have willfully violated, or willfully aided and abetted the +violation of, any provision of the securities laws or the rules and regulations thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + +The Commission may… deny, temporarily or permanently, the privilege of appearing or + + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”), which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over him and the subject matter of +these proceedings, which are admitted, Respondent consents to the entry of this Order Instituting +Public Administrative and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the +Securities Exchange Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice, +Making Findings, and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as +set forth below. + +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + +1. This matter involves improper professional conduct by Sprankle, a +PricewaterhouseCoopers LLP (“PwC”) partner, in connection with PwC’s audit work for Issuer +A in 2014. While Sprankle was a member of the audit engagement team and during the period +that Issuer A was subject to a PCAOB audit, he was responsible for supervising the performance +of prohibited non-audit services for two PwC projects for Issuer A. The first project involved the +design and implementation of Governance, Risk and Compliance (“GRC”) software, which +companies generally use to coordinate and to monitor controls over financial reporting, which +are subject to the internal control over financial reporting audit procedures. The second project +pertained to services concerning Issuer A’s upgrade of its enterprise software and related +programs, including financial and accounting areas that are subject to audit. For both of these +projects, Sprankle violated and was a cause of PwC’s violating independence requirements by +supervising prohibited non-audit services, including exercising decision-making authority in the +design and implementation of software relating to the company’s financial reporting and +engaging in management functions for the company during the 2014 audit and professional +engagement period. + +2. Specifically, with regard to the GRC project, Sprankle engaged in a number +actions that violated the independence rules, including: a) supervising the provision of non-audit +services that were prohibited under the auditor independence rules; b) failing to ensure the + +practicing before it . . . to any person who is found . . . to have engaged in unethical or +improper professional conduct. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not +binding on any other person or entity in this or any other proceeding. + +planned work—and services provided—complied with the independence rules; c) failing to +adhere fully to PwC’s quality controls; and d) failing to supervise the personnel who performed +the services to provide reasonable assurance that PwC maintained auditor independence. As a +result, on the GRC engagement, PwC engaged in prohibited non-audit services. + +3. On the enterprise software engagement, Sprankle obtained internal approval +within PwC by describing the project as audit services despite numerous red flags and +indications that the project included prohibited non-audit services. Sprankle thereafter +supervised PwC’s providing prohibited services. + +4. On both engagements, PwC personnel, under Sprankle’s supervision, also +performed management functions by directing Issuer A’s employees, and by engaging in +supervisory functions. + +5. In addition, in connection with the GRC-related work, Sprankle provided +material, non-public information concerning Issuer A to a software company without Issuer A’s +consent. + +6. As a result of his actions, Sprankle engaged in improper professional conduct. +Sprankle also was a cause of certain reporting violations by Issuer A and was a cause of PwC’s +violation of Rule 2-02(b) of Regulation S-X, which requires that an auditor state that it +performed the audit in accordance with generally accepted auditing standards, including the +requirement to be independent. + +Respondent + +7. Brandon Sprankle (“Sprankle”), age 42, is a resident of San Jose, California, +and has been a partner of PwC from July 1, 2014 to the present. Sprankle is a Certified Public +Accountant, licensed in California, Pennsylvania, and Virginia. + +Relevant Entities + +8. Issuer A is a multi-national technology company with substantial operations in +the United States, and which trades on the Nasdaq Stock Market. During the relevant period, +Issuer A had a reporting obligation under Section 13(a) of the Exchange Act. + +9. PricewaterhouseCoopers LLC (“PwC”) is an audit firm headquartered in New +York, New York. Since 2004, PwC has been registered with the Public Company Accounting +Oversight Board (“PCAOB”), pursuant to the Sarbanes-Oxley Act of 2002, to prepare and issue +audit reports. During the relevant period, PwC was the independent accountant for Issuer A. + +Facts + +The Independence Violations Concerning the GRC Project + +10. Under the Commission’s auditor independence rules, external accountants are +required to be independent—in fact and in appearance—of their audit clients. The +Commission’s auditor independence rules set forth a general standard of independence in Rule 2- +01(b) of Regulation S-X which, among other things, states that, in determining whether an +accountant is independent, the Commission will consider “all relevant circumstances, including +all relationships between the accountant and the audit client . . .” Rule 2-01(c) of Regulation S-X +then sets forth a non-exclusive list of circumstances, including certain relationships, that are +inconsistent with the general standard in Rule 2-01(b), including where the auditors provide +certain specified non-audit services to their audit clients. Subject to certain enumerated +exceptions, independent auditors are prohibited from engaging in the design or implementation +of systems that are significant to the audit client’s financial statements or other financial +information systems taken as a whole, to perform any internal audit service related to the internal +controls over financial reporting, or to perform management functions for audit clients. Set forth +below is a description of the non-audit services PwC performed—and Sprankle supervised—for +Issuer A, which included the provision of prohibited services that violated the independence +rules. +11. In 2014, PwC performed—and Sprankle supervised—non-audit services for +Issuer A concerning Governance Risk and Compliance (“GRC”) software. GRC systems are +used by companies to coordinate and to monitor controls over financial reporting, including +employee access to critical financial functions. Issuer A intended to use the GRC software to +generate information as part of the company’s control environment and to provide data to assist +personnel in forming conclusions regarding the effectiveness of internal controls related to +financial information systems. As such, at the time the GRC system was being implemented, it +was intended to be subject to the internal control over financial reporting audit procedures. +12. The Commission’s independence rules prohibit independent auditors from +designing and implementing systems such as GRC where the software aggregates source data, or +generates information significant to the clients’ financial statements or other financial systems as +a whole. Designing, implementing, or operating systems affecting the financial statements may +also place the accountant in a management role, or result in the accountant auditing his or her +own work or attesting to the effectiveness of internal control systems designed or implemented +by that accountant. The independence rules also prohibit an independent auditor from +performing management functions. + +13. As early as April 2014, Issuer A placed PwC on notice that the company was +seeking help for an implementation project. At that time, in connection with Issuer A’s pursuing +proposals for implementing a module of GRC software, the company’s then-Head of Internal +Audit asked Sprankle whether PwC could provide an implementation proposal and inquired +about auditor independence. Sprankle responded that “we are absolutely permitted to implement +so there will be no issues . . . .” Sprankle, however, was aware at the time that PwC’s +independence policies did not allow the firm or him to implement a GRC system for an audit +client. + +14. In or around early May 2014, Sprankle forwarded a proposal to Issuer A for +“assistance with implementing” the GRC module. The proposal contained numerous tasks that, +taken as a whole, would not be consistent with independence rules and PwC’s policies, e.g., +performing integration testing and working closely with Issuer A’s personnel to resolve +integration problems, working with management to determine security configurations, and +providing continuous hands-on training on how to use the software. + +15. As Sprankle and his team understood, Issuer A did not have the internal +capabilities or expertise to design and implement the GRC module and, thus, required an outside +party to perform these functions. In late May 2014, for example, Sprankle knew that Issuer A +had elicited multiple competitive bids from third parties to design and implement the GRC +module. + +16. In early June 2014, Issuer A selected PwC for the GRC project. Although Issuer +A did not utilize GRC in connection with the preparation of its fiscal year 2014 financial +statements, at this time, PwC was auditing Issuer A’s financial statements and internal control +over financial reporting for fiscal year 2014. Sprankle not only negotiated and oversaw the GRC +project, but also participated in PwC’s audit of Issuer A as an information technology specialist +on the audit engagement team. + +17. In seeking internal authorization to perform the non-audit GRC work, Sprankle +drafted an engagement letter for approval by PwC’s Risk Assurance Independence (“RAI”) +group, an independence-reviewer within his business unit. In the draft engagement letter, +Sprankle described the proposed services as assessing multiple areas, and providing observations +and recommendations, as opposed to designing and implementing the GRC project. This +description was inconsistent with Issuer A’s expectation that PwC would conduct a design and +implementation project as previously communicated to Sprankle. + +18. In early June 2014, Issuer A again put Sprankle on notice that it expected PwC to +design and implement a GRC solution for Issuer A and to manage the project. After Sprankle +sent the draft engagement letter, Issuer A’s then-Head of Internal Audit objected to the +description of the services contained in the draft engagement letter. In the email, he informed +Sprankle that the proposed work was an “implementation project that’s been outsourced” to +PwC. + +19. Sprankle thereafter met with the then-Head of Internal Audit, who understood +from speaking with Sprankle that PwC would substantially design and implement the GRC +module, and would perform project management functions. At the time, PwC was continuing its +audit of Issuer A for fiscal year 2014 and, due to Issuer A’s prior accounting errors, performing +additional audit work for fiscal years 2011 and 2012. + +20. The final engagement letter for the GRC project described the work as performing +assessments and high-level recommendations. However, as internal PwC communications +reflect, certain PwC employees characterized the engagement as a design and implementation +project. For example, in a July 2014 email, a PwC manager communicated his view to Sprankle +that the project involved the implementation of a financial-related information system. The +email stated: “We will now implement GRC on 11i to support the production year end and +audit.” Another PwC manager responded, in part: “We’ll need to get . . . scripts for the client to +run on 11i so we can grab the data and then can leverage that for implementing GRC.” In +response, the first manager suggested additional items, including a “straw-man of a PwC 11i +GRC implementation plan or task list.” + +21. In August 2014, PwC began the GRC work with a kick-off presentation that was +explicit about the goal to “Implement an Oracle Advanced Controls solution for [Issuer A].” +Sprankle received a copy of the presentation. Thereafter, under Sprankle’s supervision, PwC +employees prepared a project plan and milestones, and provided regular status reports. + +22. To start the work, another PwC manager, who Sprankle supervised, instructed a +PwC associate to prepare a design document: “I need you to immediately begin working on +creating a design document for how [the GRC module] will be built for the [GRC] rules we +already know about. Below are the SOD [Segregation of Duties, an internal control concept +allocating duties amongst employees] rules we know we need to build . . . .” + +23. From August through mid-October 2014, PwC employees under Sprankle’s +supervision managed the project, performed substantial design work, configured the design on a +non-production server, and provided oversight and direction for the implementation to a live +environment. According to its senior manager for IT Internal Audit: Issuer A had little +involvement in the assessment and design phase of the project; further, Issuer A lacked the +technical expertise to configure the system; and, although Issuer A ultimately had to approve the +work, Sprankle and PwC employees under his supervision exercised decision-making authority +in designing and configuring the GRC module. + +24. As the project progressed in September 2014, the PwC manager emailed the +senior manager for IT Internal Audit at Issuer A, who had oversight of the project, and copied +Sprankle, about problems with the GRC server and application that needed to be addressed +before PwC could perform development work: “We identified some critical issues that need to be +resolved before we can get in there and do the development.” + +25. Throughout the course of the GRC engagement, Issuer A considered PwC to be +the system implementer and deferred to PwC on best practices for settings that needed to be +included in the system. Further, according to the senior manager for IT Internal Audit, Issuer A +allowed PwC “to make those decisions for us” and, although an Issuer A employee would +technically have his hands on the keyboard, a PwC employee, under Sprankle’s supervision, +managed the process and directed the Issuer A employee on what actions to take. + +The Independence Violations on the R12 Project +26. On another project for Issuer A, occurring around the same time in 2014 as the +GRC project, PwC employees, under Sprankle’s supervision, provided services related to Issuer +A’s upgrade of its enterprise software and related programs (“the R12 project”). + +27. Companies use enterprise software to manage their overall businesses, including a +wide array of day-to-day activities such as accounting, procurement, and manufacturing. PwC +employees, under Sprankle’s supervision, performed services on the R12 project with Issuer A’s +Internal Audit group. + +28. In early 2014, Sprankle was involved in marketing pre- and post-implementation +assessment services to Issuer A, which ultimately became the R12 project. Pre-implementation +services are performed prior to a system going “live,” or actually being used by the company in +its business or financial operations. By contrast, post-implementation work is performed after a +system is in use. In the documents PwC used to market the work, many of the proposed services +were non-audit work to be performed pre-implementation, i.e., assessments and reviews before +the system was in use, with PwC making recommendations and providing reports to Issuer A. + +29. In late March 2014, the Audit Committee of the Board of Directors of Issuer A +approved an Internal Audit Plan, which included a “Pre Implementation Review” of R12, and of +financial and human resources software. This meant that Issuer A’s internal auditors were going +to perform a pre-implementation review of R12 and the other software programs. + +30. In early May 2014, Sprankle sought internal approval from PwC’s RAI group for +the R12 project as a non-audit consulting engagement. He asked that a draft engagement letter +be prepared. The draft engagement letter (and two subsequent drafts) described services for +which Issuer A personnel would contribute 1000 hours of work, and specifically stated that the +work would be performed in accordance with the Standards for Consulting Services established +by the American Institute of Certified Public Accountants (“AICPA”). + +31. On June 5, 2014, Issuer A’s Audit Committee approved the R12 project as “non- +audit consulting” services. Specifically, the Audit Committee approved up to $290,000 for +services with respect to the pre-implementation of the enterprise software upgrade. On the same +day, after Audit Committee approval of the non-audit consulting project, Sprankle sent an +updated statement of work to RAI, in which the project was again described as non-audit +assessments to be performed under AICPA consulting standards. + +32. By mid-June, RAI had not approved the project. Sprankle delegated an IT +manager from PwC’s audit team to speak with RAI. On June 16, 2014, the IT manager informed +Sprankle that RAI “was asking: Why did we delegate 1000 hours to [Internal Audit]. It seemed a +lot of hours. It could [be] considered/viewed as an [internal audit] co-sourcing engagement, +which is not allowed for [an audit client].” Later that day, Sprankle forwarded another revised +engagement letter, which continued to describe the proposed work as a consulting engagement +with the client providing over 1000 hours of assistance. + +33. On June 19, 2014, RAI responded in writing to the IT manager, who forwarded +the email to Sprankle. RAI raised concerns that the proposed consulting services violated +independence requirements because the services constituted a prohibited arrangement with Issuer +A’s internal audit department. RAI wrote: +The enlisting of the client’s internal audit department in assistance of our +assessment makes this engagement appear to be a prohibited internal audit co- +sourcing arrangement. The draft engagement letter states that the client’s internal +audit department will dedicate 1000 hours to assist in our assessment/engagement. +I believe we are at an impasse and believe you should either cease the +involvement of the client’s internal audit department in our assessment or if you +do not agree than [sic] you should submit a formal independence consultation +with the US Independence Office to obtain clearance that we can use the client’s +internal audit department in our assessment. + +34. After discussing the matter with RAI, Sprankle did not follow the instructions to +either remove Issuer A’s Internal Audit or seek a formal independence consultation. Instead, +Sprankle changed the description of the services from a consulting project to audit procedures. +Sprankle then notified the IT manager that “if we switch the current [engagement letter] format +from a consultancy to an addendum to the audit engagement letter we will be fine.” On that +basis, RAI approved the R12 project without further questions, concerns or review despite +knowing that the description of the engagement had suddenly changed, without explanation, +from non-audit to audit services. + +35. Because the R12 project was re-characterized as audit services, the work was not +subject to proper internal review to assess auditor independence prohibitions, including a review +to determine whether the R12 project constituted prohibited non-audit services or outsourced +internal audit work to be performed during an audit engagement for Issuer A. + +36. On July 1, 2014, Sprankle forwarded the draft addendum to the audit engagement +letter to Issuer A’s then-Head of Internal Audit, indicating that PwC’s “risk management office +has asked that we have this engagement letter as an extension of the audit engagement letter +because of the assistance we are receiving from internal audit.” + +37. Before beginning the R12 work, Sprankle, however, did not provide the draft +addendum to Issuer A’s Audit Committee, which had to approve an audit engagement, or +otherwise inform the Audit Committee that the R12 work was now being characterized as audit +work. On July 9, 2014, Issuer A’s then-Head of Internal Audit signed the amendment to the +audit engagement letter. + +38. Issuer A’s Audit Committee did not authorize the R12 project as part of any audit. +As a result of Sprankle’s mischaracterizing the project as audit services and not informing the +Audit Committee of this change, the Audit Committee was deprived of the opportunity to +perform its responsibilities, including having an understanding of the services that were proposed +and the purpose of that work, approving audit engagement fees and terms, reviewing the +auditor’s approach to and the scope of the audit, and overseeing the company’s compliance with +SEC requirements related to disclosure of the auditor’s services and fees. + +39. In reality, the R12 project remained a non-audit services project related to +financial information systems design and implementation upon which PwC needed to directly +rely on Issuer A’s Internal Audit group. The engagement letter for the R12 project, for example, +demonstrates that the project was not intended as audit procedures. It did not describe how the +R12 project involved procedures required to audit Issuer A’s financial statements or internal +control over financial reporting. In fact, as set forth in the letter, Issuer A sought an +“independent reviewer” to “help management to understand the potential risks and quality of the +[R12] project” and to make assessments and provide recommendations. Based on the letter, +Issuer A would control “the scope of [PwC’s] assessment and designate each of the processes, +etc. that will be the subject of [PwC’s] assessment.” By contrast, in an audit, the independent +auditor determines the scope of the audit and the procedures to be performed. + +40. On July 16, 2014, Issuer A informed Sprankle that the company would not go live +with R12 until fiscal year 2016—two years later from the 2014 audit that PwC was performing at +the time. As a result, R12 was not Issuer A’s system of record for fiscal year 2014, making it +impossible for the R12 project to be a part of any audit for 2014 or even fiscal year 2015, for +which the Audit Committee had not executed an engagement letter retaining PwC. Accordingly, +there was no basis for PwC to perform any audit procedures concerning R12. + +41. In mid-July 2014, PwC employees under Sprankle’s supervision started working +on the R12 project, billing Issuer A over $70,000 for work performed through September 2014. +In late October 2014, PwC halted work on the R12 project because of independence concerns +raised by the PCAOB concerning the GRC project. + +42. Although PwC did not complete the full R12 project, PwC employees under +Sprankle’s supervision developed audit work programs, which were not needed for any PwC +audit work, but which were used by Issuer A’s internal auditors for their fiscal year 2015 internal +audit of R12 and the other software programs (per the Internal Audit Plan approved in March +2014). + +43. During the R12 project, PwC employees under Sprankle’s supervision also +provided PwC’s proprietary frameworks on settings and configurations to Issuer A so that the +company could incorporate the configurations and controls into its design. + +Sprankle Also Engaged in Improper Professional Conduct by Disclosing Client +Confidential Information + +44. Sprankle was required by PCAOB rules to act with objectivity and integrity in +connection with the professional services he provided to clients.4 + +45. When pursuing the GRC work with Issuer A, Sprankle regularly communicated, +and shared strategies and information, with a third-party GRC sales representative. In the course +of those communications, Sprankle provided material, non-public information concerning Issuer +A’s financial progress. By doing so, Sprankle failed to comply with PCAOB Rule 3500T. + +VIOLATIONS +46. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state +“whether the audit was made in accordance with generally accepted auditing standards” +(“GAAS”). “[R]eferences in Commission rules and staff guidance and in the federal securities +laws to GAAS or to specific standards under GAAS, as they relate to issuers, should be +understood to mean the standards of the PCAOB plus any applicable rules of the Commission.” +See SEC Release No. 34-49708 (May 14, 2004). Thus, and through the conduct described +above, Sprankle was a cause of PwC’s violating Rule 2-02(b)(1) of Regulation S-X when PwC + +4 PCAOB Rule 3500T requires auditors to comply with the AICPA’s Code of Professional Conduct Rule 102, and +interpretations and rulings thereunder, as in existence on April 16, 2003. Rule 102, in turn, requires that, “[i]n the +performance of any professional service, a member shall maintain objectivity and integrity, shall be free of conflicts +of interest, and shall not knowingly misrepresent facts or subordinate his or her judgment to others.” + +issued its audit report dated November 13, 2014, stating that PwC had conducted its audit in +accordance with PCAOB standards when it had not. + +47. An issuer violates Section 13(a) of the Exchange Act and Rule 13a-1 thereunder +when such issuer files with the Commission annual reports that contain materially false or +misleading information or if they file annual reports that fail to include independently audited +financials. Scienter is not required for a violation of Section 13(a). Similarly, an issuer violates +Section 13(a) of the Exchange Act and Rule 13a-13 thereunder when such issuer files with the +Commission quarterly reports that fail to include independently reviewed interim financials. +Scienter is not required for a violation of Section 13(a). In administrative proceedings, the +Commission may impose sanctions upon any person that is, was, or would be a cause of a +violation, due to an act or omission the person knew or should have known would contribute to +such violation. In order to establish that a person was a cause of a non-scienter based violation, +the Commission has specifically ruled that a showing of negligence will suffice. PwC did not +conduct the audit of Issuer A’s financial statements in accordance with PCAOB standards, and +then issued an audit report stating that PwC was independent when it was not. PwC also was not +independent when it reviewed Issuer A’s interim financial statements for the first quarter of +Issuer A’s fiscal year 2015. Sprankle was a cause of Issuer A’s violations of Section 13(a) and +Rules 13a-1 and 13a-13 thereunder. + +48. Section 4C of the Exchange Act and Commission Rule of Practice 102(e)(1)(ii) +provide, in part, that the Commission may censure or deny, temporarily or permanently, the +privilege of appearing or practicing before the Commission to any person who is found by the +Commission to have engaged in improper professional conduct. With respect to persons licensed +to practice as accountants, “improper professional conduct” includes either of the following two +types of negligent conduct: (1) a single instance of highly unreasonable conduct that results in a +violation of applicable professional standards in circumstances in which an accountant knows, or +should know, that heightened scrutiny is warranted; or (2) repeated instances of unreasonable +conduct, each resulting in a violation of applicable professional standards, that indicate a lack of +competence to practice before the Commission. CRP Rule 102(e)(1)(iv)(B). As a result of the +conduct described above, Sprankle engaged in “improper professional conduct” within the +meaning of Exchange Act Section 4C(a)(2) and CRP Rule 102(e)(1)(ii). + +Findings + +49. Based on the foregoing, the Commission finds that Respondent Sprankle (a) +engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and +Rule 102(e)(1)(ii) of the Commission’s Rules of Practice; (b) was a cause of PwC’s violating +Rule 2-02(b) of Regulation S-X; and (c) was a cause of Issuer A’s violating Section 13(a) of the +Exchange Act and Rules 13a-1 and 13a-13 thereunder. + +IV. + +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. + +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Respondent Sprankle shall cease and desist from committing or causing any +violations and any future violations of Rule 2-02 of Regulation S-X. + +B. Respondent Sprankle shall cease and desist from committing or causing any +violations and any future violations of Section 13(a) of the Exchange Act and Rules 13a-1 and +13a-13 thereunder. + +C. Pursuant to Section 4C of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice, Respondent Sprankle is denied the privilege of appearing or +practicing before the Commission as an accountant. + +D. After four years from the date of this order, Sprankle may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + +1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission (other than as a member of an audit committee, as that +term is defined in Section 3(a)(58) of the Securities Exchange Act of +1934). Such an application must satisfy the Commission that Sprankle’s +work in his practice before the Commission as an accountant will be +reviewed either by the independent audit committee of the public company +for which he works or in some other acceptable manner, as long as he +practices before the Commission in this capacity; and/or + +2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with +the Commission as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934. Such +an application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + +(a) Sprankle, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + +(b) Sprankle, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did +not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that Sprankle will not receive appropriate supervision; + +(c) Sprankle has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + +(d) Sprankle acknowledges his responsibility, as long as he appears or +practices before the Commission as an independ ent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +E. The Commission will consider an application by Sprankle to resume appearing or +practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Sprankle’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + +F. Respondent Sprankle shall, within ten (10) days of the entry of this Order, pay a +civil money penalty in the amount of $25,000, to the Securities and Exchange Commission for +transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment of a civil penalty is not made, additional interest shall accrue +pursuant to 31 U.S.C. § 3717. + +G. All payments required by this Order must be made in one of the following ways: + +1. Respondent may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +2. Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +3. Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter +identifying Brandon Sprankle as the Respondent in these proceedings, and the file +number of these proceedings. A copy of the cover letter and check or money +order, or documentation of whatever other form of payment is used, must be +simultaneously sent to Anita Bandy, Associate Director, Division of Enforcement, +Securities and Exchange Commission, 100 F St., N.E., Washington, DC 20549. + +H. Amounts ordered to be paid as civil money penalties pursuant to this Order shall +be treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, he shall not argue that he is entitled to, nor shall he benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such +a Penalty Offset, Respondent agrees that he shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” +means a private damages action brought against Respondent by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in +Section 523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal securities laws or any regulation or order +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. +§523(a)(19). + + +By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4086.txt b/raw/aaer/2019/AAER-4086.txt new file mode 100644 index 0000000000000000000000000000000000000000..6e2b60aacf98a0da8b8b7fa09c948481e53f375b --- /dev/null +++ b/raw/aaer/2019/AAER-4086.txt @@ -0,0 +1,531 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87054 / September 23, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4086 / September 23, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19492 + + +In the Matter of + +NISSAN MOTOR CO., LTD. + +Respondent. + + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) against Nissan Motor Co., Ltd. (“Nissan” or +“Respondent”). +II. +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which is admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, Making +Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + 2 +III. +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: +Summary +1. From 2001 through November 2018, Carlos Ghosn (“Ghosn”) served as +Chairman of the Board and/or CEO2 of Nissan Motor Co., Ltd. From fiscal year 2004 through +2018, Nissan’s Board delegated to Ghosn the authority to set the amount of individual director +and executive compensation, including his own compensation, within certain aggregate limits. +Although in certain years the Board’s delegation contemplated that Ghosn would consult with +Nissan’s representative directors on the compensation decisions, in practice, Ghosn set the +amount of his compensation without input or oversight. +2. From fiscal year 2009 to fiscal year 2018, Nissan, through the fraudulent actions +of Ghosn, with substantial assistance from Gregory L. Kelly (“Kelly”), a former Nissan +executive and director, failed to disclose more than $90 million3 in compensation for Ghosn. +Although this undisclosed compensation was in fact not paid to Ghosn, his total compensation +was fixed and certain in each fiscal year, with a paid portion that was disclosed by Nissan and a +significant portion that was unpaid and undisclosed. Ghosn, with substantial assistance from +Kelly and a senior employee in Nissan’s Secretariat’s Office (“Nissan Employee 1”), devised +multiple ways to have the undisclosed portion of the fixed compensation paid through Nissan- +related entities without public disclosure. +3. After their attempts to have the compensation paid from other Nissan-related +entities in current periods raised certain disclosure issues, Ghosn, with substantial assistance +from Kelly and Nissan Employee 1, instead crafted ways to structure payment after Ghosn’s +retirement from Nissan without disclosure in the periods when the compensation was earned and +fixed. Among other schemes: Ghosn entered into secret contracts countersigned by Nissan +Employee 1, and executed backdated letters granting himself cash bonuses under Nissan’s +annual Long Term Incentive Plan (“LTIP”) in the amount of the undisclosed compensation. +4. In addition to the $90 million in undisclosed fixed compensation, Ghosn and +certain subordinates, including Kelly, made, or caused to be made, knowingly false and +misleading statements regarding approximately $50 million of additional pension benefits for +Ghosn. This included affirmatively misleading Nissan’s CFO and other Nissan executives + +1 The findings herein are made pursuant to Respondent’s Offer and are not binding on any other +person or entity in this or any other proceeding. +2 Ghosn resigned his position as CEO on April 1, 2017, but remained Chairman of the Board. +Ghosn was stripped of the Chairman title following his arrest on November 19, 2018. He was +removed from Nissan’s Board by shareholder vote on April 8, 2019. +3 Based on the average exchange rate during the year in which the undisclosed compensation was +fixed and earned. + 3 +regarding the accounting for the additional pension amounts, and creating a false disclosure to +support how Nissan accounted for them. +5. The failure to disclose the full amount of Ghosn’s compensation and the false +disclosure regarding the pension increase in annual securities reports certified by Ghosn violated +Japanese disclosure requirements, and resulted in material misstatements in Nissan’s annual +securities reports in violation of Section 10(b) and Rule 10b-5 of the Exchange Act. Consistent +with the exemption from Exchange Act registration on which Nissan relied, Nissan’s annual +securities reports were translated into English for, among other things, the benefit of U.S. +investors in Nissan American Depository Receipts (“ADRs”) (OTC: NSANF) that trade over- +the-counter in the United States. Those reports contained materially false and misleading +statements. As part of their schemes to underreport Ghosn’s compensation, Ghosn, with +substantial assistance from Kelly, participated in additional acts, practices or courses of business +that operated as a fraud or deceit upon Nissan’s U.S.-based ADR holders. +Respondent +6. Nissan Motor Co., Ltd. is a Japanese automaker based in Yokohama, Japan. +Nissan’s sponsored ADRs trade over-the-counter in the United States. Nissan does not have a +class of securities registered with the Commission and does not file reports with the +Commission, instead relying on the exemption contained in Exchange Act Rule 12g3-2(b). +Nissan’s common stock is listed and trades primarily on the Tokyo Stock Exchange (TYO: +7201). Nissan is a member of the Renault–Nissan–Mitsubishi Alliance, a strategic partnership +between the automobile manufacturers based on a cross sharing agreement originally formed in +1999 and expanded to include Mitsubishi in 2016. +Other Relevant Persons +7. Carlos Ghosn, 65, is a citizen of France, Lebanon and Brazil and was most +recently a resident of the Netherlands or Lebanon. Ghosn joined Nissan in 1999 as its Chief +Operating Officer and became President in 2000. He served as Nissan’s Chief Executive Officer +from 2001 until April 2017, when he stepped down as CEO while maintaining his chairmanship. +He served as Chairman from 2003 until November 22, 2018 (co-Chairman from 2003 to 2008). +Ghosn was removed from the Chairman role after his arrest by Japanese authorities on +November 19, 2018. Ghosn was formally removed from Nissan’s Board by shareholder vote on +April 8, 2019. Ghosn also served as Chairman and CEO of Renault S.A. starting in 2009 and +Chairman of Mitsubishi Motor Corp. starting in 2016. Ghosn was removed as Chairman of +Mitsubishi on November 26, 2018 and resigned his positions with Renault on January 24, 2019. +Ghosn is currently unemployed and awaiting trial in Japan. +8. Gregory L. Kelly, 62, is a United States citizen and resident of Nashville, +Tennessee. Kelly is an attorney admitted in Indiana, Tennessee, and various federal courts. +Kelly served as an executive at Nissan North America since 1988, and served as a Senior Vice +President of Human Resources of Nissan from 2008-2014. In that role, Kelly oversaw Nissan’s +CEO’s Office, Secretariat’s Office, Legal Department, and Internal Audit Department. In June +2012, Kelly was elected to serve as a representative director on Nissan’s Board of Directors. + 4 +Kelly retired from his management role on January 31, 2015, but continued to serve as a +representative director on Nissan’s Board until he was arrested, along with Ghosn, by Japanese +authorities on November 19, 2018. Kelly was removed as a representative director in November +2018 and was formally removed from Nissan’s Board by shareholder vote on April 8, 2019. +Kelly is currently unemployed and awaiting trial in Japan. +Nissan’s Disclosure of Director Compensation +9. Prior to fiscal year 2009, Japanese law required Japanese reporting companies like +Nissan to disclose the aggregate amount of all director compensation paid in each fiscal year. +However, in early 2010, the Japan Financial Services Agency (“JFSA”) amended its disclosure +rules and began requiring companies to disclose the total compensation of each individual officer +and director whose total compensation equaled or exceeded ¥100 million.4 See Cabinet Office +Ordinance on Partial Amendment of Cabinet Office Ordinance on Disclosure of Corporate +Information, etc. (2010 Cabinet Office Ordinance No. 12). This change impacted Nissan’s +Japanese securities filings beginning with fiscal year 2009, which ended on March 31, 2010.5 +The compensation required to be disclosed encompassed salary, bonuses, stock options, +severance payments, and “other” compensation paid during a fiscal year or where “an estimate of +the amount to be paid became certain within [that] fiscal year.” +10. Ghosn served as Chairman and/or CEO of Nissan from 2001 through November +2018. From fiscal year 2004 forward, Nissan’s Board delegated to Ghosn the authority to set the +amount of individual director and executive compensation, including his own compensation, +within certain aggregate limits. Although the Board’s delegation in certain years contemplated +that he would consult with Nissan’s representative directors on the compensation decisions, in +practice, Ghosn set the amount of director and executive compensation without oversight. For +each of Nissan’s fiscal years 2009 through 2018, Ghosn’s total compensation exceeded the ¥100 +million threshold requiring disclosure. +11. Prior to the change in Japanese disclosure law, Ghosn’s compensation from +Nissan was not publicly available. After the impending change to Japan’s disclosure rules was +announced, Ghosn became concerned about criticism that might result in the Japanese and +French media if Ghosn’s total compensation became publicly known. As a result, when the +amendments to the Japanese disclosure law were first announced, Ghosn directed a senior Nissan +executive to undertake lobbying efforts to eliminate or postpone implementation of the new law. +Those attempts were ultimately unsuccessful. So, beginning with fiscal year 2009, Ghosn and + +4 The ¥100 million threshold was the equivalent of about $1 million in U.S. dollars when the +changed law took effect in or around February 2010. +5 In Japan, most companies operate on a fiscal year that runs from April 1 to March 31, so +Nissan’s fiscal year 2009 ran from April 1, 2009 through March 31, 2010. Nissan’s annual +securities report (“Yukashoken-Hokokusho”) for fiscal year 2009 was filed in June 2010. The +new disclosure law took effect in or around February 2010 and was applicable to companies’ +fiscal year 2009 disclosures. + 5 +certain subordinates, including Kelly, began taking steps to conceal a substantial portion of +Ghosn’s fixed compensation from public disclosure. +Ghosn Awarded Himself More than $90 Million of Undisclosed Compensation +12. Beginning in fiscal year 2009, after the change in Japanese disclosure law, and +continuing until his arrest in 2018, Ghosn and Kelly devised and executed a scheme whereby +more than 50% of the compensation that Ghosn awarded to himself was not reported in Nissan’s +annual securities disclosures filed with the JFSA. Each year beginning with fiscal year 2011,6 +Nissan Employee 1 would prepare for Ghosn’s approval a document summarizing Ghosn’s total +fixed compensation, his paid compensation that was being disclosed, and his remaining +compensation that was not being disclosed. +13. The following is a summary of Ghosn’s total fixed compensation for fiscal years +2009-2017, the amount actually paid,7 and the amount of undisclosed compensation, according to +records from the Secretariat’s Office. + + +6 Although Nissan Employee 1 began keeping the tracking documents in 2011, in coordination +with Ghosn and Kelly, he created backdated charts memorializing Ghosn’s 2008-2010 +compensation. +7 These numbers have been rounded and do not reflect exact amounts. The numbers also may +not reflect all compensation and benefits that were paid to Ghosn from Nissan-related sources in +the given year. Other than a few immaterial differences, the paid compensation is consistent +with the amount disclosed in Nissan’s annual securities reports (“Yukashoken-Hokokusho”) for +2010-2017. For 2009, the paid compensation recorded by the Secretariat’s Office exceeded the +disclosed compensation recorded in Nissan’s annual securities reports by ¥320 million, or 36%. + 6 + Fiscal Year Total Fixed Comp +(JPY/USD)8 +Paid Comp Undisclosed +Comp +2009 ¥1,437M / $15M ¥1,211M / $13M ¥226M / $2M +2010 ¥1,782M / $21M ¥982M / $11M ¥800M / $9M +2011 ¥1,894M / $24M ¥987M / $12M ¥907M / $11M +2012 ¥1,984M / $24M ¥949M / $11M ¥1,035M / $12M +2013 ¥2,048M / $20M ¥958M / $10M ¥1,090M / $11M +2014 ¥2,131M / $19M ¥1,035M / $9M ¥1,096M / $10M +2015 ¥2,228M / $19M ¥1,071M / $9M ¥1,157M / $10M +2016 ¥2,392M / $22M ¥1,098M / $10M ¥1,293M / $12M +2017 ¥2,422M / $22M ¥735M / $7M ¥1,688M / $15M +Total ¥18,318M / $186M ¥9,026M / $91M ¥9,292M / $94M + +14. Beginning in 2010, and continuing until Ghosn and Kelly’s arrests in 2018, +Ghosn, with substantial assistance from Kelly and Nissan Employee 1, devised a series of +schemes designed to ensure the payment of the undisclosed compensation to Ghosn. The +undisclosed compensation was originally in the form of fixed and certain compensation that +Ghosn and certain subordinates, including Kelly, sought to have paid in the current year from +certain Nissan-related companies. After their attempts to have the undisclosed compensation +paid in current periods raised certain disclosure issues, Ghosn and certain of his subordinates +sought ways to guarantee payment of the compensation after Ghosn’s retirement from Nissan +without disclosure in the periods when the compensation was earned and fixed. +Ghosn and Kelly, with the assistance of Nissan Employee 1, Sought Payment of the +Undisclosed Compensation through Other Related Entities + +15. Beginning in early 2010, Ghosn and certain subordinates sought multiple ways to +pay the undisclosed fixed compensation in current years from other Nissan-related entities +without disclosure. Initially, certain of Ghosn’s subordinates suggested making payments +through Renault-Nissan, B.V., the joint venture between Renault and Nissan, without disclosure +in Japan or to the Renault Board. When further review raised concerns over potential disclosure +requirements in France, this plan was abandoned. +16. Ghosn and certain subordinates, next explored paying Ghosn’s undisclosed +compensation from an unconsolidated subsidiary. In October 2010, Kelly presented a plan to +Nissan’s Executive Committee proposing the creation of a new unconsolidated subsidiary “to + +8 United States dollar conversions are based on average JPY/USD exchange rate for the fiscal +year. + 7 +analyze business opportunities such as potential joint ventures and investments in promising +technologies.” Nissan’s Executive Committee approved the proposal and certain of Ghosn’s +subordinates proceeded to set up new legal entities named Zi-A Capital B.V. (Netherlands) and +Zi-A Capital Ltd. (Dubai), which Nissan initially funded with approximately $60 million (USD). +17. Through the end of fiscal year 2010, Nissan Employee 1 made preparations to pay +Ghosn’s postponed compensation through Zi-A Capital Ltd. However, in March 2011, Ghosn +told him that they would not proceed with the payment of the undisclosed compensation from Zi- +A Capital Ltd. In the end, the Zi-A entities never invested in any technologies, business +opportunities or joint ventures as proposed to the Executive Committee. +Ghosn Signed Secret Contracts to Secure Payment of a Portion of his Fixed +Compensation after his Retirement +18. After their failed attempts to pay the undisclosed portions of Ghosn’s +compensation in current periods, Ghosn, Kelly, and Nissan Employee 1 devised plans to pay the +postponed remuneration in future years as “consultant fees.” +19. First in 2011 and again in 2013, Ghosn entered into secret letter agreements with +Nissan to have the outstanding postponed compensation for fiscal years 2009-2012 paid to +Ghosn upon retirement. The letter agreements, prepared on Ghosn’s letterhead and addressed to +himself, specified Ghosn’s fixed remuneration, the paid remuneration disclosed in prior years, +and the remaining remuneration owed by Nissan to Ghosn upon his retirement. The letter +agreements were signed by Ghosn and counter-signed by Nissan Employee 1. The 2011 and +2013 letter agreements specified that Ghosn would be paid the full amount of the undisclosed +compensation in the year following his retirement from the Board, and that he would be +appointed an Executive Consultant or Executive Advisor for two years following his retirement. +20. The 2011 and 2013 letter agreements also provided Ghosn currency price +protection by granting Ghosn the right to choose, at the time the payments were to be made, +whether to be paid in Japanese yen or U.S. dollars. The stated currency of Ghosn’s +compensation for the fiscal years in question had always been Japanese yen. The option to +choose the currency of payment years later in retirement would enable Ghosn to select the most +advantageous currency based on the respective strength of the currencies. The letter agreements +also stated that Ghosn could choose to have his retirement allowance paid in yen or dollars, a +new benefit that was not included in his original 2007 award. As described below, Ghosn’s +choice of currency when he directed the booking of additional amounts for his retirement +allowance resulted in a more than $20 million increase in the value of his retirement allowance +that was not afforded to other directors and was outside the applicable shareholder approval. +Ghosn Executed Back-Dated LTIP Grant Letters to Secure Payment of a Portion of the +Undisclosed Compensation + +21. In the autumn of 2013, Ghosn was awarded a grant of interests in Nissan’s LTIP +in the amount of the undisclosed compensation. Ghosn had not previously participated in +Nissan’s LTIP program. + 8 +22. To implement this scheme, Nissan Employee 1 prepared four backdated LTIP +award letters for fiscal years 2009-2012, granting Ghosn an LTIP interest in the amount of his +previously undisclosed compensation for each of those years. The backdated LTIP letters +included a U.S. dollar value for each LTIP award using an annual average exchange rate from +the respective fiscal year, and allowed Ghosn to decide whether to be paid in Japanese yen or +U.S. dollars after his retirement in 2017. The backdated LTIP letters were intended to ensure +Ghosn would receive payment on the postponed compensation that had been omitted from +Nissan’s director compensation disclosures. +23. In fiscal year 2014, Ghosn directed Nissan Employee 1 to have Nissan’s finance +department book approximately $80 million into Nissan’s LTIP reserve to cover $58 million of +LTIP awards to Ghosn for fiscal years 2009 through 2014, as well as approximately $22 million +for exchange rate fluctuations on Ghosn’s recently-inflated retirement allowance, described +below. At Ghosn’s direction, Nissan Employee 1 contacted a senior finance department +executive to discuss recording the LTIP, and was informed that, given the size of the booking, it +would be best to use the CEO Reserve9 and for Ghosn to discuss the booking directly with the +CFO. On or around February 23, 2015, at Ghosn’s direction, Nissan Employee 1 submitted an +“Application for Budget Usage” signed by Ghosn, Nissan Employee 1, and Nissan’s CFO, to +approve the use of the CEO Reserve to book the LTIP awards. +24. Nissan’s CFO was falsely told that the LTIP awards were a broad-based grant to +numerous Nissan participants rather than that the vast majority was for Ghosn and included +exchange rate protection on the inflated retirement allowance. Relying on this information, +Nissan’s CFO approved and signed off on the LTIP expense request, and the amounts were +recorded over three fiscal years. Nissan’s CFO would not have approved booking the LTIP +expense without additional disclosure if he had known the truth about its actual intended use. +25. By 2017, Nissan Employee 1 became concerned that Japan’s tax authorities might +raise questions about the tax treatment of the LTIP award and require disclosure of the LTIP +award recipients in the event of a tax audit, and alerted Ghosn to his concerns. Fearing public +disclosure of the LTIP award, Ghosn approved reversing the impact of his 2014 LTIP award in +Nissan’s accounting system. +26. Kelly provided substantial assistance to Ghosn’s efforts to pay his undisclosed +compensation through an LTIP award that was never disclosed to investors, including by +discussing the plan with Ghosn and certain other Nissan subordinates, reviewing and editing +backdated documents intended to effect the scheme, and directing other Nissan employees in +furtherance of the scheme. +Ghosn and Kelly Fraudulently Inflated Ghosn’s Pension Allowance by More Than $50 +Million and Created a False Disclosure to Disguise the Increase + + +9 Nissan’s CEO Reserve was a budgetary tool that allowed non-allocated expenses to be charged +to the CEO’s Office for budget purposes so that they would not unexpectedly impact the results +of other departments at Nissan. + 9 +27. In or around June 2007, Nissan’s shareholders voted to discontinue Nissan’s +pension program for directors and statutory auditors.10 To implement the shareholder vote, +Nissan determined the estimated value of each director’s retirement allowance at that point in +time and included the aggregate amount in “Other Long-Term Liabilities” for the fiscal year +ended March 31, 2008. On June 18, 2007, Nissan informed Ghosn by letter that the estimated +value of his retirement allowance was approximately ¥4.4 billion. The June 18, 2007 letter +included the calculations used to arrive at that amount. +28. In or around July 2013, Ghosn asked certain subordinates, including Kelly, to +consider whether Ghosn’s retirement allowance had been miscalculated in 2007 and explore +alternative ways to calculate it to make it a larger amount. As a result of those efforts, Ghosn +approved an alternative calculation that would increase his retirement allowance from ¥4.4 +billion to roughly ¥6.9 billion. +29. Although Nissan Employee 1 initially prepared calculations that considered +changing the formula for all directors and statutory auditors, Ghosn ultimately decided that they +would only increase his retirement allowance. In subsequent email communications, an +employee in Nissan’s legal department who was involved as one of the subordinates in the +pension allowance increase scheme (“Nissan Employee 2”) described the increase in Ghosn’s +retirement allowance as a “contrived construction of the pension plan.” +30. In or around October 2013, after settling on the calculation, Ghosn directed +Nissan Employee 1 to have the new pension amount recorded in Nissan’s accounting records. +Pursuant to those instructions, Nissan Employee 1 executed a new retirement allowance award +letter that was backdated to September 1, 2007, and signed on behalf of Nissan before providing +it to Ghosn. The backdated retirement award letter used the same formula as the original June +2007 award letter but increased the average annual remuneration on which the award was based +by more than ¥600 million per year through a line-item labeled “Stock-option[s],” which resulted +in Ghosn’s retirement allowance increasing to roughly ¥6.9 billion. +31. On October 21, 2013, Nissan Employee 1 emailed Nissan Employee 2 about +booking the increase to Ghosn’s retirement allowance “without making it public.” Nissan +Employee 1 wrote, “It is necessary to explain to the accountants and external auditors . . . but it +would be no problem by explaining that there was [a] miscalculation at the Secretariat.” +32. Sometime afterward, certain Ghosn subordinates, including Kelly, took steps to +have Nissan’s finance department record the pension increase in Nissan’s accounting systems, +including by falsely informing Nissan’s CFO that the increase was the result of a mistake at the +Secretariat’s Office. The additional retirement allowance was recorded in Nissan’s accounting +and finance records for fiscal year 2014. + +10 In Japanese corporations, a statutory auditor is appointed by shareholder vote and performs +functions different from an outside auditor, including auditing the execution of duties by officers, +directors, and accounting advisors for a company. + 10 +33. In early 2015, Nissan Employee 2 sent the CFO and Kelly a proposed disclosure +describing the increase as an “updated amount of retirement benefits for directors and statutory +auditors.” The disclosure gave the impression that the increase benefited multiple directors and +statutory auditors, when in fact the entire approximately $29 million increase only benefitted +Ghosn. Nissan’s fiscal year 2014 annual report filed in June 2015 reflected that misleading +disclosure, and did not disclose that only Ghosn’s retirement benefits were substantially +increased or that they were increased by roughly $29 million. +34. In addition to changing the calculation of Ghosn’s pension allowance, Ghosn also +instructed Nissan Employee 1 to change the currency in which Ghosn’s pension would be paid, +resulting in an additional $22 million increase in the value of Ghosn’s pension allowance. When +it was valued in the original June 18, 2007 letter, Ghosn’s pension allowance was specifically +calculated and expressed in Japanese yen, as required by the applicable shareholder approval. +However, as described above, the letter agreement signed by Ghosn and Nissan Employee 1 in or +around March 2011 included a clause allowing Ghosn to choose whether his pension allowance +would be paid in Japanese yen or U.S. dollars. The currency clause included in the 2011 +agreement was not included in Ghosn’s original pension agreement, and was inconsistent with +the valuation of Nissan’s pensions for other directors. +35. Beginning in or around October 2014, Ghosn directed Nissan Employee 1 to +include the value of the pension allowance in United States dollars on the spreadsheets tracking +the value of Ghosn’s undisclosed compensation and retirement allowance, resulting in an +approximately $22 million increase in the value of Ghosn’s retirement allowance. In doing so, +Nissan Employee 1 calculated the conversion using an exchange rate from 2012 that would +provide Ghosn greater benefit than the prevailing exchange rate at the time of the conversion in +2014. Because of changes in the value of the Japanese yen relative to the U.S. dollar, the choice +of currency resulted in a significant financial benefit to Ghosn. +36. In or around February 2015, Ghosn, with the assistance of Nissan Employee 1, +approved the incorrect booking of the additional $22 million in retirement allowance in +connection with the booking of Nissan’s $58 million increase in the value of the LTIP awards. +This was never disclosed by Nissan or Ghosn. +37. Kelly provided substantial assistance to Ghosn’s efforts to increase his retirement +allowance, including by discussing the plans with Ghosn and other Nissan employees, reviewing +and editing documents intended to effect the schemes, providing a false description of the +retirement allowance change to Nissan’s CFO, failing to correct the false and misleading +disclosure regarding the change, and directing other Nissan employees in furtherance of the +scheme. +Resulting Misstatements and Omissions +38. As a result of the above misconduct by Ghosn and Kelly, Nissan’s annual +securities reports for fiscal years 2009-2017 contained materially false and misleading +information. Those securities reports included officer and director compensation information +required by Japanese law and were translated by Nissan into English and posted on Nissan’s + 11 +website consistent with Nissan’s reliance on the Exchange Act Rule 12g3-2 exemption from +Exchange Act Section 12(g) registration. Specifically, (1) Nissan’s disclosures of director +compensation for fiscal years 2009-2017 were materially understated by the amount of the +undisclosed compensation awarded to Ghosn during those fiscal years, and (2) Nissan’s +disclosure regarding the increase to the retirement allowance in its fiscal year 2014 annual +securities report was false and misleading because it implied that the change impacted all of +Nissan’s directors and statutory auditors who were subject to the retirement allowance. +Nissan’s Remedial Efforts and Cooperation +39. In determining to accept the Offer, the Commission considered the significant +cooperation afforded the Commission staff by Respondent. The Commission also considered +remedial acts promptly undertaken by Respondent, including the following corporate governance +changes: Respondent changed the basic structure of the Board of Directors to include a +Compensation Committee and Audit Committee; Respondent constituted its Compensation +Committee entirely of independent outside directors and gave it sole authority to determine +compensation of Executive Officers, including the CEO and directors, which authority cannot be +delegated; Respondent’s Secretariat Office was modified to make its actions more transparent +and subject to internal auditing and internal controls procedures; Respondent changed its Board +composition to include a majority of independent outside directors, including the Chairman of +the Board as an independent outside director and eliminating the Chairman’s role in connection +with business operations; Respondent constituted its Audit Committee of a majority independent +outside directors, including an independent outside director as its chair, with at least one member +of the Audit Committee having experience in international audits; and Respondent eliminated +Nissan’s CEO Reserve. +Undertakings +40. In connection with this action and any related judicial or administrative +proceeding or investigation commenced by the Commission or to which the Commission is a +party, Respondent undertakes and agrees to: (i) use best efforts to make employees, officers and +directors appear and be interviewed by Commission staff at such times and places as the staff +requests upon reasonable notice; (ii) produce in any United States judicial district for deposition +a witness pursuant to Rule 30(b)(6) of the Federal Rules of Civil Procedure and a custodian of +records capable of authenticating any documents produced by Respondent; (iii) accept service by +mail or facsimile transmission of notices or subpoenas issued by the Commission for documents +or testimony at depositions, hearings, or trials, or in connection with any related investigation by +Commission staff; (iv) appoint Respondent's undersigned attorney as agent to receive service of +such notices and subpoenas; (v) to waive the territorial limits on service contained in Rule 45 of +the Federal Rules of Civil Procedure and any applicable local rules with respect to such notices +and subpoenas, provided that the party requesting the testimony reimburses Respondent's travel, +lodging, and subsistence expenses at the then-prevailing U.S. Government per diem rates; and (vi) +consent to personal jurisdiction over Respondent in any United States District Court for purposes +of enforcing any such subpoena. +Violations + 12 + +41. As a result of the conduct described above, Respondent violated Section 10(b) of +the Exchange Act and Rule 10b-5, thereunder. Section 10(b) of the Exchange Act and Rule 10b- +5 prohibit fraud in connection with the purchase or sale of securities. Section 10(b) and Rule +10b-5 prohibit: (1) using any device, scheme or artifice to defraud; (2) making a material +misstatement of fact or omitting a material fact necessary to make a statement made not +misleading; or (3) engaging in any act, practice or course of business that operates or would +operate as a fraud or deceit upon any person. Scienter is an element of both Section 10(b) and +Rule 10b-5. See Aaron v. SEC, 446 U.S. 680, 701-02 (1980). +42. Ghosn’s perpetration of the fraudulent conduct, with Kelly’s substantial +assistance, described herein, including intent and knowledge of the misleading statements, +devices, schemes and artifices to defraud Nissan investors can be imputed to Nissan, and serves +as the basis for Nissan’s liability. Under traditional principles of respondeat superior, the +knowledge of an employee or agent of an entity may be imputed to that entity for purposes of +establishing a violation of the federal securities laws, and a company is liable for the acts of its +employees or agents, where the acts are undertaken within the scope of their employment. See +Restatement (Third) of Agency, § 2.04 (2006) (“An employer is subject to liability for torts +committed by employees while acting within the scope of their employment.”); SEC v. Morgan +Keegan & Co., 678 F.3d 1233, 1249 (11th Cir. 2012); Standard Oil Co. v. United States, 307 +F.2d 120, 127 (5th Cir. 1962). +43. Ghosn’s conduct violated Section 10(b) of the Exchange Act and Rule 10b-5, and +Kelly aided and abetted Ghosn’s violation. The misleading statements, devices, schemes and +artifices to defraud were material and evidenced a high degree of scienter. Ghosn’s acts were +undertaken within the scope of his employment, particularly in light of Nissan’s specific +delegation to Ghosn of authority to set individual director compensation, including his own. +Therefore, his conduct, mental state, and liability can be imputed to Nissan, and Nissan thereby +violated Section 10(b) of the Exchange Act and Rule 10b-5, thereunder. + +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, it is hereby ORDERED that: +A. Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist +from committing or causing any violations and any future violations of Section 10(b) of the +Exchange Act. +B. Respondent shall, within 30 days of the entry of this Order, pay a civil monetary +penalty of $15,000,000.00 to the Securities and Exchange Commission for transfer to the gene ral +fund of the United States Treasury. If timely payment is not made, interest shall accrue pursuant to +31 U.S.C. § 3717. + 13 + +Payments must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Service Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Nissan Motor Co., Ltd. as a Respondent in these procee dings, and the file number of these +proceedings. A copy of the cover letter and check or money order must be sent to Associate +Director Melissa Hodgman, Division of Enforcement, Securities and Exchange Commission, 100 F +Street, NE, Washington, DC 20549. +C. Amounts ordered to be paid as civil money penalties in this Order shall be treated as +penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, it shall +not argue that it is entitled to, nor shall it benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in this +action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty Offset, +Respondent agrees that it shall, within 30 days after entry of a final order granting the Penalty +Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty Offset to +the Commission. Such a payment shall not be deemed an additional civil penalty and shall not be +deemed to change the amount of the civil penalty imposed in this proceeding. For purposes of this +paragraph, a “Related Investor Action” means a private damages action brought against Respondent +by or on behalf of one or more investors based on substantially the same facts as alleged in the +Order instituted by the Commission in this proceeding. +D. It is further Ordered that, solely for purposes of exceptions to discharge set forth +in Section 523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and +admitted by Respondent, and further, any debt for disgorgement, prejudgment interest, civil +penalty or other amounts due by Respondent under this Order or any other judgment, order, +consent order, decree or settlement agreement entered in connection with this proceeding, is a +debt for the violation by Respondent of the federal se curities laws or any regulation or order + 14 +issued under such laws, as set forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § +523(a)(19). + +By the Commission. + + + + Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4088.txt b/raw/aaer/2019/AAER-4088.txt new file mode 100644 index 0000000000000000000000000000000000000000..2c87765d6eb9940f1c7156a3b195059905adcfe3 --- /dev/null +++ b/raw/aaer/2019/AAER-4088.txt @@ -0,0 +1,1400 @@ + + + + + + + + + + + + + + + + SEC.gov | Carlos Ghosn and Gregory L. 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Kelly + + + + + + + + + + + + Carlos Ghosn and Gregory L. Kelly + + + + + + + + + + + + + + + + + + + + + --> + + SEC Charges Nissan, Former CEO, and Former Director with Fraudulently Concealing from Investors More Than $140 Million of Compensation and Retirement Benefits + + + Litigation Release No. 24606 / September 23, 2019 + + Accounting and Auditing Release No. 4088 / September 23, 2019 + + Securities and Exchange Commission v. Carlos Ghosn and Gregory L. Kelly , No. 1:19-civ-08798 (S.D.N.Y. filed September 23, 2019) + + + + + + + + + Washington D.C., Sept. 23, 2019 - The SEC today filed settled fraud charges against Nissan, its former CEO Carlos Ghosn, and its former director Greg Kelly related to false financial disclosures that omitted more than $140 million to be paid to Ghosn in retirement. + + According to the SEC's orders and complaint, beginning in 2004 Nissan's Board delegated to Ghosn the authority to set individual director and executive compensation levels, including his own. From 2009 until his arrest in Tokyo in November 2018, Ghosn, with substantial assistance from Kelly and subordinates at Nissan, engaged in a scheme to conceal more than $90 million of compensation from public disclosure, while also taking steps to increase Ghosn's retirement allowance by more than $50 million. Each year, Ghosn fixed a total amount of compensation for himself, with a certain amount paid and disclosed and an additional amount that was unpaid and undisclosed. Ghosn and his subordinates, including Kelly, crafted various ways to structure payment of the undisclosed compensation after Ghosn's retirement, such as entering into secret contracts, backdating letters to grant Ghosn interests in Nissan's Long Term Incentive Plan, and changing the calculation of Ghosn's pension allowance to provide more than $50 million in additional benefits. Kelly and Ghosn's Nissan subordinates misled Nissan's CFO, and Nissan issued a misleading disclosure in connection with the increased pension allowance. The $140 million in undisclosed compensation and retirement benefits was never paid out to Ghosn. + + In an administrative proceeding, the Commission charged Nissan with violating the anti-fraud provisions of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. Nissan settled the charges, agreeing to pay a $15 million civil penalty and to cease and desist from committing or causing violations of the anti-fraud provisions. The SEC's complaint filed in district court charges Ghosn with violating the same anti-fraud provisions and Kelly with aiding and abetting Ghosn's and Nissan's violations. To settle the charges, Ghosn and Kelly agreed to be permanently enjoined from violating or aiding and abetting violations of the anti-fraud provisions. Ghosn also agreed to a $1 million civil penalty and a 10-year officer and director bar. Kelly agreed to a $100,000 penalty, a five-year officer and director bar and a five-year suspension from practicing or appearing before the Commission as an attorney. Nissan, Ghosn, and Kelly settled without admitting or denying the SEC's allegations and findings. + + The SEC investigation was conducted by Brad Ney and Christian Schultz, with assistance from Jamie Wohlert, Richard Haynes and Sandhya Harris. The case was supervised by Tim England and Melissa Hodgman. The SEC would like to thank the Tokyo District Public Prosecutors Office for its assistance in connection with this investigation. + + + + + + + + SEC Complaint + + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2019/AAER-4089.txt b/raw/aaer/2019/AAER-4089.txt new file mode 100644 index 0000000000000000000000000000000000000000..962a7c3e05184ce4a0882a8de3b8d0055a1fcdde --- /dev/null +++ b/raw/aaer/2019/AAER-4089.txt @@ -0,0 +1,99 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87063 / September 23, 2019 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4089 / September 23, 2019 +ADMINISTRATIVE PROCEEDING +File No. 3-16339 + +In the Matter of +Jason Griffith, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION + +On September 18, 2015, Jason Griffith, CPA (“Griffith”) was suspended from appearing +or practicing before the Commission as an accountant as a result of settled public administrative +proceedings instituted by the Commission against him pursuant to Rule 102(e) of the +Commission’s Rules of Practice.1 This order is issued in response to Griffith’s application for +reinstatement to appear and practice before the Commission as an accountant responsible for the +preparation or review of financial statements required to be filed with the Commission. +The Commission found that Griffith willfully violated Section 17(a)of the Securities Act +of 1933, caused violations of Rule 2-02(b)(1) of Regulation S-X, and engaged in improper +professional conduct with respect to his role as the engagement quality review partner for the +audits of seven clients of the accounting firm De Joya Griffith, LLC (“De Joya”). These seven +clients were part of a scheme engineered by John Briner, Esq, a recidivist securities law violator, +to create sham public shell companies. Griffith, and others, failed to respond appropriately to +certain red flags that appeared during the course of the audits. In addition, Griffith failed to +appropriately evaluate the engagement teams’ judgments to continue with the audits without re- +assessing and responding to the risk of fraud when presented with the concerns of a De Joya staff +member that Briner may be engaged in fraud and he further failed to detect basic accounting +errors and inconsistencies between certain financial statements and registration statements of the +issuers. + + +1 See Accounting and Auditing Enforcement Release No. 3699 dated September 18, 2015. Griffith was permitted, +pursuant to the order, to apply for reinstatement after three years upon making certain showings. + + 2 +In his capacity as a preparer or reviewer, or as a person responsible for the preparation or +review, of financial statements of a public company to be filed with the Commission, Griffith +attests that he will undertake to have his work reviewed by the independent audit committee of +any company for which he works, or in some other manner acceptable to the Commission, while +practicing before the Commission in this capacity. Griffith is not, at this time, seeking to appear +or practice before the Commission as an independent accountant. If he should wish to resume +appearing and practicing before the Commission as an independent accountant, he will be +required to submit an application to the Commission showing that he has complied and will +comply with the terms of the original suspension order in this regard. Therefore, Griffith’s +suspension from practice before the Commission as an independent accountant continues in +effect until the Commission determines that a sufficient showing has been made in this regard in +accordance with the terms of the original suspension order. + +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.”2 This “good cause” determination is +necessarily highly fact specific. + +On the basis of information supplied, representations made, and undertakings agreed to +by Griffith, it appears that he has complied with the terms of the September 18, 2015 order +suspending him from appearing or practicing before the Commission as an accountant, that no +information has come to the attention of the Commission relating to his character, integrity, +professional conduct or qualifications to practice before the Commission that would be a basis +for adverse action against him pursuant to Rule 102(e) of the Commission's Rules of Practice, +and that Griffith, by undertaking to have his work reviewed by the independent audit committee +of any company for which he works, or in some other manner acceptable to the Commission, in +his practice before the Commission as a preparer or reviewer of financial statements required to +be filed with the Commission, has shown good cause for reinstatement. Therefore, it is +accordingly, + +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Jason Griffith, CPA is hereby reinstated to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission. + +By the Commission. + + +Vanessa Countryman +Acting Secretary + +2 Rule 102(e)(5)(i) provides: + +“An application for reinstatement of a person permanently suspended or disqualified under paragraph (e)(1) or (e)(3) +of this rule may be made at any time, and the applicant may, in the Commission’s discretion, be afforded a hearing; +however, the suspension or disqualification shall continue unless and until the applicant has been reinstated by the +Commission for good cause shown.” 17 C.F.R. § 201.102(e)(5)(i). + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4091.txt b/raw/aaer/2019/AAER-4091.txt new file mode 100644 index 0000000000000000000000000000000000000000..bc02d1d289a65b0b2ec0687a522e5298826a51d2 --- /dev/null +++ b/raw/aaer/2019/AAER-4091.txt @@ -0,0 +1,683 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10692 / September 24, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87069 / September 24, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4091 / September 24, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19499 + + +In the Matter of + +COMSCORE, INC., + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against Comscore, Inc. (“Comscore” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of +the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + + +2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + +1. This matter concerns a financial accounting and disclosure fraud committed by +Comscore, a publicly-traded data services and measurement company, principally through the +conduct of its former Chief Executive Officer, Serge Matta (“Matta”). From February 2014 +through February 2016 (the “Relevant Period”), Comscore public filings materially overstated +revenue by approximately $50 million as result of a fraudulent scheme and improper accounting +involving the manipulation of non-monetary and monetary contracts. Comscore’s and Matta’s +actions enabled the company to artificially exceed its analysts’ consensus revenue target in seven +consecutive quarters. In addition, from April 2014 through February 2016, Comscore and Matta +made false and misleading statements about two important performance metrics. + +2. Comscore entered into non-monetary transactions (“NMTs”) for the purpose of +improperly increasing revenue recognition. Comscore valued these NMTs, which involved the +exchange of data between Comscore and a counterparty, by assessing the fair value of the data it +surrendered in each transaction. In negotiating certain of these arrangements, however, Matta +included certain data that the counterparty did not ask for, want, need, or use. In addition, in +communications with internal accountants and the independent auditor regarding the NMTs, Matta +and other Comscore employees made false or misleading statements about the true purpose of the +agreements, the commercial substance of the transactions, and the fair value of the assets. As a +result, Comscore’s revenue related to these transactions was overstated by over $34.5 million +during the Relevant Period. + +3. Comscore also entered into certain monetary transactions that improperly +increased revenue recognition. In two instances, Matta knew that contracts he negotiated were +related and linked but he misrepresented or failed to disclose the true facts to Comscore’s internal +accountants and its independent auditor, which had the impact of overstating revenue by +approximately $12 million in 2015. In two other instances, Matta agreed to deliver data to a +counterparty by the end of a quarter and then entered into undisclosed side agreements to deliver +additional data after the quarter closed. Placing future data delivery obligations into a side +agreement allowed Comscore to take the position that all data at issue had been delivered before +the current quarter closed, thereby permitting Comscore to recognize all of the revenue associated +with the transaction in that quarter rather than defer some or all of the revenue to subsequent +quarters. + +4. In addition, Comscore made false or misleading disclosures regarding two +important performance metrics. In 2014 and 2015, Comscore disclosed inflated customer totals +that falsely conveyed a consistent increase in the number of net new customers added. In fact, the + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + +3 +number of net new customers was declining. Comscore disclosed these overstated numbers in its +periodic filings with the Commission and Matta highlighted them during earnings calls with +investors. Also, in the third and fourth quarters of 2015, Comscore disclosed misstated revenue +growth percentages concerning one of its flagship data analytic products. Matta described this +purported revenue growth in earnings calls. In fact, the product’s revenue had been declining. In +both instances, Matta directed or approved incremental changes within Comscore to the +methodology by which the disclosed figures were calculated without disclosing those changes to +investors. + +5. In February 2016, after receiving a tip, Comscore’s Audit Committee commenced +an internal investigation. On March 23, 2018, Comscore, under new management, filed its Form +10-K for the year ended December 31, 2017, which included a restatement (the “Restatement”). +The Restatement provided restated and corrected financial information for the years ended +December 31, 2014 and 2013. The Restatement also stated that Comscore restated certain +information for the quarters ended March 31, June 30, and September 30, 2015 and adjusted +information previously furnished on Form 8-K for the year ended December 31, 2015. In total, +Comscore reversed approximately $50 million in revenue due to the improper conduct and +accounting described herein. The Restatement also identified various material weaknesses in +Comscore’s internal control over financial reporting and acknowledged that prior senior +management did not establish or maintain an acceptable corporate culture. Since February 29, +2016, when Comscore announced that its Audit Committee was conducting an internal +investigation into potential accounting matters, Comscore has lost over 85% of its market +capitalization. + +6. Based on the foregoing and the conduct described herein below, Comscore +violated Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) +of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + +RESPONDENT AND RELEVANT PERSON + +7. Comscore, Inc. is a Delaware corporation based in Reston, Virginia. Comscore is +a global information and analytics company that measures consumer audiences and advertising +across media platforms. Comscore creates products by combining information about content and +advertising consumption on digital platforms, televisions, and movie screens with demographics +and other descriptive information. Comscore common stock is registered under Section 12(b) of +the Exchange Act and traded on the NASDAQ Global Select Market at all times during the +Relevant Period. Comscore merged with another company in January 2016. All senior +management and directors who were with Comscore at the time of the conduct described herein are +no longer with Comscore. + +8. Serge Matta, age 45, resides in Vienna, Virginia. Matta served as Comscore’s +Chief Executive Officer from March 1, 2014 until August 5, 2016, after working at Comscore in +various capacities for more than a decade. The Commission has instituted a separate proceeding +against Matta related to these matters. + + +4 + +FACTS + +Focus on Meeting Revenue and Stock Price Targets + +9. During the Relevant Period, Comscore’s former management became increasingly +focused on meeting analysts’ consensus revenue targets, a factor that reasonable investors consider +important to their investment decisions. In 2013, 2014, and 2015, Comscore implemented +incentive compensation plans for certain executives, including Matta, that were tied, in large part, +to hitting revenue and adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and +Amortization) targets. In addition, in November 2014, Comscore implemented a special market- +based equity award plan that would reward certain executives, including Matta, upon the +achievement of pre-established stock price targets. Thereafter, Comscore management, and Matta +in particular, closely tracked Comscore’s internal revenue performance versus its revenue targets. +For seven consecutive quarters during the Relevant Period, the revenue derived from NMTs +negotiated by or at the direction of Matta made the difference between Comscore missing or hitting +its revenue targets. In total, based on the conduct described herein, Comscore overstated revenues +by approximately $50 million and in amounts that were material to Comscore’s reported revenues +on an annual and quarterly basis. + +Fraudulent Revenue Recognition Practices for Non-Monetary Transactions + +10. In its NMTs, Comscore and a counterparty would negotiate and agree to exchange +sets of data without any cash consideration. In theory, each party was acquiring data it could use to +build or enhance its products and services without having to pay any cash. As described below, +even though no cash is changing hands, accounting principles generally accepted in the United +States of America (“GAAP”) permit revenue recognition for NMTs as long as, among other things, +the fair value of the assets subject to the exchange is determinable within reasonable limits and the +transaction is expected to have a significant impact on Comscore’s future cash flows, also known +as having “commercial substance.” + +11. Prior to the Relevant Period, Comscore had recognized revenue for one relatively +small-value NMT. During the Relevant Period, however, the frequency and internally ascribed +values of Comscore’s NMTs increased. The NMTs were recorded in Comscore’s books and +records as if Comscore had negotiated and agreed to an exchange of assets of equivalent value. +The actual substance of the NMTs, however, was significantly different. Comscore’s NMTs often +involved data exchanges where the contracts provided for Comscore to deliver substantially more +data – including historical data – than counterparties wanted or intended to use. None of the +counterparties recognized revenue on the NMTs, and were generally indifferent to Matta’s +including substantial amounts of additional data. Comscore and Matta – facing quarter-end +shortfalls to analysts’ revenue targets – used the NMTs as an opportunity to increase reported +revenues, primarily by including such unwanted Comscore data in the contract or making +unsupported, false, or misleading statements in an effort to support the fair values attributed to the +transactions. + + +5 + +12. During the Relevant Period, Matta was the primary negotiator for and/or directed +Comscore to execute the following NMTs: + + Company A transaction, effective December 20, 2013, valued by Comscore at +$21.2 million over a 3-year term; + Amended Company A transaction, effective December 19, 2014, valued by +Comscore at $23.2 million over a 3-year term; + Company B transaction, executed on June 30, 2015, valued by Comscore at $8.8 +million over a 2-year term; + Company C transaction, executed on June 26, 2015, valued by Comscore at $12 +million over a 3-year term; and + Company D transaction, executed on September 30, 2015, valued by Comscore +at $11.1 million over a 3-year term. +Without the improper revenue recognized from these NMTs, Comscore would have missed +quarterly analysts’ consensus revenue targets each quarter beginning with the fourth quarter of +2013 and continuing through the second quarter of 2015, and would have had much larger revenue +shortfalls in the third and fourth quarters of 2015. + +Matta included data in the NMTs that counterparties did not ask for, want, value, or use for +the purpose of inflating Comscore’s reported revenues. + +13. Comscore accounted for each NMT based on its determination of the fair value of +the Comscore data provided to the counterparty. As part of the scheme, Matta increased the +internally determined fair value – and thus the amount of revenue that Comscore would recognize +– by including data in the NMT contracts that counterparties did not ask for, want, value, or use. +Matta then misrepresented or omitted facts about the counterparties’ interest in and business uses +for Comscore’s data in communications with internal accounting personnel and/or Comscore’s +independent auditor. + +14. In Company C, for example, Matta added categories of data, including historical +data, to the draft agreement. Company C initially objected to the addition of the data because it did +not have a use for it, but ultimately accepted its inclusion in the agreement because, at least in part, +no additional data or other consideration was being requested by Comscore in return. Matta +directed Comscore to execute the agreement knowing that it included data Company C did not +want or intend to use and that the unwanted data was only included by Comscore to inflate the +revenue Comscore recognized from the transaction. Matta also made misrepresentations to +Comscore’s independent auditor about the fact that Company C wanted all of the data that +Comscore had included in the agreement. + + + + +6 +Matta misrepresented the Company B NMT as a significant data exchange and made +misrepresentations in response to concerns raised by accountants. + +15. In Company B, Matta not only included in the NMT data that Company B did not +want or intend to use, but also misrepresented the overall substance of the transaction. While +Company B intended the agreement to be an evaluation by Comscore of a sample of Company B’s +data, Matta drafted the agreement to appear to be a significant mutual exchange of 42 months of +data. Specifically, Company B intended to give Comscore a small sample set of its data for +Comscore to evaluate whether or not it could match that data to Comscore’s demographic and +other data. Similar to the Company C example above, Matta included significant amounts of +Comscore data into the contract even though Company B did not ask for or intend to use any of the +data. Company B told Matta that the data had very little value to it and, in fact, Company B never +looked at the data Comscore delivered. Again, Matta directed the execution of the Company B +NMT knowing that the agreement included data that Company B did not want or intend to use and +that the additional data would be used to inflate the revenues recorded by Comscore. When asked +later by Comscore’s internal accountants and independent auditor, Matta made misrepresentations +about the true nature of the agreement and Company B’s interest in, and the importance Company +B placed on, Comscore’s data. + +The NMTs should not have been accounted for using fair value. + +16. ASC 845 provides accounting guidance for nonmonetary exchanges. Under ASC +845-10-30-1 through 30-3, the accounting for nonmonetary transactions is generally based on the +fair values of the assets involved. However, pursuant to ASC 845-10-30-3, nonmonetary +transactions should be measured based on the recorded amount of the assets transferred (less any +indicated impairment) instead of fair value if, for example, the fair value of neither the assets +transferred nor received is determinable within reasonable limits or the transaction lacks +commercial substance. As described in more detail below, Comscore’s conclusions that the NMTs +had commercial substance and that the fair values of the data assets subject to the exchanges could +be determined within reasonable limits were based on unsupported, false, or misleading statements +or assumptions. As a result, the NMTs should not have been accounted for using fair value. Since +the data transferred had recorded amounts of zero, no revenue should have been recognized for +Comscore’s NMTs during the Relevant Period. + + NMTs Lacked Commercial Substance + +17. ASC 845-10-30-4 states that a nonmonetary exchange has commercial substance if +the entity’s future cash flows are expected to significantly change as a result of the exchange. +Matta knew that to recognize revenue on any NMT, Comscore had to demonstrate that the deal had +commercial substance. With respect to four of the five NMTs, Matta made and/or directed others +to make false and unsupported statements to internal accounting personnel and Comscore’s +independent auditor regarding the integration of the counterparty’s data into Comscore products +and the impact the counterparty’s data was expected to have on Comscore’s future cash flows. +With respect to the fifth NMT, Company D, unsupported claims regarding data integration and + + +7 +monetization were made by a mid-level and a senior-level employee. Absent the false and +unsupported representations made by Matta and others, Comscore lacked sufficient evidence to +support the commercial substance of the NMTs necessary for revenue recognition under GAAP. + +18. For example, in connection with Company B and Company C, Comscore’s former +management represented that its quantitative projections of future cash flows were based on direct +customer statements of interest in purchasing Comscore’s Cross Media products that integrated the +counterparty’s data. Former management, including Matta, knew those representations were not +accurate. Moreover, Comscore never integrated Company C’s data into Comscore’s Cross Media +products. In connection with Company A, Matta had, and was aware of, concerns about the +quality of Company A’s data, which was problematic in terms of the successful integration of that +data into Comscore’s products, but did not share those concerns with internal accounting personnel +and Comscore’s independent auditor. As previously noted, Matta also knew that Company B only +committed to deliver a small set of sample data for evaluation purposes, so he knew that the +projection of Comscore’s future cash flows from obtaining Company B’s data was based upon +future data deliveries that Company B had not yet agreed to make. Nevertheless, Matta made +misrepresentations to both internal accountants and Comscore’s independent auditor when +explaining the purported use and significance of the Company B data. + +Fair Value Not Determinable Within Reasonable Limits + +19. Comscore’s analysis of whether the fair value was determinable within reasonable +limits was based on a flawed valuation process that relied on unsupported assumptions and/or +contrived calculations. Because there were neither identical previous cash sales nor any other +observable market for Comscore’s data, for most of the data Comscore delivered in the NMTs +Comscore attributed fair value to the data assets it gave up using best estimated selling price +(“BESP”) pursuant to ASC 605-25-30-2. Comscore had not previously sold the same data in the +same way, thus the BESP process for the NMTs involved estimating fair value based on previous +cash sales of purportedly similar data. + +20. Matta knew that the ability to determine fair value within reasonable limits was +essential for justifying revenue recognition on NMTs. Beginning with the Company A contract in +2013, Matta directed which prior cash contracts and more specifically which components of prior +cash contracts Comscore accounting personnel should use in order to develop a BESP. The +revenue accounting team was not able to independently identify any previous comparable cash +sales and therefore relied on direction from Matta, who, in addition to being a senior executive, +was generally viewed as having extensive product knowledge. + +21. The contracts Matta identified were not reasonably comparable and should not +have been used to support BESP, yet Matta directed internal accountants to use them and defended +their use in meetings with internal accounting personnel and Comscore’s independent auditor. As +more NMTs were entered into, Comscore repeatedly included the same data categories as in the +Company A transaction, which by that point was viewed internally as having an established + + +8 +“value,” and therefore the same purportedly comparable contracts were used again and again to +value new NMTs. + +22. To support a fair value using contracts that were not reasonably comparable, +Comscore engaged in a flawed and unreasonable valuation process. In essence, Comscore broke +the relevant data down into underlying components or data attributes and then used bits and pieces +of prior cash sales, sometimes involving unsupported assumptions and/or contrived calculations, to +value those components or attributes. Comscore’s reliance on unsupported assumptions and/or +contrived calculations to equate the value of the underlying attributes of one data category to that +of a different data category was unreasonable. + +23. In sum, based on the facts described above, Comscore improperly recognized +revenue on these NMTs. In Comscore’s 2017 Form 10-K, all NMT revenue and expense +previously reported or disclosed between 2013 and 2015 was reversed. + +Improper Accounting of Linked Transactions + +24. From mid-2014 through early 2015, Comscore negotiated a transaction whereby +Company E, among other things, would acquire a percentage of Comscore stock (the “Capital +Transaction”). Matta was concerned that the transaction would dilute Comscore’s earnings per +share, a key measure featured in Comscore’s filings with the Commission, so he negotiated for a +revenue guarantee to offset any dilution.2 Company E agreed to guarantee Comscore a revenue +stream of $20.9 million, which was to be paid to Comscore through one of Company E’s wholly- +owned affiliates in exchange for a discount to the fair market value of Comscore stock. The +amount of the discount to fair market value that Company E received in acquiring Comscore stock +virtually matched the revenue guaranteed to be paid to Comscore under the revenue guarantee. + +25. Though Matta led the negotiation of the Capital Transaction and the revenue +guarantee at the same time and with the same parties, he falsely represented to Comscore’s +accounting personnel and the independent auditor that the transactions were separate. As a result, +Comscore improperly recognized $9.3M in revenue from the revenue guarantee in 2015. Had +Comscore’s internal accountants and independent auditor known the truth, Comscore would not +have recognized revenue under the revenue guarantee and would have instead accounted for it as +part of the Capital Transaction. + +26. In the fourth quarter of 2015, Matta manipulated the negotiations related to a series +of transactions between Comscore, Company F, and Company G (collectively, the “Triangle +Transactions”) to increase Comscore’s revenue. As part of the Triangle Transactions, which were +all signed on December 31, 2015, Company F agreed to purchase $2.95 million of data from +Comscore, Company F agreed to purchase $3.05 million of data from Company G, and Company +G agreed to purchase $5.75 million of data from Company F. At the time the Triangle +Transactions were being negotiated, Comscore and Company G had entered into a definitive + +2 The Capital Transaction would result in additional Comscore shares outstanding, which in turn would, +without a corresponding increase in revenue, reduce Comscore’s earnings per share. + + +9 +merger agreement, which eventually closed in January 2016 and resulted in Matta having +knowledge of and influence over Company G’s negotiations with Company F. Matta also had side +communications with Company F’s CEO, with whom he had a close business relationship, in +which they negotiated over the details of the Comscore/Company F transaction as well as the terms +of the transactions between Company F and Company G. In particular, Matta and Company F’s +CEO negotiated the price Company F would pay Comscore in contemplation of the pricing of +Company F’s transactions with Company G. Matta then orchestrated the transactions such that +Company F would pay Comscore $2.95 million by the end of the year and Company F would +receive a net $2.7 million from the Company F/Company G transactions – specifically, Company +Gagreed to pay Company F $5.75 million prior to the effective date of the merger and Company F +agreed to pay Company G $3.05 million after the effective date of the merger. + +27. In sum, Matta’s conduct in the negotiations resulted in this series of transactions +being, in effect, part of a single arrangement that should have been accounted for as such. +Comscore recognized $2.95 million in revenue in the fourth quarter of 2015 when, in reality, the +Triangle Transactions net out to only $250,000 in favor of Comscore. Had Matta disclosed the +linked nature of these contracts to accounting personnel, Comscore would have recognized no +revenue in the fourth quarter of 2015, and only the net amount of $250,000 in a later period. + +Comscore’s Use of Undisclosed Side Agreements + +28. In the third quarter of 2014 and the first quarter of 2015, Comscore negotiated two +contracts with Company F for the sale of historical data. In each instance, Matta entered into +undisclosed side agreements with Company F whereby Matta agreed to provide data and/or +services outside the terms of the written contracts. These side agreements allowed Matta to hide +from internal accountants and the independent auditor future data delivery obligations, thereby +permitting Comscore to recognize all revenue from the contracts in the quarter they were signed +rather than having to defer some or all of the revenue to future quarters. Matta signed management +representation letters provided to Comscore’s independent auditor in each of those quarters falsely +stating that he had no knowledge of side agreements. + +29. In September 2014, Company F agreed to purchase eCommerce data from +Comscore. Company F made it clear that it needed both historical data and ongoing monthly data +updates. Matta agreed to provide the monthly updates in return for a revenue sharing provision, +but on the condition that the monthly updates not be included in the contract because Comscore’s +accountants had advised him that these terms would impact revenue recognition. On September +30, 2014, Comscore executed a contract to sell two years of historical data to Company F for +$700,000. Subsequently, pursuant to the side agreement, Comscore delivered to Company F ten +months of updated data. Without the $700,000 in revenue from this contract, Comscore would +have missed its consensus revenue target for the third quarter of 2014. + +30. Similarly, in March 2015, Company F agreed to purchase Ad Exposure data from +Comscore for $500,000. Company F specified that it needed “matched” data – meaning that a + + +10 +third party would match Comscore’s panelists to Company F’s panelists.3 This process, however, +takes time and Matta was informed by Comscore’s internal accountants that revenue recognition +would be deferred until the match was completed. Matta then informed Company F’s CEO that he +was taking the “match” language out of the written contract because it impacted revenue, but that +Comscore would still deliver the matched data. Comscore then recognized $500,000 in revenue in +March 2015 based on the altered contract, and subsequently delivered both matched data and four +months of monthly updated data that was not provided for under the terms of the contract. + +False and Misleading Disclosures Concerning Customer Totals + +31. In 2014 and 2015, Comscore disclosed its total number of customers and net new +customers added in quarterly earnings calls. Comscore also disclosed its customer total in periodic +filings with the Commission. The number of net new customers added per quarter was an +important performance indicator for Comscore that analysts tracked and reported on. During this +time, in an effort to conceal the fact that quarterly growth in Comscore’s customer total had slowed +or was declining, Matta approved and implemented multiple changes to the methodology by which +the quarterly customer count was calculated. These changes were neither applied retroactively nor +disclosed to the public. + +32. Initially, Matta approved the incremental lowering – over at least four quarters – of +the dollar threshold pursuant to which certain then existing customers were considered Comscore +customers for purpose of the disclosure. When that dollar threshold reached the point where it +could not be lowered any further, Matta approved adding different categories of agency end-users +to the customer count over at least three different quarters. Prior to these changes, Comscore +consistently counted only the agency as its client. + +33. Matta implemented these changes to the customer count methodology to show a +consistent net increase in Comscore’s total customers. For seven of the eight quarters during 2014 +and 2015, Comscore’s disclosed net customers added was in the 40s – creating the illusion of a +smooth and steady growth in its business. In fact, had the methodology remained consistent, +Comscore’s customer total would have shown a decline over the two-year period and been lower +by hundreds of customers. By the end of 2015, Comscore’s customer count total was overstated +by more than 15%. + +False and Misleading Disclosures Concerning vCE Revenue + +34. Validated Campaign Essentials, or vCE, was a flagship product for Comscore. +vCE analyzes and measures the success of advertising campaigns in real-time. Matta emphasized +Comscore’s vCE revenue growth in his public statements to analysts and investors. In Comscore’s +quarterly earnings call for the second, third, and fourth quarters of 2015, Matta told investors that +Comscore would achieve $100 million in annual vCE revenue by 2017. This optimistic picture +was inconsistent with Comscore’s internal reports. In reality, Comscore’s vCE revenue had + +3 In this context, a “panelist” is one of a collection of consumers who have agreed to provide certain +demographic information and to allow some or all of their online activity to be tracked. + + +11 +decreased in 2015 compared to 2014. Comscore and Matta knew that vCE revenue was declining, +yet they disclosed in quarterly earnings calls that Comscore’s year-over-year vCE revenue grew by +53% in the third quarter of 2015 and by 56% in the fourth quarter of 2015. These disclosures were +false and misleading. + +35. In an effort to conceal the decline in Comscore’s vCE revenue, Comscore +manipulated which sales were classified as vCE revenue. During 2015, at Matta’s direction, +Comscore picked a small number of high-dollar agreements, generally involving the delivery of +historical data, and directed them to be re-classified as vCE even though they did not involve the +sale of an actual vCE product or service. These additions were reflected in internal documents as +“On Top Additions.” While characterized as vCE for the purposes of Comscore’s public +disclosures, the transactions underlying the “On Top Additions” were not recorded under vCE +SKUs in Comscore’s general ledger. Thus, Comscore’s vCE revenue disclosures were inconsistent +with its own books and records. In sum, the entire amount of the disclosed 53% and 56% vCE +revenue growth was attributable to the selected “On Top Additions” – and not the sale of vCE +products or services. + +Materially Misstated Financial Statements and False and Misleading Disclosures + +36. Based on the foregoing, revenue was materially misstated in Comscore’s financial +statements filed with the Commission on Form 10-K for the years ended December 31, 2013 and +December 31, 2014, and on Form 10-Q for the quarters ended March 31, June 30, and September +30, 2014, and March 31, June 30, and September 30, 2015. In addition, revenue was materially +misstated in Comscore’s February 17, 2016 earnings release for the year ended December 31, 2015 +filed on Form 8-K. Comscore also made materially false and misleading statements regarding its +customer count or vCE revenue growth in its quarterly earnings calls for the quarters ended March +31, June 30, and September 30, and December 31, 2014 and March 31, June 30, and September 30, +and December 31, 2015. + +Failure to Maintain Effective Internal Control Over Financial Reporting + +37. During the Relevant Period, several material weaknesses in Comscore’s internal +control over financial reporting contributed to the material misstatements described above. As +acknowledged in its Restatement, Comscore’s ineffectual corporate culture resulted in, among +other material weaknesses, sales practices designed to maximize and manage the timing of revenue +recognition, inadequate accountability for recording transactions in accordance with GAAP, and +insufficient internal controls to limit the ability of management to exercise influence over customer +count and vCE disclosures. Further, Comscore identified material weaknesses related to revenue +accounting, business combinations and asset acquisitions, financial close and reporting process, +and tax processes. As of the filing of its Form 10-K for the year ended December 31, 2018, +Comscore had remediated the identified material weaknesses, with the exception of a material +weakness in internal control over financial reporting related to revenue accounting. Comscore +management has certified to the Commission that it has remediated the remaining material +weakness. + + +12 + +Comscore’s Misconduct Was In Connection With the Purchase or Sale of Securities and In the +Offer or Sale of Securities + +38. During the Relevant Period, Comscore’s stock was actively traded on the +NASDAQ Global Select Market, and its materially misstated financial statements and false and +misleading disclosures were filed with the Commission for review by investors. Therefore, +Comscore’s fraud was in connection with the purchase or sale of securities. + +39. In the second quarter of 2015, Comscore also sold stock to a counterparty engaged +in a tender offer and asset sale with Comscore. In addition, effective January 29, 2016, Comscore +acquired another company by issuing Comscore stock as consideration. + +VIOLATIONS + +40. As a result of the conduct described above, Comscore violated Section 10(b) of the +Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct in connection with +the purchase or sale of securities. + +41. As a result of the conduct described above, Comscore violated Section 17(a) of the +Securities Act, which prohibits fraudulent conduct in the offer and sale of securities. + +42. As a result of the conduct described above, Comscore violated Section 13(a) of the +Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which require issuers of +securities registered pursuant to Section 12 of the Exchange Act to file with the Commission +annual, quarterly, and current reports containing such information as the Commission’s rules +may require and such further material information as may be necessary to make the required +statements, in light of the circumstances under which they were made, not misleading. + +43. As a result of the conduct described above, Comscore violated Section 13(b)(2)(A) of +the Exchange Act, which requires reporting companies to make and keep books, records, and +accounts which, in reasonable detail, accurately and fairly reflect their transactions and dispositions +of their assets. + +44. Finally, as a result of the conduct described above, Comscore violated Section +13(b)(2)(B) of the Exchange Act, which requires reporting companies to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that transactions +are recorded as necessary to permit preparation of financial statements in accordance with +generally accepted accounting principles. + +COMSCORE’S REMEDIAL EFFORTS AND COOPERATION +45. In determining to accept the Offer, the Commission considered remedial +acts promptly undertaken by Respondent and cooperation afforded the Commission staff. + + +13 +Specifically, Comscore’s cooperation included retaining, through its Audit Committee, +independent outside counsel and a forensic accounting firm to conduct an investigation +and keeping the Commission’s staff informed throughout the internal investigation, +including sharing the results of the investigation. Following the completion of the Audit +Committee’s investigation, Comscore continued its cooperation with the staff’s +investigation. Comscore also undertook significant remedial efforts, including replacing +its CEO and other executives, constituting a new management team, and implementing a +new, comprehensive compliance management system. Comscore also implemented new +and extensive internal control procedures and policies. +UNDERTAKINGS + +46. Respondent undertakes to cooperate fully with the Commission in any and all +investigations, litigations or other proceedings relating to or arising from the matters described in +the Order. In connection with such cooperation, Respondent undertakes: + +a. To produce, without service of a notice or subpoena, any and all documents +and other information reasonably requested by the Commission’s staff, with a custodian +declaration as to their authenticity, if requested; + +b. To use its best efforts to cause Respondent’s current and former employees, +officers and directors to be interviewed by the Commission's staff at such times and places as the +staff reasonably may direct; + +c. To use its best efforts to cause Respondent’s current and former employees, +officers and directors to appear and testify truthfully and completely without service of a notice or +subpoena in such investigations, depositions, hearings or trials as may be reasonably requested by +the Commission’s staff; and + +d. In connection with any interviews of Respondent’s current and former +employees, officers and directors to be conducted pursuant to this undertaking, requests for such +interviews may be provided by the Commission’s staff by regular or electronic mail to: Joan E. +McKown, Esq., Jones Day, 51 Louisiana Avenue, NW, Washington, DC, 20001, +jemckown@jonesday.com, or such other counsel that may be substituted by Respondent. + +In determining whether to accept the Offer, the Commission has considered the +above Undertakings. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Comscore’s Offer. + + Accordingly, it is hereby ORDERED that: + + +14 + + A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent cease and desist from committing or causing any violations and any future violations of +Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the +Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + +B. Respondent shall pay a civil penalty of $5,000,000 to the Securities and Exchange +Commission. Respondent shall pay $2.1 million within 30 days after entry of the Order and the +remaining balance of the civil penalty in one-third equal installments under the following +schedule: 120 days, 240 days, and 360 days after the entry of the Order until the full amount of +penalty and interest is paid. Payments shall be applied first to post order interest, which accrues +pursuant to 31 U.S.C. § 3717. Prior to making the final payment set forth herein, Respondent shall +contact the staff of the Commission for the amount due. If Respondent fails to make any payment +by the date agreed and/or in the amount agreed according to the schedule set forth above, all +outstanding payments under this Order, including post-order interest, minus any payments made, +shall become due and payable immediately at the discretion of the staff of the Commission without +further application to the Commission. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Comscore, Inc. as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Melissa R. Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5561. + + C. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the penalties referenced in paragraph IV.B. above. The Fair Fund will be + + +15 +distributed in accordance with a Commission-approved plan of distribution. Amounts ordered to be +paid as civil money penalties pursuant to this Order shall be treated as penalties paid to the +government for all purposes, including all tax purposes. To preserve the deterrent effect of the +civil penalty, Respondent agrees that in any Related Investor Action, it shall not argue that it is +entitled to, nor shall it benefit by, offset or reduction of any award of compensatory damages by +the amount of any part of Respondent’s payment of a civil penalty in this action (“Penalty +Offset”). If the court in any Related Investor Action grants such a Penalty Offset, Respondent +agrees that it shall, within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission’s counsel in this action and pay the amount of the Penalty Offset to the Securities and +Exchange Commission. Such a payment shall not be deemed an additional civil penalty and shall +not be deemed to change the amount of the civil penalty imposed in this proceeding. For purposes +of this paragraph, a “Related Investor Action” means a private damages action brought against +Respondent by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. + + By the Commission. + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4092.txt b/raw/aaer/2019/AAER-4092.txt new file mode 100644 index 0000000000000000000000000000000000000000..f6d0224eed2901a9c09bc0ef55fdb60ffb535646 --- /dev/null +++ b/raw/aaer/2019/AAER-4092.txt @@ -0,0 +1,731 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10693 / September 24, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87070 / September 24, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4092 / September 24, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19500 + + +In the Matter of + +SERGE MATTA, + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against Serge Matta (“Matta” or “Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Cease-and-Desist Proceedings Pursuant to Section 8A of the +Securities Act of 1933 and Section 21C of the Securities Exchange Act of 1934, Making Findings, +and Imposing a Cease-and-Desist Order (“Order”), as set forth below. + + +2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +SUMMARY + +1. This matter concerns a financial accounting and disclosure fraud committed by +Serge Matta, formerly the Chief Executive Officer of Comscore, Inc. (“Comscore”). Comscore is +a publicly-traded data services and measurement company. From February 2014 through February +2016 (the “Relevant Period”), Comscore public filings materially overstated revenue by +approximately $43 million as result of a fraudulent scheme and improper accounting involving the +manipulation of non-monetary and monetary contracts. Matta’s actions enabled the company to +artificially exceed its analysts’ consensus revenue target in seven consecutive quarters. In addition, +from April 2014 through February 2016, Matta made false and misleading statements about two +important performance metrics. + +2. Matta directed Comscore to enter into non-monetary transactions (“NMTs”) for +the purpose of improperly increasing revenue recognition. Comscore valued these NMTs, which +involved the exchange of data between Comscore and a counterparty, by assessing the fair value of +the data it surrendered in each transaction. In negotiating certain of these arrangements, however, +Matta included certain data that the counterparty did not ask for, want, need, or use. In addition, in +communications with internal accountants and the independent auditor regarding the NMTs, Matta +made false or misleading statements about the true purpose of the agreements, the commercial +substance of the transactions, and the fair value of the assets. As a result, Comscore’s revenue +related to these transactions was overstated by almost $30 million during the Relevant Period. + +3. Matta also directed Comscore to enter into certain monetary transactions that +improperly increased revenue recognition. In two instances, Matta knew that contracts he +negotiated were related and linked but he misrepresented or failed to disclose the true facts to +Comscore’s internal accountants and its independent auditor, which had the impact of overstating +revenue by approximately $12 million in 2015. In two other instances, Matta agreed to deliver +data to a counterparty by the end of a quarter and then entered into undisclosed side agreements to +deliver additional data after the quarter closed. Placing future data delivery obligations into a side +agreement allowed Comscore to take the position that all data at issue had been delivered before +the current quarter closed, thereby permitting Comscore to recognize all of the revenue associated +with the transaction in that quarter rather than defer some or all of the revenue to subsequent +quarters. + +4. In addition, Matta made false or misleading disclosures regarding two important +performance metrics. In 2014 and 2015, Matta and Comscore disclosed inflated customer totals +that falsely conveyed a consistent increase in the number of net new customers added. In fact, the +number of net new customers was declining. Comscore disclosed these overstated numbers in its + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + + +3 +periodic filings with the Commission and Matta highlighted them during earnings calls with +investors. Also, in the third and fourth quarters of 2015, Matta and Comscore disclosed misstated +revenue growth percentages concerning one of its flagship data analytic products. Matta described +this purported revenue growth in earnings calls. In fact, the product’s revenue had been declining. +In both instances, Matta directed or approved incremental changes within Comscore to the +methodology by which the disclosed figures were calculated without disclosing those changes to +investors. + +5. Matta, as CEO, signed false certifications pursuant to Section 302 of the Sarbanes- +Oxley Act of 2002 (“Sarbanes-Oxley”) in connection with Comscore’s Form 10-K and Form 10-Q +filings. In addition, Matta received incentive-based compensation and profits from the sale of +Comscore stock during the 12-month periods following Comscore’s filing with the Commission of +inaccurate financial statements and, to date, has not reimbursed Comscore for those amounts in +violation of Section 304(a) of Sarbanes-Oxley. + +6. On March 23, 2018, Comscore, under new management, filed its Form 10-K for +the year ended December 31, 2017, which included a restatement (the “Restatement”). The +Restatement provided restated and corrected financial information for the years ended December +31, 2014 and 2013. The Restatement also stated that Comscore restated certain information for the +quarters ended March 31, June 30, and September 30, 2015 and adjusted information previously +furnished on Form 8-K for the year ended December 31, 2015. In total, Comscore reversed +approximately $43 million in revenue due to the improper conduct and accounting described +herein. The Restatement also identified various material weaknesses in Comscore’s internal +control over financial reporting and acknowledged that prior senior management did not establish +or maintain an acceptable corporate culture. + +7. Based on the foregoing and the conduct described herein below, Matta violated +Section 17(a) of the Securities Act, Sections 10(b) and 13(b)(5) of the Exchange Act and Rules +10b-5, 13a-14, 13b2-1, and 13b2-2 thereunder, and Section 304(a) of the Sarbanes-Oxley Act, and +caused Comscore’s violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and +13a-13 thereunder. + +RESPONDENT AND RELEVANT PERSON + +8. Serge Matta, age 45, resides in Vienna, Virginia. Matta served as Comscore’s +Chief Executive Officer from March 1, 2014 until August 5, 2016, after working at Comscore in +various capacities for more than a decade. + +9. Comscore, Inc. is a Delaware corporation based in Reston, Virginia. Comscore is +a global information and analytics company that measures consumer audiences and advertising +across media platforms. Comscore creates products by combining information about content and +advertising consumption on digital platforms, televisions, and movie screens with demographics +and other descriptive information. Comscore common stock is registered under Section 12(b) of + + +4 +the Exchange Act and traded on the NASDAQ Global Select Market at all times during the +Relevant Period. Comscore merged with another company in January 2016. The Commission has +instituted a separate proceeding against Comscore related to these matters. + +FACTS + +Focus on Meeting Revenue and Stock Price Targets + +10. During the Relevant Period, Comscore’s former management became increasingly +focused on meeting analysts’ consensus revenue targets, a factor that reasonable investors consider +important to their investment decisions. In 2013, 2014, and 2015, Comscore implemented +incentive compensation plans for certain executives, including Matta, that were tied, in large part, +to hitting revenue and adjusted EBITDA (Earnings Before Interest, Taxes, Depreciation and +Amortization) targets. In addition, in November 2014, Comscore implemented a special market- +based equity award plan that would reward certain executives, including Matta, upon the +achievement of pre-established stock price targets. Thereafter, Comscore management, and Matta +in particular, closely tracked Comscore’s internal revenue performance versus its revenue targets. +For seven consecutive quarters during the Relevant Period, the revenue derived from NMTs +negotiated by or at the direction of Matta made the difference between Comscore missing or hitting +its revenue targets. In total, based on the conduct described herein, Comscore overstated revenues +by approximately $43 million and in amounts that were material to Comscore’s reported revenues +on an annual and quarterly basis. + +Fraudulent Revenue Recognition Practices for Non-Monetary Transactions + +11. In its NMTs, Comscore and a counterparty would negotiate and agree to exchange +sets of data without any cash consideration. In theory, each party was acquiring data it could use to +build or enhance its products and services without having to pay any cash. As described below, +even though no cash is changing hands, accounting principles generally accepted in the United +States of America (“GAAP”) permit revenue recognition for NMTs as long as, among other things, +the fair value of the assets subject to the exchange is determinable within reasonable limits and the +transaction is expected to have a significant impact on Comscore’s future cash flows, also known +as having “commercial substance.” + +12. Prior to the Relevant Period, Comscore had recognized revenue for one relatively +small-value NMT. During the Relevant Period, however, the frequency and internally ascribed +values of Comscore’s NMTs increased. The NMTs were recorded in Comscore’s books and +records as if Comscore had negotiated and agreed to an exchange of assets of equivalent value. +The actual substance of the NMTs, however, was significantly different. Comscore’s NMTs often +involved data exchanges where the contracts provided for Comscore to deliver substantially more +data – including historical data – than counterparties wanted or intended to use. None of the +counterparties recognized revenue on the NMTs, and were generally indifferent to Matta’s +including substantial amounts of additional data. Matta and Comscore – facing quarter-end +shortfalls to analysts’ revenue targets – used the NMTs as an opportunity to increase reported + + +5 +revenues, primarily by including such unwanted Comscore data in the contract or making +unsupported, false, or misleading statements in an effort to support the fair values attributed to the +transactions. + +13. During the Relevant Period, Matta was the primary negotiator for and/or directed +Comscore to execute the following NMTs: + + Company A transaction, effective December 20, 2013, valued by Comscore at +$21.2 million over a 3-year term; + Amended Company A transaction, effective December 19, 2014, valued by +Comscore at $23.2 million over a 3-year term; + Company B transaction, executed on June 30, 2015, valued by Comscore at $8.8 +million over a 2-year term; and + Company C transaction, executed on June 26, 2015, valued by Comscore at $12 +million over a 3-year term. +Without the improper revenue recognized from these NMTs, Comscore would have missed +quarterly analysts’ consensus revenue targets each quarter beginning with the fourth quarter of +2013 and continuing through the second quarter of 2015, and would have had much larger revenue +shortfalls in the third and fourth quarters of 2015. + +Matta included data in the NMTs that counterparties did not ask for, want, value, or use for +the purpose of inflating Comscore’s reported revenues. + +14. Comscore accounted for each NMT based on its determination of the fair value of +the Comscore data provided to the counterparty. As part of the scheme, Matta increased the +internally determined fair value – and thus the amount of revenue that Comscore would recognize +– by including data in the NMT contracts that counterparties did not ask for, want, value, or use. +Matta then misrepresented or omitted facts about the counterparties’ interest in and business uses +for Comscore’s data in communications with internal accounting personnel and/or Comscore’s +independent auditor. + +15. In Company C, for example, Matta added categories of data, including historical +data, to the draft agreement. Company C initially objected to the addition of the data because it did +not have a use for it, but ultimately accepted its inclusion in the agreement because, at least in part, +no additional data or other consideration was being requested by Comscore in return. Matta +directed Comscore to execute the agreement knowing that it included data Company C did not +want or intend to use and that the unwanted data was only included by Comscore to inflate the +revenue Comscore recognized from the transaction. Matta also made misrepresentations to +Comscore’s independent auditor about the fact that Company C wanted all of the data that +Comscore had included in the agreement. + + + + +6 +Matta misrepresented the Company B NMT as a significant data exchange and made +misrepresentations in response to concerns raised by accountants. + +16. In Company B, Matta not only included in the NMT data that Company B did not +want or intend to use, but also misrepresented the overall substance of the transaction. While +Company B intended the agreement to be an evaluation by Comscore of a sample of Company B’s +data, Matta drafted the agreement to appear to be a significant mutual exchange of 42 months of +data. Specifically, Company B intended to give Comscore a small sample set of its data for +Comscore to evaluate whether or not it could match that data to Comscore’s demographic and +other data. Similar to the Company C example above, Matta included significant amounts of +Comscore data into the contract even though Company B did not ask for or intend to use any of the +data. Company B told Matta that the data had very little value to it and, in fact, Company B never +looked at the data Comscore delivered. Again, Matta directed the execution of the Company B +NMT knowing that the agreement included data that Company B did not want or intend to use and +that the additional data would be used to inflate the revenues recorded by Comscore. When asked +later by Comscore’s internal accountants and independent auditor, Matta made misrepresentations +about the true nature of the agreement and Company B’s interest in, and the importance Company +B placed on, Comscore’s data. Matta also made misrepresentations about the timing of data +receipt, which was relevant to the timing of expense recognition and to establishing Company B’s +intent to deliver data pursuant to the agreement, and about the conflict of interest created by Matta +negotiating the transaction with a Company B executive at the same time Matta was negotiating +with that Company B executive for an executive vice president position at Comscore. Moreover, +Matta improperly influenced Comscore’s independent auditor’s third-party confirmation process +on two occasions, both of which resulted in the submission of third-party confirmations that Matta +knew to be false. + +The NMTs should not have been accounted for using fair value. + +17. ASC 845 provides accounting guidance for nonmonetary exchanges. Under ASC +845-10-30-1 through 30-3, the accounting for nonmonetary transactions is generally based on the +fair values of the assets involved. However, pursuant to ASC 845-10-30-3, nonmonetary +transactions should be measured based on the recorded amount of the assets transferred (less any +indicated impairment) instead of fair value if, for example, the fair value of neither the assets +transferred nor received is determinable within reasonable limits or the transaction lacks +commercial substance. As described in more detail below, Comscore’s conclusions that the NMTs +had commercial substance and that the fair values of the data assets subject to the exchanges could +be determined within reasonable limits were based on unsupported, false, or misleading statements +or assumptions. As a result, the NMTs should not have been accounted for using fair value. Since +the data transferred had recorded amounts of zero, no revenue should have been recognized for +Comscore’s NMTs during the Relevant Period. + + + + + +7 +NMTs Lacked Commercial Substance + +18. ASC 845-10-30-4 states that a nonmonetary exchange has commercial substance if +the entity’s future cash flows are expected to significantly change as a result of the exchange. +Matta knew that to recognize revenue on any NMT, Comscore had to demonstrate that the deal had +commercial substance. With respect to the NMTs, Matta made and/or directed others to make +false and unsupported statements to internal accounting personnel and Comscore’s independent +auditor regarding the integration of the counterparty’s data into Comscore products and the impact +the counterparty’s data was expected to have on Comscore’s future cash flows. Absent the false +and unsupported representations made by Matta, Comscore lacked sufficient evidence to support +the commercial substance of the NMTs necessary for revenue recognition under GAAP. + +19. For example, in connection with Company B and Company C, Comscore’s former +management represented that its quantitative projections of future cash flows were based on direct +customer statements of interest in purchasing Comscore’s Cross Media products that integrated the +counterparty’s data. Former management, including Matta, knew those representations were not +accurate. Moreover, Comscore never integrated Company C’s data into Comscore’s Cross Media +products. In connection with Company A, Matta had, and was aware of, concerns about the +quality of Company A’s data, which was problematic in terms of the successful integration of that +data into Comscore’s products, but did not share those concerns with internal accounting personnel +and Comscore’s independent auditor. As previously noted, Matta also knew that Company B only +committed to deliver a small set of sample data for evaluation purposes, so he knew that the +projection of Comscore’s future cash flows from obtaining Company B’s data was based upon +future data deliveries that Company B had not yet agreed to make. Nevertheless, Matta made +misrepresentations to both internal accountants and Comscore’s independent auditor when +explaining the purported use and significance of the Company B data. + +Fair Value Not Determinable Within Reasonable Limits + +20. Comscore’s analysis of whether the fair value was determinable within reasonable +limits was based on a flawed valuation process that relied on unsupported assumptions and/or +contrived calculations. Because there were neither identical previous cash sales nor any other +observable market for Comscore’s data, for most of the data Comscore delivered in the NMTs +Comscore attributed fair value to the data assets it gave up using best estimated selling price +(“BESP”) pursuant to ASC 605-25-30-2. Comscore had not previously sold the same data in the +same way, thus the BESP process for the NMTs involved estimating fair value based on previous +cash sales of purportedly similar data. + +21. Matta knew that the ability to determine fair value within reasonable limits was +essential for justifying revenue recognition on NMTs. Beginning with the Company A contract in +2013, Matta directed which prior cash contracts and more specifically which components of prior +cash contracts Comscore accounting personnel should use in order to develop a BESP. The +revenue accounting team was not able to independently identify any previous comparable cash + + +8 +sales and therefore relied on direction from Matta, who, in addition to being a senior executive, +was generally viewed as having extensive product knowledge. + +22. The contracts Matta identified were not reasonably comparable and should not +have been used to support BESP, yet Matta directed internal accountants to use them and defended +their use in meetings with internal accounting personnel and Comscore’s independent auditor. As +more NMTs were entered into, Comscore repeatedly included the same data categories as in the +Company A transaction, which by that point was viewed internally as having an established +“value,” and therefore the same purportedly comparable contracts were used again and again to +value new NMTs. + +23. To support a fair value using contracts that were not reasonably comparable, +Comscore engaged in a flawed and unreasonable valuation process. In essence, Comscore broke +the relevant data down into underlying components or data attributes and then used bits and pieces +of prior cash sales, sometimes involving unsupported assumptions and/or contrived calculations, to +value those components or attributes. Comscore’s reliance on unsupported assumptions and/or +contrived calculations to equate the value of the underlying attributes of one data category to that +of a different data category was unreasonable. + +24. In sum, based on the facts described above, Comscore improperly recognized +revenue on these NMTs. In Comscore’s 2017 Form 10-K, all NMT revenue and expense +previously reported or disclosed between 2013 and 2015 was reversed. + +Improper Accounting of Linked Transactions + +25. From mid-2014 through early 2015, Matta led the negotiation of a transaction +whereby Company E, among other things, would acquire a percentage of Comscore stock (the +“Capital Transaction”). Matta was concerned that the transaction would dilute Comscore’s +earnings per share, a key measure featured in Comscore’s filings with the Commission, so he +negotiated for a revenue guarantee to offset any dilution.2 Company E agreed to guarantee +Comscore a revenue stream of $20.9 million, which was to be paid to Comscore through one of +Company E’s wholly-owned affiliates in exchange for a discount to the fair market value of +Comscore stock. The amount of the discount to fair market value that Company E received in +acquiring Comscore stock virtually matched the revenue guaranteed to be paid to Comscore under +the revenue guarantee. + +26. Though Matta led the negotiation of the Capital Transaction and the revenue +guarantee at the same time and with the same parties, he falsely represented to Comscore’s +accounting personnel and the independent auditor that the transactions were separate. As a result, +Comscore improperly recognized $9.3M in revenue from the revenue guarantee in 2015. Had +Comscore’s internal accountants and independent auditor known the truth, Comscore would not + +2 The Capital Transaction would result in additional Comscore shares outstanding, which in turn would, +without a corresponding increase in revenue, reduce Comscore’s earnings per share. + + +9 +have recognized revenue under the revenue guarantee and would have instead accounted for it as +part of the Capital Transaction. + +27. In the fourth quarter of 2015, Matta manipulated the negotiations related to a series +of transactions between Comscore, Company F, and Company G (collectively, the “Triangle +Transactions”) to increase Comscore’s revenue. As part of the Triangle Transactions, which were +all signed on December 31, 2015, Company F agreed to purchase $2.95 million of data from +Comscore, Company F agreed to purchase $3.05 million of data from Company G, and Company +G agreed to purchase $5.75 million of data from Company F. At the time the Triangle +Transactions were being negotiated, Comscore and Company G had entered into a definitive +merger agreement, which eventually closed in January 2016 and resulted in Matta having +knowledge of and influence over Company G’s negotiations with Company F. Matta also had side +communications with Company F’s CEO, with whom he had a close business relationship, in +which they negotiated over the details of the Comscore/Company F transaction as well as the terms +of the transactions between Company F and Company G. In particular, Matta and Company F’s +CEO negotiated the price Company F would pay Comscore in contemplation of the pricing of +Company F’s transactions with Company G. Matta then orchestrated the transactions such that +Company F would pay Comscore $2.95 million by the end of the year and Company F would +receive a net $2.7 million from the Company F/Company G transactions – specifically, Company +G agreed to pay Company F $5.75 million prior to the effective date of the merger and Company F +agreed to pay Company G $3.05 million after the effective date of the merger. + +28. In sum, Matta’s conduct in the negotiations resulted in this series of transactions +being, in effect, part of a single arrangement that should have been accounted for as such. +Comscore recognized $2.95 million in revenue in the fourth quarter of 2015 when, in reality, the +Triangle Transactions net out to only $250,000 in favor of Comscore. Had Matta disclosed the +linked nature of these contracts to accounting personnel, Comscore would have recognized no +revenue in the fourth quarter of 2015, and only the net amount of $250,000 in a later period. + +Matta’s Use of Undisclosed Side Agreements + +29. In the third quarter of 2014 and the first quarter of 2015, Matta negotiated two +contracts with Company F for the sale of historical data. In each instance, Matta entered into +undisclosed side agreements with Company F whereby Matta agreed to provide data and/or +services outside the terms of the written contracts. These side agreements allowed Matta to hide +from internal accountants and the independent auditor future data delivery obligations, thereby +permitting Comscore to recognize all revenue from the contracts in the quarter they were signed +rather than having to defer some or all of the revenue to future quarters. Matta signed management +representation letters provided to Comscore’s independent auditor in each of those quarters falsely +stating that he had no knowledge of side agreements. + +30. In September 2014, Company F agreed to purchase eCommerce data from +Comscore. Company F made it clear that it needed both historical data and ongoing monthly data +updates. Matta agreed to provide the monthly updates in return for a revenue sharing provision, + + +10 +but on the condition that the monthly updates not be included in the contract because Comscore’s +accountants had advised him that these terms would impact revenue recognition. Specifically, +Matta emailed Company F’s CEO, “[c]an’t have it in the agreement but you and I can agree.” On +September 30, 2014, Comscore executed a contract to sell two years of historical data to Company +F for $700,000. Subsequently, pursuant to the side agreement, Comscore delivered to Company F +ten months of updated data. Without the $700,000 in revenue from this contract, Comscore would +have missed its consensus revenue target for the third quarter of 2014. + +31. Similarly, in March 2015, Company F agreed to purchase Ad Exposure data from +Comscore for $500,000. Company F specified that it needed “matched” data – meaning that a +third party would match Comscore’s panelists to Company F’s panelists.3 This process, however, +takes time and Matta was informed by Comscore’s internal accountants that revenue recognition +would be deferred until the match was completed. Matta then informed Company F’s CEO that he +was taking the “match” language out of the written contract because it impacted revenue, but that +Comscore would still deliver the matched data. Specifically, Matta emailed Company F’s CEO, +“[t]urns out if I include language on the match it screws up my Revenue [sic] but don’t worry we’ll +obviously do the match.” Comscore then recognized $500,000 in revenue in March 2015 based on +the altered contract, and subsequently delivered both matched data and four months of monthly +updated data that was not provided for under the terms of the contract. + +False and Misleading Disclosures Concerning Customer Totals + +32. In 2014 and 2015, Matta and Comscore disclosed its total number of customers +and net new customers added in quarterly earnings calls. Comscore also disclosed its customer +total in periodic filings with the Commission. The number of net new customers added per quarter +was an important performance indicator for Comscore that analysts tracked and reported on. +During this time, in an effort to conceal the fact that quarterly growth in Comscore’s customer total +had slowed or was declining, Matta approved and implemented multiple changes to the +methodology by which the quarterly customer count was calculated. These changes were neither +applied retroactively nor disclosed to the public. + +33. Initially, Matta approved the incremental lowering – over at least four quarters – of +the dollar threshold pursuant to which certain then existing customers were considered Comscore +customers for purpose of the disclosure. When that dollar threshold reached the point where it +could not be lowered any further, Matta approved adding different categories of agency end-users +to the customer count over at least three different quarters. Prior to these changes, Comscore +consistently counted only the agency as its client. + +34. Matta implemented these changes to the customer count methodology to show a +consistent net increase in Comscore’s total customers. For seven of the eight quarters during 2014 +and 2015, Comscore’s disclosed net customers added was in the 40s – creating the illusion of a +smooth and steady growth in its business. In fact, had the methodology remained consistent, + +3 In this context, a “panelist” is one of a collection of consumers who have agreed to provide certain +demographic information and to allow some or all of their online activity to be tracked. + + +11 +Comscore’s customer total would have shown a decline over the two-year period and been lower +by hundreds of customers. By the end of 2015, Comscore’s customer count total was overstated +by more than 15%. + +False and Misleading Disclosures Concerning vCE Revenue + +35. Validated Campaign Essentials, or vCE, was a flagship product for Comscore. +vCE analyzes and measures the success of advertising campaigns in real-time. Matta emphasized +Comscore’s vCE revenue growth in his public statements to analysts and investors. In Comscore’s +quarterly earnings call for the second, third, and fourth quarters of 2015, Matta told investors that +Comscore would achieve $100 million in annual vCE revenue by 2017. This optimistic picture +was inconsistent with Comscore’s internal reports. In reality, Comscore’s vCE revenue had +decreased in 2015 compared to 2014. Matta knew that vCE revenue was declining, yet Matta and +Comscore disclosed in quarterly earnings calls that Comscore’s year-over-year vCE revenue grew +by 53% in the third quarter of 2015 and by 56% in the fourth quarter of 2015. These disclosures +were false and misleading. + +36. In an effort to conceal the decline in Comscore’s vCE revenue, Matta and +Comscore manipulated which sales were classified as vCE revenue. During 2015, at Matta’s +direction, Comscore picked a small number of high-dollar agreements, generally involving the +delivery of historical data, and directed them to be re-classified as vCE even though they did not +involve the sale of an actual vCE product or service. These additions were reflected in internal +documents as “On Top Additions.” While characterized as vCE for the purposes of Comscore’s +public disclosures, the transactions underlying the “On Top Additions” were not recorded under +vCE SKUs in Comscore’s general ledger. Thus, Comscore’s vCE revenue disclosures were +inconsistent with its own books and records. In sum, the entire amount of the disclosed 53% and +56% vCE revenue growth was attributable to the selected “On Top Additions” – and not the sale of +vCE products or services. + +Materially Misstated Financial Statements and False and Misleading Disclosures + +37. Based on the foregoing, revenue was materially misstated in Comscore’s financial +statements filed with the Commission on Form 10-K for the years ended December 31, 2013 and +December 31, 2014, and on Form 10-Q for the quarters ended March 31, June 30, and September +30, 2014, and March 31, June 30, and September 30, 2015. In addition, revenue was materially +misstated in Comscore’s February 17, 2016 earnings release for the year ended December 31, 2015 +filed on Form 8-K. Comscore also made materially false and misleading statements regarding its +customer count or vCE revenue growth in its quarterly earnings calls for the quarters ended March +31, June 30, and September 30, and December 31, 2014 and March 31, June 30, and September 30, +and December 31, 2015. + + + + + + +12 +Matta’s False Sarbanes-Oxley Certifications + +38. Matta signed certifications pursuant to Section 302 of Sarbanes-Oxley in +connection with Comscore’s Form 10-K for the year ended December 31, 2014 and Forms 10-Q +for the quarters ended March 31, June 30, and September 30, 2014, and March 31, June 30, and +September 30, 2015. Matta certified, among other things, that the periodic report filed with the +Commission does not contain any untrue statement of material fact or omit to state a material fact +necessary to make the statements made, in light of the circumstances under which such statements +were made, not misleading and that the financial statements fairly present in all material respects +the financial condition, results of operations, and cash flows for the periods presented. These +certifications were false. + +Matta’s Incentive-Based Compensation and Trading Profits + +39. The misconduct described above resulted in material misstatements in Comscore’s +financial statements that were filed with the Commission during the Relevant Period. Comscore +was required to restate its financial statements for those periods. During the 12-month periods that +followed the filing of those periodic reports, Matta received incentive-based compensation and +trading profits from the sale of Comscore stock. Matta has not reimbursed those amounts to +Comscore. + +Failure to Maintain Effective Internal Control Over Financial Reporting + +40. During the Relevant Period, several material weaknesses in Comscore’s internal +control over financial reporting contributed to the material misstatements described above. As +acknowledged in its Restatement, Comscore’s ineffectual corporate culture resulted in, among +other material weaknesses, sales practices designed to maximize and manage the timing of revenue +recognition, inadequate accountability for recording transactions in accordance with GAAP, and +insufficient internal controls to limit the ability of management to exercise influence over customer +count and vCE disclosures. + +Matta’s Misconduct Was In Connection With the Purchase or Sale of Securities and In the +Offer or Sale of Securities + +41. During the Relevant Period, Comscore’s stock was actively traded on the +NASDAQ Global Select Market, and its materially misstated financial statements and false and +misleading disclosures were filed with the Commission for review by investors. Therefore, +Comscore’s fraud was in connection with the purchase or sale of securities. + +42. In the second quarter of 2015, Comscore also sold stock to a counterparty engaged +in a tender offer and asset sale with Comscore. In addition, effective January 29, 2016, Comscore +acquired another company by issuing Comscore stock as consideration. + + + + +13 +VIOLATIONS + +43. As a result of the conduct described above, Matta violated, and caused Comscore’s +violations of, Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit +fraudulent conduct in connection with the purchase or sale of securities. + +44. As a result of the conduct described above, Matta violated, and caused Comscore’s +violations of, Section 17(a) of the Securities Act, which prohibits fraudulent conduct in the offer +and sale of securities. + +45. As a result of the conduct described above, Matta violated Section 13(b)(5) of the +Exchange Act, which prohibits any person from knowingly circumventing or knowingly failing to +implement a system of internal accounting controls or knowingly falsifying books, records, or +accounts described in Section 13(b)(2) of the Exchange Act. + +46. As a result of the conduct described above, Matta violated Rule 13b2-1 +promulgated under the Exchange Act, which prohibits any person from directly or indirectly +falsifying any books and records subject to Section 13(b)(2)(A) of the Exchange Act. + +47. As a result of the conduct described above, Matta violated Rule 13b2-2 +promulgated under the Exchange Act, which prohibits any director or officer of an issuer from +directly or indirectly making, or causing to be made, or omitting to state or causing another person +to omit to state, a materially false or misleading statement or any material fact necessary in order to +make statements made, in light of the circumstances under which such statements were made, not +misleading, to an accountant in connection with any audit, review or examination of the financial +statements of the issuer, or the preparation or filing of any document or report required to be filed +with the Commission. + +48. As a result of the conduct described above, Matta violated Rule 13a-14 +promulgated under the Exchange Act, which requires that the principal executive and principal +financial officers of an issuer that files a report pursuant to Section 13(a) of the Exchange Act sign +a certification that, among other things and based on their knowledge, the periodic report filed with +the Commission does not contain any untrue statement of material fact or omit to state a material +fact necessary to make the statements made, in light of the circumstances under which such +statements were made, not misleading and the financial statements fairly present in all material +respects the financial condition, results of operations, and cash flows for the periods presented. + +49. As a result of the conduct described above, Matta caused Comscore’s violations of +Section 13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which +require issuers of securities registered pursuant to Section 12 of the Exchange Act to file with the +Commission annual, quarterly, and current reports containing such information as the +Commission’s rules may require and such further material information as may be necessary to +make the required statements, in light of the circumstances under which they were made, not +misleading. + + +14 + +50. As a result of the conduct described above, Matta caused Comscore’s violations of +Section 13(b)(2)(A) of the Exchange Act, which requires reporting companies to make and keep +books, records, and accounts which, in reasonable detail, accurately and fairly reflect their +transactions and dispositions of their assets. + +51. As a result of the conduct described above, Matta caused Comscore’s violations of +13(b)(2)(B) of the Exchange Act, which requires reporting companies to devise and maintain a +system of internal accounting controls sufficient to provide reasonable assurances that transactions +are recorded as necessary to permit preparation of financial statements in accordance with +generally accepted accounting principles. + +52. Finally, Section 304 of the Sarbanes-Oxley Act of 2002 requires the chief +executive officer and chief financial officer of any issuer required to prepare an accounting +restatement due to material noncompliance with the securities laws as a result of misconduct to +reimburse the issuer for (i) any bonus or incentive-based or equity-based compensation received by +that person from the issuer during the 12-month periods following the false filings, and (ii) any +profits realized from the sale of securities of the issuer during those 12-month periods. Matta has +not, to date, reimbursed Comscore for any portion of his incentive-based compensation or stock +sale profits received during the 12-month periods following the filing of inaccurate financial +statements described above and, therefore, Matta violated Sarbanes-Oxley Section 304. + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Matta’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent cease and desist from committing or causing any violations and any future violations of +Section 17(a) of the Securities Act, Sections 10(b), 13(a), 13(b)(2)(A), 13(b)(2)(B), and 13(b)(5) of +the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, 13a-13, 13a-14, 13b2-1, and 13b2-2 +thereunder, and Section 304(a) of the Sarbanes-Oxley Act. + +B. Respondent be, and hereby is, prohibited for a period of ten years following the date +of this Order from acting as an officer or director of any issuer that has a class of securities +registered pursuant to Section 12 of the Exchange Act or that is required to file reports pursuant to +Section 15(d) of the Exchange Act. + +C. Respondent shall, within 30 days of the entry of this Order, pay a civil money +penalty in the amount of $700,000 to the Securities and Exchange Commission. If timely payment +is not made, additional interest shall accrue pursuant to 31 U.S.C. §3717. + + + +15 +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Serge Matta as a Respondent in these proceedings, and the file number of these proceedings; a +copy of the cover letter and check or money order must be sent to Melissa R. Hodgman, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549-5561. + +D. Respondent shall, within 14 days of the entry of this Order, reimburse Comscore +for a total of $2.1 million representing profits from the sale of Comscore stock and incentive- +based compensation pursuant to Section 304(a) of the Sarbanes-Oxley Act. Matta shall +simultaneously deliver proof of satisfying this reimbursement obligation to Melissa R. Hodgman, +Associate Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., +NE, Washington, DC 20549-5561. If timely payment is not made, additional interest shall +accrue pursuant to 31 U.S.C. § 3717. + + E. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the penalties referenced in paragraph IV.C. above. The Fair Fund will be +distributed in accordance with a Commission-approved plan of distribution. Amounts ordered to be +paid as civil money penalties pursuant to this Order shall be treated as penalties paid to the +government for all purposes, including all tax purposes. To preserve the deterrent effect of the +civil penalty, Respondent agrees that in any Related Investor Action, he shall not argue that he is +entitled to, nor shall he benefit by, offset or reduction of any award of compensatory damages by +the amount of any part of Respondent’s payment of a civil penalty in this action (“Penalty +Offset”). If the court in any Related Investor Action grants such a Penalty Offset, Respondent +agrees that he shall, within 30 days after entry of a final order granting the Penalty Offset, notify +the Commission’s counsel in this action and pay the amount of the Penalty Offset to the Securities +and Exchange Commission. Such a payment shall not be deemed an additional civil penalty and + + +16 +shall not be deemed to change the amount of the civil penalty imposed in this proceeding. For +purposes of this paragraph, a “Related Investor Action” means a private damages action brought +against Respondent by or on behalf of one or more investors based on substantially the same facts +as alleged in the Order instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4093.txt b/raw/aaer/2019/AAER-4093.txt new file mode 100644 index 0000000000000000000000000000000000000000..8410f87a39c00c759601ff8e7fa8ff48390ceaae --- /dev/null +++ b/raw/aaer/2019/AAER-4093.txt @@ -0,0 +1,126 @@ +1 + + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87102 / September 25, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4093 / September 25, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19516 + + +In the Matter of + +MICHAEL P. TOUPS, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE PROCEEDINGS AND +IMPOSING TEMPORARY SUSPENSION +PURSUANT TO RULE 102(e)(3) OF THE +COMMISSION’S RULES OF PRACTICE + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted pursuant to +Rule 102(e)(3)1 of the Commission’s Rules of Practice against Michael P. Toups (“Respondent” or +“Toups”). + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + + +2 +II. + +The Commission finds that: + + A. RESPONDENT + +1. Toups, age 53, was the Chief Financial Officer (“CFO”) of Longwei +Petroleum Holdings Company Limited (“Longwei”) from June 2010 until his resignation in June +2013. Between 1993 and 2010, Toups was a registered representative associated with broker - +dealers registered with the Commission. +B. CIVIL INJUNCTION + +2. On December 22, 2017 , a judgment (the “Interlocutory Judgment”) was +entered by consent against Toups, permanently enjoining him fr om future violations of Section +17(a) of the Securities Act of 1933 (“Securities Act”) and Section 10(b) of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder, in the civil action entitled Securities and +Exchange Commission v. Michael P. Toups, et al. , Civil Action Number 8:16-cv-01798-JDW- +AEP, in the United States District Court for the Middle District of Florida —Tampa Division +(“District Court Litigation”). On August 12, 2019, the court in the District Court Litigation entered +its Order and Final Judgment as to Defendant Michael P. Toups (“Final Judgment”) wherein the +court ordered that: (1) the injunctive relief imposed in the December 22, 2017 Judgment remains in +full effect; (2) pursuant to Section 20(e) of the Securities Act and Section 21(d)(2) of the Exchange +Act, Toups be prohibited for a period of twenty-five (25) years from acting as an officer or director +of any issuer that has a class of securities registered pursuant to Section 12 of the Exchange Act or +that is required to file reports pursuant to Section 15(d) of the Exchange Act; (3) Toups pay +$265,000 in disgorgement and $15,387.04 in prejudgment interest; and ( 4) Toups pay a civil +penalty in the amount of $265,000 pursuant to Section 20 (d) of the Securities Act and Section +21(d)(3) of the Exchange Act. +3. The Commission’s complaint in the District Court Litigation alleged that +Toups, in his capacity as Longwei ’s CFO, participated in multiple fraudulent schemes. First, +Toups drafted public filings and press releases that falsely touted Longwei’s fuel storage depot +capacity and continued to do so after the falsity of those statements were brought to his attention. +Second, Toups participated in a fraudulent scheme to indu ce Longwei shareholders to exercise +warrants to purchase Longwei stock when it was desperate for cash. By creating a false sense of +urgency that the company was going to let the warrants expire, while an extension of the deadline +was imminent and already in process, Longwei and Toups induced investors to exercise their +warrants. Finally, Toups along with others at Longwei concocted a plan to have Toups purchase +Longwei stock—secretly using funds provided by the company —to give the impression that a +high-ranking insider was investing his own money in the company. + + +3 +III. + +Based upon the foregoing, the Commission finds that a court of competent jurisdiction has +permanently enjoined Toups from violating the Federal securities laws within the meaning of Rule +102(e)(3)(i)(A) of the Commission’s Rules of Practice. In view of these findings, the Commission +deems it appropriate and in the public interest that Toups be temporarily suspended from appearing +or practicing before the Commission. + + IT IS HEREBY ORDERED th at Toups be, and hereby is, temporarily suspended from +appearing or practicing before the Commission. This Order shall be effective upon service on the +Respondent. + + IT IS FURTHER ORDERED that Toups may within thirty days after service of this Order +file a petition with the Commission to lift the temporary suspension. If the Commission within +thirty days after service of the Order receives no petition, the suspension shall become permanent +pursuant to Rule 102(e)(3)(ii). + + If a petition is received within thirty days after service of this Order, the Commission shall, +within thirty days after the filing of the petition, either lift the temporary suspension, or set the +matter down for hearing at a time and place to be designated by the Commission, or both. If a +hearing is ordered, following the hearing, the Commission may lift the suspension, censure the +petitioner, or disqualify the petitioner from appearing or practicing before the Commission for a +period of time, or permanently, pursuant to Rule 102(e)(3)(iii). + +This Order shall be served forthwith upon Toups as provided for in the Commission’s +Rules of Practice. + + By the Commission. + + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4094.txt b/raw/aaer/2019/AAER-4094.txt new file mode 100644 index 0000000000000000000000000000000000000000..252bea9af16e7b182fe59a179a304a058b18f71f --- /dev/null +++ b/raw/aaer/2019/AAER-4094.txt @@ -0,0 +1,355 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10701 /September 26, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87129 / September 26, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4094 / September 26, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19532 + + +In the Matter of + +PPG Industries, Inc. + +Respondent. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against PPG Industries, Inc. (“PPG” or “Respondent”). + +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over it and the subject matter of these +proceedings, which are admitted, Respondent consents to the entry of this Order Instituting Cease- +and-Desist Proceedings Pursuant to Section 8A of the Securities Act of 1933 and Section 21C of +the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist Order +(“Order”), as set forth below. + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + +Summary + +1. PPG manufactures paint and other specialty industrial, automotive and architectural +coating materials. From December 2016 through April 2018 (the “relevant period”), PPG +maintained materially inaccurate books and records and insufficient internal accounting controls. +The misstatements resulted from the conduct of a PPG senior accounting officer (“Officer A”) and +employees within PPG’s finance division who manipulated accounting entries. The misstatements +were designed to enable PPG to meet, or come closer to meeting, analysts’ consensus earnings +estimates. + + 2. Officer A made improper accounting determinations and directed subordinate +personnel to delay recording or not to record certain expense accruals, and to misclassify certain +income as from continuing operations, in contravention of generally accepted accounting +principles (“GAAP”). As a result, PPG’s income from continuing operations in its published +financial results was inflated for the years ended December 31, 2016 and December 31, 2017, and +for certain quarters within that period. PPG included its misleading financial results in press +releases and its filings with the Commission. Because of similar accounting misconduct, PPG’s +books and records contained intentional inaccuracies during the closing period for the first quarter +of 2018; these inaccuracies were later corrected in PPG’s Form 10-Q for that quarter. + + 3. PPG restated its financial statements for the relevant period on June 28, 2018 (the +“Restatement”). The Restatement disclosed 14 instances of accounting misconduct during the +relevant period, reduced PPG’s previously reported GAAP pretax income from continuing +operations by a cumulative $6 million for 2016 and 2017, and identified a material weakness in +PPG’s internal control over financial reporting. + + 4. Based on the foregoing and the conduct described below, PPG violated Section +17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Exchange +Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + + + 3 +Respondent + + 5. PPG is a Pennsylvania corporation based in Pittsburgh, PA. PPG’s securities are +registered with the Commission under Section 12(b) of the Exchange Act and trade under the +symbol “PPG” on the New York Stock Exchange. PPG files periodic reports, including Forms 10- +K and 10-Q, with the Commission pursuant to Section 13(a) of the Exchange Act and related rules +thereunder. + +Facts + + 6. During the relevant period, Officer A and subordinates who carried out his +directives exploited deficiencies in PPG’s internal accounting controls to delay recognition of, or +misclassify, known expenses and liabilities, and to overstate income from continuing operations in +certain fiscal quarters. Officer A’s conduct involved tracking earnings and determining whether, +and how, to record certain accounting entries, often late in the closing process, based on the +entries’ potential to move income from continuing operations positively or negatively in order to +meet analysts’ consensus expected earnings, or to narrow a gap. This resulted in fourteen +identified instances of intentionally erroneous accounting entries during five period-end reporting +processes, as described below. + + Understated Expense Accruals in Q4 2016, Q2 2017, and Q3 2017 + + 7. Q4 2016 RSU Accrual Reduction: PPG records an initial accrual for performance- +based Restricted Stock Units (“RSUs”) based on a methodology related to performance factors and +adjusts the accrual over the vesting period. In January 2017, several days into the Q4 2016 closing +process, Officer A, acting without a reasonable basis, reduced an input to the performance factor +methodology in order to adjust the accrual, resulting in an inappropriate reduction of the accrual by +$6.8 million for Q4 2016. + +8. Q2 2017 Healthcare Reserve Accrual: PPG is self-insured and retains a reserve +for healthcare claims that have been incurred but not yet reported. It records an accrual every +month and evaluates and adjusts, if necessary, the reserve on a quarterly basis. At the end of Q2 +2017, the reserve for healthcare claims was underaccrued by $3.5 million, based on actual claims +incurred to that date. Officer A directed a subordinate not to make the $3.5 million accrual in Q2 +2017, but instead to delay the accrual until Q3 2017. +9. Q2 2017 Compensation Expense Accrual: Pursuant to a contract requiring +compensation payments to a PPG employee who departed in Q2 2017, PPG should have +recorded a $4.8 million accrual in that quarter. Instead, at Officer A’s direction and without a +reasonable basis, PPG recorded only $1.3 million in Q2 2017 and spread the remaining $3.5 +million accrual over the rest of the year. + 4 +10. Q2 and Q3 2017 Vacation Pay Accruals: During Q2 2017, a policy change +related to employee vacation pay required the accrual of $3.5 million ratably over the rest of +2017. At Officer A’s direction, no expense was recorded in Q2 or Q3 2017. While the full +amount was accrued in Q4 2017, PPG was underaccrued by $0.885 million and $1.329 million in +Q2 2017 and Q3 2017, respectively. +11. Q3 2017 Fiberglass Pension Accrual: During the closing process for Q3 2017, +Officer A’s staff discovered that an entry recorded to a pension expense related to PPG’s +fiberglass business was inaccurate. Officer A directed PPG staff to reduce the necessary accrual +adjustments by $1 million, with the remainder distributed over Q4 2017. +12. The accrual entries described in Paragraphs 7-11 were made or omitted in +contravention of GAAP. +Improperly Classified Adjustments to Income +13. Q4 2016 Restructuring Reserve Release: In Q4 2016, PPG released $3.4 million +of restructuring reserves which, at Officer A’s direction, was improperly classified as an increase +to “other income.” This treatment was inconsistent with PPG’s accounting practices; the effect +was to improperly increase, by $3.4 million, PPG’s adjusted income from continuing operations, +a non-GAAP measure that was a component of PPG’s reported EPS for the quarter. +14. Q2 2017 Release of Reserves for Discontinued Operations: PPG determined to +release $2 million of reserve related to a supply contract following the sale of an overseas +fiberglass business and $400,000 of reserve established in relation to a sale of a flat glass plant. +Both of these were discontinued businesses, but at Officer A’s direction the gains were +misclassified as gains to continuing operations. +15. Q4 2017 Release of Reserves for Discontinued Operations: In Q4 2017, PPG +determined to release $2 million of reserve related to the demolition of a former PPG facility +used in the flat glass line of business, and $2.7 million of reserve related to a workers’ +compensation contingency connected to the sale of the U.S. fiberglass business. Despite the fact +that these were discontinued businesses, Officer A directed his subordinates to misclassify the +gains as income from continuing operations. +16. According to GAAP, the entries described in Paragraphs 14 and 15 should have +been classified as income from discontinued operations. +Fraudulent Entries in the First Quarter of 2018 +17. Legal Expenses and Property Tax Accruals: During the closing process for Q1 +2018, Officer A directed subordinates not to record certain legal and property tax accruals for the +quarter, and instead to put them off until Q2. The proper GAAP accounting is to recognize +expenses when they are incurred or the benefit received. This improper failure to record +expenses of $311,684 was reflected in PPG’s books and records for Q1 2018 as of mid-April +2018. + 5 +18. Incentive Compensation/Management Award Plan Accrual: PPG has an incentive +compensation plan that is based on performance factors. PPG adjusts its accrual for this annual +expense based on changes in the factors, followed by a true-up in March of the following year to +account for differences between the accrued amount and the final amount approved for payout. +During the Q1 2018 closing process, Officer A directed his staff not to record the true-up, a +$963,021 expense, but instead to delay it to Q2 2018, in contravention of GAAP. +19. Reserve for Healthcare Claims: At the end of Q1 2018, Officer A directed that +approximately $445,000 of a reserve for healthcare claims be released, without a reasonable +basis and contrary to GAAP. +20. Amortization Expense: In March 2018, a PPG business unit discovered that it had +inadvertently failed to record monthly amortization in connection to a certain intangible asset for +a number of years. The unit determined that it was necessary to make an entry of $1.4 million in +that quarter. However, Officer A directed his staff not to make the entry but instead +inappropriately spread the amortization amount over the remaining life of the asset. +21. Inventory Undervaluation: PPG’s practice was to conduct inventory revaluations +for the Company’s overseas business units only once each quarter. However, at the end of Q4 +2017, Officer A had a second, off-cycle inventory revaluation conducted and waited until the +third workday of the closing process, in January 2018, to direct the regions to record the resulting +increased valuations for Q4 2017. In the following quarter, Q1 2018, Officer A again directed +inventory revaluations, but directed that a positive adjustment be recorded only for one region +despite that a second region also merited an adjustment. Selectively recording such revaluations +was inappropriate. +22. The improper entries described in paragraphs 17-21 caused PPG’s books and +records to be inaccurate as of mid-April 2018. However, as described below, prior to filing its +Form 10-Q for Q1 2018, PPG identified and corrected these errors. +The Restatement, Impact of the Fraud, and Material Internal Accounting Controls +Weaknesses +23. On or about April 16, 2018, PPG received a report through its internal reporting +system detailing some of the Q1 2018 accounting misconduct detailed above. After commencing +an internal investigation and before filing its Form 10-Q for Q1 2018, PPG disclosed in a press +release on April 19, 2018 that it had identified $1.4 million in understated expenses for Q1 2018, +and further disclosed that its internal investigation would continue. +24. On June 28, 2018, PPG filed its Form 10-Q for Q1 2018 and a Form 10-K/A for +2017. These filings restated PPG’s previously issued financial statements for 2016 and 2017 and +quarterly results for the fourth quarter of 2016 through the fourth quarter of 2017. The Form 10- +K/A disclosed the fourteen intentional misstatements described above and other inadvertent +errors detected over the course of the internal investigation. PPG disclosed the cumulative +impact of the Restatement (resulting from both the misconduct as described above and from +inadvertent error) to net income from continuing operations as follows: + 6 +Period +(Quarter, Year, Months Ended) +Restated Income Restated Earnings per +Share (“EPS”) +QE 12/31/2016 decreased by $4 million decreased by $0.01 +YE 12/31/2016 decreased by $4 million decreased by $0.01 +QE 03/31/2017 increased by $3 million increased by $0.01 +QE 6/30/2017 decreased by $7 million decreased by $0.03 +Six months ended 06/30/2017 decreased by $4 million decreased by $0.02 +QE 9/30/2017 increased by $1 million zero cents +Nine months ended 09/30/2017 decreased by $3 million decreased by $0.01 +QE 12/31/2017 increased by $1 million zero cents +YE 12/31/2017 decreased by $2 million decreased by $0.01 + +25. The contemporaneous impact (i.e., excluding the cumulative effect on subsequent +quarters and the impact of inadvertent errors) of PPG’s fraudulent accounting entries on PPG’s +EPS was to artificially increase PPG’s reported EPS such that it met analysts’ consensus EPS2, or +narrowed a gap, as shown below: +Period (Quarter Ended)3 Contemporaneous Impact +to Pre-Tax Income +Contemporaneous Impact +to EPS +QE 12/31/2016 increased by $6.8 million4 increased by $.03 +QE 6/30/2017 increased by $10.34 million increased by $.03 +QE 9/30/2017 increased by $2.33 million increased by $.01 +QE 12/31/2017 increased by $4.7 million increased by $.02 + +2 PPG’s reported EPS was based on adjusted income from continuing operations, a non-GAAP +measure, for Q4 2016, Q2 2016 and Q4 2017. PPG made no adjustments to its income from +continuing operations in Q3 2017; its reported EPS was calculated based on continuing income. + +3 Although PPG restated its financial results for the quarter ended March 31, 2017 based on +cumulative effects of the Q4 2016 misstatement, it did not report any intentional accounting +manipulations first arising in Q1 2017. + +4 This amount does not include the $3.4 million improper entry described in Paragraph 13, which +had no impact to pre-tax income from continuing operations. The cumulative impact to pre-tax +adjusted income from continuing operations of the two improper entries for Q4 2016 was $10.2 +million. + 7 + + 26. As set forth in the Restatement, PPG’s internal control over financial reporting +suffered from a material weakness “because the Company did not maintain effective controls +within its financial close process. Specifically, [Officer A] directed his subordinates to improperly +override the Company’s internal controls during the Company’s financial close process, which +directions were followed and not disclosed to others in senior management, the Audit Committee +or the Company’s independent registered public accounting firm and not otherwise detected by the +Company’s internal controls. These actions often occurred after the end of a quarter and close to +the end of the financial close process for the quarter and had the effect of positively impacting +income from continuing operations reported for such quarter.” + + 27. Officer A’s ability to repeatedly improperly influence accounting entries was +facilitated by inadequate controls over certain accounting areas: significant recurring accruals +subject to management estimate, especially related to compensation; discontinued operations +accounting; inventory cost revaluation; and the period-end financial reporting process. Certain +deficiencies in the organization of PPG’s corporate finance function also exacerbated the control +weakness noted in the Restatement, including insufficient segregation of the financial planning and +accounting functions, inadequately trained financial personnel, and poorly documented accounting +policies and procedures. + +Violations + + 28. As a result of the conduct described above: + +a. PPG violated Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, +which prohibit fraudulent conduct in connection with the purchase or sale of +securities. + +b. PPG violated Section 17(a) of the Securities Act, which prohibit fraudulent +conduct in connection with the offer or sale of securities. + +c. PPG violated Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, +13a-13 and 12b-20 thereunder, which require every issuer of a security registered +pursuant to Section 12 of the Exchange Act to file with the Commission +information, documents, and annual and quarterly reports as the Commission may +require, and mandate that periodic reports contain such further material +information as may be necessary to make the required statements not misleading. + +d. PPG violated Section 13(b)(2)(A) of the Exchange Act, which requires +issuers with securities registered under Section 12 of the Exchange Act to make and +keep books, records and accounts which, in reasonable detail, accurately and fairly +reflect the transactions and dispositions of assets of the issuer; and + +e. PPG violated Section 13(b)(2)(B) of the Exchange Act, which requires +issuers with securities registered under Section 12 of the Exchange Act to devise + 8 +and maintain a system of internal accounting controls sufficient to provide +reasonable assurances that transactions are recorded as necessary to permit +preparation of financial statements in accordance with generally accepted +accounting principles. + +PPG’s Self-Reporting, Cooperation and Remedial Efforts +29. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent, and cooperation afforded the Commission staff, as +described below. +30. PPG promptly self-reported to the Commission staff and, in its earnings release +for the first quarter of 2018, disclosed to investors the allegations in the internal report and that it +was conducting an internal investigation. +31. PPG provided timely updates to the Commission staff and voluntarily produced +documents, reports and other materials. After issuing the Restatement, PPG has continued to +cooperate with the Commission staff’s investigation. +32. PPG undertook remedial measures beginning immediately upon learning of the +improper conduct. In addition to taking disciplinary actions with respect to individuals in the +finance area involved in the conduct described above, PPG’s management has enhanced review +in the finance area, adjusted its organizational design by formally separating its financial +forecasting process from its financial accounting process, and instituted enhanced training, +policies and procedures to standardize and increase oversight in the high risk accounting areas +where control weaknesses were identified. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent PPG’s Offer. + + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent PPG cease and desist from committing or causing any violations and any future +violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, 13a-1, 13a-11, and 13a-13 thereunder. + + B. Respondent acknowledges that the Commission is not imposing a civil penalty +based in part upon its substantial cooperation in a Commission investigation and related +enforcement action. If at any time following the entry of the Order, the Division of Enforcement +(“Division”) obtains information indicating that Respondent knowingly provided materially false +or misleading information or materials to the Commission, or in a related proceeding, the Division +may, at its sole discretion and with prior notice to the Respondent, petition the Commission to + 9 +reopen this matter and seek an order directing that the Respondent pay a civil money penalty. +Respondent may contest by way of defense in any resulting administrative proceeding whether it +knowingly provided materially false or misleading information, but may not: (1) contest the +findings in the Order; or (2) assert any defense to liability or remedy, including, but not limited to, +any statute of limitations defense. + + + By the Commission. + + + +Vanessa A. Countryman +Secretary + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4095.txt b/raw/aaer/2019/AAER-4095.txt new file mode 100644 index 0000000000000000000000000000000000000000..40d5ad021b9954fd4d618b1037ab4f36c3b2c9e5 --- /dev/null +++ b/raw/aaer/2019/AAER-4095.txt @@ -0,0 +1,443 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10706 / September 27, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87134 / September 27, 2019 + +ACCOUNTING AND AUDITING ENFORCMENT +Release No. 4095 / September 27, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19541 + + + +In the Matter of + +FCA US LLC and +FIAT CHRYSLER +AUTOMOBILES N.V. + +Respondents. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 8A OF THE SECURITIES ACT +OF 1933 AND SECTION 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +MAKING FINDINGS, AND IMPOSING A +CEASE-AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 8A of the Securities Act +of 1933 (“Securities Act”) and Section 21C of the Securities Exchange Act of 1934 (“Exchange +Act”), against FCA US LLC and Fiat Chrysler Automobiles N.V. (“FCA US” and “FCA N.V.” +respectively, and collectively the “Respondents”). + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over Respondents and the subject matter of +these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting +Cease-and-Desist Proceedings pursuant to Section 8A of the Securities Act of 1933 and Section + 2 +21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a Cease-and-Desist +Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: + +Summary +1. From at least August 2012 to July 2016, FCA US, an automotive company, +fraudulently misled investors about the number of new vehicles that it and its dealers sold each +month to customers. Beginning in September 2013, FCA US or its predecessor also falsely touted +that it continued to increase new vehicle sales every month on a year-over-year basis by reporting +what it called a “streak” of uninterrupted sales growth. FCA US issued monthly press releases +falsely reporting its new vehicle sales and growth streak. FCA US and its parent company, FCA +N.V., attached the monthly press releases to reports that were filed with or furnished to the +Commission. +2. FCA US, based in Auburn Hills, Michigan, sells vehicles in the U.S. primarily +under the Chrysler, Dodge, Jeep, and Ram brands. FCA US sells vehicles both to dealers and, in +limited numbers, directly to customers. FCA US has nine regional offices, called Business +Centers, that work with dealers in their respective regions to sell vehicles. In their monthly press +releases, Respondents reported “new vehicle sales,” which included sales to customers directly and +through dealers. +3. New vehicle sales and the growth streak were key performance indicators that were +important to Respondents, investors, and analysts. FCA N.V. explained to investors in annual +reports that new vehicle sales illustrated the company’s competitive position and demand for its +vehicles. Vehicle sales in the U.S. accounted for close to half of FCA N.V.’s worldwide sales. In +an article posted on its website, FCA US described the sales streak as “a symbol of our continuing +success in the marketplace.” +4. FCA US inflated monthly vehicle sales to customers by paying dealers to report +fake sales, which were later “unwound” or reversed. In addition, FCA US Business Center +employees reported fake vehicle sales. +5. Further, FCA US failed to report all actual sales in the months in which they were +made. Instead, FCA US maintained a database of actual but unreported sales. FCA employees +often referred to the database as a “cookie jar.” In months when it wanted its vehicle sales results +to appear better than they were, FCA US dipped into the “cookie jar” to inflate vehicle sales +numbers. In particular, FCA US manipulated vehicle sales to avoid ending the growth streak. + +1 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. + + + 3 +FCA US falsely reported year-over-year sales growth in September 2013 and May 2016, when in +fact, sales in those months declined as compared to sales in the same months of the preceding +years. FCA US also inflated results before investor events that were held while FCA N.V. was +preparing to list shares on the New York Stock Exchange (“NYSE”). As a result of these +practices, FCA US’s reported sales and year-over-year growth percentages were misstated every +month during the relevant period. +6. On multiple occasions from 2013 through 2015, dealers and employees informed +FCA US of fake sales reporting at its Business Centers. Nevertheless, FCA US continued to +falsely report sales through mid-2016. Moreover, after a dealer filed a lawsuit in January 2016 +alleging that FCA US offered to pay the dealer to report fake sales, FCA N.V. publicly denied the +allegations. +7. In their books and records, Respondents inaccurately recorded FCA US’s payments +to dealers to report fake sales as advertising expenses. Moreover, Respondents’ books and records +did not accurately reflect the number of vehicles sold by FCA US in a particular month because +FCA US used the database where it stored actual but unreported sales. Respondents also failed to +have a sufficient system of internal accounting controls relating to how new vehicle sales and +dealer payments were recorded. +8. Accordingly, Respondents violated the antifraud provisions of the Securities Act +and the Exchange Act as well as the reporting, books and records, and internal accounting controls +provisions of the Exchange Act. Specifically, FCA US violated Section 17(a) of the Securities Act +and Sections 10(b), 15(d), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b- +20, and 15d-11 thereunder. FCA N.V. violated Section 17(a) of the Securities Act and Sections +10(b), 13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, and 13a- +16 thereunder. +Respondents +9. FCA US, a subsidiary of FCA N.V., is a Delaware limited liability company +headquartered in Auburn Hills, Michigan. It designs, manufactures and sells vehicles. FCA US +was previously known as Chrysler Group LLC. Fiat S.p.A. (“Fiat”), FCA N.V.’s predecessor, first +acquired an ownership stake in FCA US in 2009. By January 2014, Fiat acquired a 100 percent +equity interest in FCA US. On February 25, 2011, to satisfy a contractual obligation to the U.S. +Department of the Treasury to make periodic reports to the Commission, FCA US registered its +Class B Membership Interests under Section 12(g) of the Exchange Act. Subsequently, FCA US +registered an offering of senior notes with the Commission on Form S-4, as amended, under the +Securities Act, which was effective April 4, 2014. FCA US filed periodic reports, including on +Forms 10-K and 10-Q, with the Commission from 2011 until December 2015. Between April 4, +2014 and December 31, 2014, FCA US’s periodic reports were filed pursuant to an obligation +under Section 15(d) of the Exchange Act and related rules thereunder as a result of the Securities +Act registration described above. +10. FCA N.V., the parent company of FCA US, is a Dutch public company +headquartered in London, United Kingdom. FCA N.V.’s common stock is registered with the + 4 +Commission pursuant to Section 12(b) of the Exchange Act. Since October 2014, FCA N.V.’s +common stock has traded on the NYSE under the ticker symbol FCAU. Between December 2014 +and December 2016, its mandatory convertible securities were registered with the Commission and +they traded on the NYSE under the ticker symbol FCAM. FCA N.V. files with the Commission +annual reports on Forms 20-F and furnishes Forms 6-K pursuant to Section 13(a) of the Exchange +Act and related rules thereunder. During the relevant period, FCA N.V. registered the following +offerings with the Commission on: Form F-4, as amended, which was effective July 8, 2014 +(under the name of Fiat Investments N.V., which was subsequently renamed FCA N.V. in October +2014); Form S-8, which was effective October 17, 2014; Form F-1, as amended, which was +effective December 10, 2014; Form S-8, which was effective January 12, 2015; and Form F-4, +which was effective June 16, 2015. +Facts +Vehicle Sales Results Reported Monthly +11. FCA US issued monthly press releases reporting sales of new vehicles in the United +States. FCA US’s publicly reported sales included vehicles sold by FCA US to customers directly +and through dealers. FCA US or FCA N.V. usually attached these press releases to reports on +Form 8-K filed with the Commission or reports on Form 6-K furnished to the Commission.2 +12. In each monthly press release, FCA US provided the total number of vehicles +purportedly sold to customers that month, as well as total sales by brand and by model, and +compared these results to those of the same month of the preceding year. Month after month, FCA +US publicly touted the number of consecutive months in which its total sales grew on a year-over- +year basis – what it referred to as the “streak.” The streak purportedly reached 75 months by mid- +2016. +13. The press releases and reports failed to alert investors that the monthly sales results +included fake vehicle sales and sales from prior months drawn from the database.3 +Vehicle Sales Results Were Important to Respondents, Investors, and Analysts +14. New vehicle sales and the growth streak were key performance indicators that were +important to Respondents, investors, and analysts. Investors and analysts followed the monthly +vehicle sales results and considered them a factor in evaluating the company’s health. + +2 From August 1, 2012 through September 3, 2014, FCA US issued monthly new vehicle +sales press releases and filed with the Commission on Forms 8-K either the entire press +releases or tables with new vehicle sales results. From December 2, 2014 through June 1, +2016, FCA US issued monthly new vehicle sales press releases, which FCA N.V. +furnished to the Commission on Forms 6-K. FCA US’s September 2014, October 2014, +and June 2016 new vehicle sales results were distributed by press releases only. +3 FCA US’s and FCA N.V.’s revenues were not impacted by the reporting of fake sales or +sales from prior months drawn from the database. + 5 +15. Each month, Bloomberg published a Wall Street & Analyst Consensus that +presented analyst estimates of U.S. vehicle sales year-over-year growth or decline for several +companies, including FCA US. Also each month, analysts published reports on the U.S. vehicle +sales achieved by the industry and its major players, including FCA US. +16. Respondents acknowledged the importance of these metrics in Commission filings +and other public statements. For example, in annual reports, FCA N.V. explained that new vehicle +sales were illustrative of its competitive position and the demand for its vehicles. In 2015, vehicle +sales in the U.S. accounted for 48 percent of FCA N.V.’s worldwide sales. +17. Accordingly, the Respondents’ then-CEO touted the uninterrupted year-over-year +growth streak describing it in January 2016 as “not an inconsequential feat” and a result of +customers valuing the FCA brand. In an article posted on its website, FCA US described the sales +streak as “a symbol of our continuing success in the marketplace.” +18. FCA US distributed the monthly press releases to analysts and journalists. FCA US +worked to ensure broad media coverage of the vehicle sales results and tried to secure +advantageous headlines. For example, FCA US was pleased with influencing a headline +concerning its July 2012 sales, “Chrysler Sales Rise 13% to Extend 28-Month Streak of U.S. +Gains.” +19. Every month, FCA US’s vehicle sales results were covered extensively by the +media. The media’s coverage frequently referred to the streak describing it as “a stunning record,” +“jaw-dropping,” and “incredible.” The media reported analysts commenting that the growth streak +was “virtually unheard of for American auto manufacturers” and that “FCA accomplished +something that nobody would have predicted a few years ago – to have five-plus years of sales +increases – even in an accelerating market [is] an impressive feat and reflects very well on the +[CEO].” +20. FCA US’s monthly vehicle sales results impacted FCA N.V.’s share price. For +example, a global investment bank emailed an FCA N.V. executive noting the positive impact that +FCA US’s November 2014 sales results had on FCA N.V.’s stock price. The email observed that +FCA US’s vehicle sales results had exceeded analyst estimates and outpaced key competitors’ +year-over-year results. Similarly, FCA N.V.’s Head of Investor Relations informed FCA N.V. +executives that “FCA shares opened the month [of June 2016] trading higher . . . due to an increase +in U.S. sales in May relative to sales decline by its Detroit peers and the industry.” +FCA US Business Centers Reported Fake Sales +21. FCA US had nine regional Business Centers—California, Denver, Mid Atlantic, +Great Lakes, Midwest, Northeast, Southeast, Southwest and West—that were responsible for sales +in various parts of the country. Business Center employees worked with local dealers to help +generate sales. Each Business Center was led by a Director, who reported to FCA US’s Head of +Sales. +22. FCA US put pressure on the Business Centers to increase sales, maintain the year- +over-year sales streak, and hit internal sales targets, particularly on the last sales day of the month. + 6 +In response to the pressure, certain employees at most of the Business Centers engaged in fake +sales reporting. +23. Business Center employees asked dealers to report fake sales in a FCA US +database, often in exchange for the payment of money. As described below, cooperative marketing +funds were used to pay dealers for reporting fake sales and disguise the payments. + +24. In addition, Business Center employees reported fake sales in the database and +falsely coded them as sales to dealers, sales to fictitious customers, or as stock reductions. +Legitimate dealer stock reductions were generally for lost, stolen, or destroyed vehicles, not for +vehicles that were available for sale on dealer lots. As a result, FCA US’s database contained false +vehicle sales entries, including false customer names and dates of sales. + +25. FCA US included the fake sales in its publicly reported vehicle sales results. +Subsequently, these sales were often reversed in the FCA US database, which consequently made +these vehicles available for sale to a future, real customer. In some cases, FCA US’s dealers +subsequently sold vehicles that had been previously inaccurately reported as sold to real customers +without the prior sales report being reversed, simply by changing the phony customer name and +address to the real customer’s name and address in the database. FCA US did not publicly report +the later real sales and thus, did not double count vehicles sold. +26. Several Business Center Directors knew about or directed the fake sales reporting. +For example, one Business Center Director personally asked dealers to report fake sales, directed +others to ask dealers to report fake sales, and directed improper stock reductions in various months +between July 2012 and the summer of 2015. In December 2014, another Business Center Director +approved paying dealers to report fake sales. On the last sales day of June 2015, another Business +Center Director approved paying a dealer for fake sales. That same day, a Director of a different +Business Center emailed another Business Center Director that “[e]veryone will hit [their targets] +but they are going to have to get dirty.” +27. FCA US had programs in place where marketing expenses that met certain criteria +could be shared between FCA US and its dealers. These programs were known as “cooperative +marketing” programs. FCA US improperly used cooperative marketing funds to make payments +to dealers for reporting fake sales. The payments to dealers were falsely recorded in Respondents’ +books and records as advertising expenses. +28. Respondents did not have a sufficient system of internal accounting controls over +payments made from cooperative marketing funds. Respondents did not have adequate written +policies, procedures, or training relating to these payments. Even though FCA US required +advanced approval of cooperative marketing programs, FCA US made payments for purported +marketing that had not been approved. FCA US also required the submission of documentation +from dealers showing the funds had been used for marketing prior to making payments. However, +FCA US made payments without obtaining the required documentation. For example, in one +Business Center, 47 out of 50 sampled payments totaling $705,000 were made without obtaining +supporting documentation. + 7 +29. On a number of occasions from 2013 through 2015, FCA US was informed by its +employees and dealers of fake sales reporting at its Business Centers. +30. For instance, in January 2013, a dealer told a Business Center Director (who later +that year became an executive at FCA US’s headquarters), that the prior Director of that Business +Center had paid the dealer for reporting fake sales. +31. In November 2014, a dealer informed a Director of a different Business Center that +his Business Center was reporting vehicles sold that the dealer had not actually sold. The Business +Center employee who had entered the fake sales continued to report fake sales repeatedly, +including in 2016. +32. Also in November 2014, FCA US completed an internal audit that found +deficiencies in the stock reduction process at a third Business Center and raised concerns about +phantom sales, reputational risks, and potential litigation exposure. The audit found that this +Business Center had entered a large number of stock reductions on the last sales days of October +2013 and December 2013. +33. In January 2015, FCA US received an ethics hotline complaint from an employee +of a fourth Business Center who stated that a manager instructed the employee to offer dealers +marketing funds to report fake sales. The employee also complained that Business Center +employees falsely reported as sold vehicles that were still in dealer inventory. Later in 2015, FCA +US received additional internal complaints about fake sales reporting. +34. Following the January 2015 ethics hotline report, FCA US launched an internal +investigation, which over time expanded to include other complaints made by Business Center +employees and dealers. Notwithstanding all of the foregoing complaints and the internal +investigation, FCA US continued to report fake sales. +35. On January 12, 2016, a dealer sued FCA US alleging that Business Center +employees asked dealers to falsify sales in exchange for marketing payments. On January 14, +2016, after the lawsuit was widely reported in the media, the trading of FCA N.V.’s stock was +halted in Italy. FCA N.V.’s NYSE listed stock price decreased by as much as 6.7 percent. On +January 14, 2016, FCA N.V. issued two press releases denying the lawsuit’s allegations. +FCA US Used a Database to Hold Certain Vehicle Sales for Reporting in Future +Months +36. Under the direction of the Head of U.S. Sales, FCA US also used a database of fleet +and certain other retail sales (“fleet database”) to misreport vehicle sales results and year-over-year +growth percentages every month. Fleet customers included rental car companies and other entities. +In months when FCA US had enough vehicle sales to continue the growth streak or hit other +targets, some sales were not publicly reported and instead were held in the fleet database for public +reporting in future months. FCA US employees referred to the vehicle sales saved for public +reporting in future months as the “cookie jar,” the “bank,” the “bag,” and the “kitty.” + 8 +37. In months when the growth streak would have ended or when FCA US fell short of +other targets, vehicle sales stored in the fleet database were taken out and reported as if they had +just occurred, making that month’s results appear better than they were. +38. On October 1, 2013, FCA US issued a press release falsely reporting that in +September 2013 it had “U.S. sales of 143,017 units, a 1 percent increase compared with sales in +September 2012.” In order to continue the streak, FCA US included in these September 2013 +results about 7,000 vehicles from the fleet database that had been sold in prior months. FCA US +also included in these vehicle sales results about 1,000 vehicles on dealers’ lots that had not yet +been sold to customers by dealers. The inclusion of these 8,000 vehicles artificially inflated the +reported sales for that month and turned what would have been a decrease in year-over-year sales +into a fictitious increase. It also enabled FCA US to falsely claim in the press release that +September 2013 was the “42nd-consecutive month of year-over-year sales gains.” The media +amplified this claim with headlines such as, “Chrysler Reports Surprise 0.7% Sales Gain to Extend +U.S. Streak.” FCA US falsely touted that this growth streak continued for another two and a half +years, when the growth streak had been broken in September 2013. +39. On June 1, 2016, FCA US issued a press release falsely reporting for May 2016 +“U.S. sales of 204,452 units, a 1 percent increase compared with sales in May 2015.” FCA US +included in the May 2016 vehicle sales results around 12,000 vehicles from the fleet database that +had been sold in prior months. This inflated the vehicle sales results for that month and turned +what would have been a decrease in year-over-year sales into an increase. News articles +inaccurately noted that the streak reached 74 months. An analyst also unwittingly commented that +“[t]he streak lives . . . FCA continues to push for consecutive [year-over-year] sales gains (74 +months of consecutive [year-over-year] sales gains.)” A few days later, FCA N.V.’s Head of +Investor Relations stated that FCA N.V.’s shares were trading higher at the beginning of June “due +to an increase in U.S. sales in May relative to sales decline by [the company’s] Detroit peers and +the industry.” +40. Further, FCA US inflated its April 2014 new vehicle sales in order to show better +results ahead of May 2014 investor day events, which were being held while FCA N.V. was +preparing to list its shares on the NYSE. During the investor day events held on May 6 and +7, 2014, FCA N.V. falsely represented that it had achieved 48 consecutive months of year-over- +year sales gains in the U.S. when, in fact, the growth streak would have been broken in September +2013 had FCA US not included sales from the fleet database. +41. FCA US also altered the vehicle sales results for particular models and brands, +which were included in its monthly press releases and filings, especially when a year-over-year +sales decline could be turned into an increase or a sales record or milestone could be reported, or to +show steady sales growth for new models. +42. By using the fleet database, Respondents’ books and records did not accurately +reflect the number of vehicles sold by FCA US in a particular month. The Respondents did not +have a sufficient system of internal accounting controls to provide reasonable assurances that FCA +US recorded new vehicle sales in the months in which they were actually sold. + 9 +43. After Commission staff began an investigation of false vehicle sales reporting, FCA +US disclosed to the staff that the company had used the fleet database to misreport vehicle sales. +44. On July 26, 2016, FCA US announced improvements to how it reported new +vehicle sales and reported historical new vehicle sales using the new methodology. +Violations +45. As a result of the conduct described above, Respondents violated Section 17(a) of +the Securities Act, which prohibits fraudulent conduct in the offer or sale of any securities, and +Section 10(b) of the Exchange Act and Rule 10b-5 thereunder, which prohibit fraudulent conduct +in connection with the purchase or sale of securities. +46. Also as a result of the conduct described above, FCA US violated Section 15(d) of +the Exchange Act and Rules 15d-11 and 12b-20 thereunder, which require every issuer of a +security registered pursuant to Section 15 of the Exchange Act to file with the Commission +accurate information, documents, and reports as the Commission may require, including current +reports on Form 8-K, and mandate that the reports contain such further material information as +may be necessary to make the required statements not misleading. +47. As a result of the conduct described above, FCA N.V. violated Section 13(a) of the +Exchange Act and Rules 13a-16 and 12b-20 thereunder, which require every issuer of a security +registered pursuant to Section 12 of the Exchange Act to file with the Commission accurate +information, documents, and reports as the Commission may require, including furnishing to the +Commission reports of foreign private issuers on Form 6-K, and mandate that the reports contain +such further material information as may be necessary to make the required statements not +misleading. +48. In addition, as a result of the conduct described above, Respondents violated +Section 13(b)(2)(A) of the Exchange Act, which requires issuers to make and keep books, records +and accounts which, in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer. +49. Furthermore, Respondents violated Section 13(b)(2)(B) of the Exchange Act, which +requires issuers to devise and maintain a system of internal accounting controls sufficient to +provide reasonable assurances that (i) transactions are executed in accordance with management’s +general or specific authorization; (ii) transactions are recorded as necessary (I) to permit +preparation of financial statements in conformity with generally accepted accounting principles or +any other criteria applicable to such statements, and (II) to maintain accountability for assets; (iii) +access to assets is permitted only in accordance with management’s general or specific +authorization; and (iv) the recorded accountability for assets is compared with the existing assets at +reasonable intervals and appropriate action is taken with respect to any differences. + 10 + + + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED that: + +A. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent FCA US cease and desist from committing or causing any violations and any future +violations of Section 17(a) of the Securities Act and Sections 10(b), 15(d), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, and 15d-11 thereunder. +B. Pursuant to Section 8A of the Securities Act and Section 21C of the Exchange Act, +Respondent FCA N.V. cease and desist from committing or causing any violations and any future +violations of Section 17(a) of the Securities Act and Sections 10(b), 13(a), 13(b)(2)(A), and +13(b)(2)(B) of the Exchange Act and Rules 10b-5, 12b-20, and 13a-16 thereunder. +C. Respondents shall, within ten (10) days of the entry of this Order, pay a civil money +penalty in the amount of $40 million, on a joint and several basis, to the Securities and Exchange +Commission. If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. +Payment must be made in one of the following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + + 11 +Payments by check or money order must be accompanied by a cover letter identifying FCA +US and FCA N.V. as Respondents in these proceedings, and the file number of these proceedings; +a copy of the cover letter and check or money order must be sent to Antonia Chion, Associate +Director, Division of Enforcement, Securities and Exchange Commission, 100 F St., NE, +Washington, DC 20549. + + D. Pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002, as amended, a Fair +Fund is created for the penalties referenced in paragraph C above. Regardless of whether any such +Fair Fund distribution is made, amounts ordered to be paid as civil money penalties pursuant to this +Order shall be treated as penalties paid to the government for all purposes, including all tax +purposes. To preserve the deterrent effect of the civil penalty, Respondents agree that in any +Related Investor Action, they shall not argue that they are entitled to, nor shall they benefit by, +offset or reduction of any award of compensatory damages by the amount of any part of +Respondents’ payment of a civil penalty in this action (“Penalty Offset”). If the court in any +Related Investor Action grants such a Penalty Offset, Respondents agree that they shall, within 30 +days after entry of a final order granting the Penalty Offset, notify the Commission’s counsel in +this action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. +Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change +the amount of the civil penalty imposed in these proceedings. For purposes of this paragraph, a +“Related Investor Action” means a private damages action brought against any Respondent by or +on behalf of one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in these proceedings. + + By the Commission. + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4096.txt b/raw/aaer/2019/AAER-4096.txt new file mode 100644 index 0000000000000000000000000000000000000000..80c1e220e2da51a68b0db87feea22d0fc48594d6 --- /dev/null +++ b/raw/aaer/2019/AAER-4096.txt @@ -0,0 +1,1401 @@ + + + + + + + + + + + + + + + + SEC.gov | Mylan N.V. + + + + + + + + !function(){var e=navigator.userAgent,a=document.documentElement,n=a.className;n=n.replace("no-js","js"),/iPad|iPhone|iPod/.test(e)&&!window.MSStream&&(n+=" ua-ios"),a.className=n}(); + {"path":{"baseUrl":"\/","pathPrefix":"","currentPath":"node\/523601","currentPathIsAdmin":false,"isFront":false,"currentLanguage":"en"},"pluralDelimiter":"\u0003","suppressDeprecationErrors":true,"gtag":{"tagId":"","consentMode":false,"otherIds":[],"events":[],"additionalConfigInfo":[]},"ajaxPageState":{"libraries":"eJxdT0GOwzAI_JBdn_oei2DkeINNZLC22devlaZS2wtiBhhmcKNUTPo97jxyaXEH3GJpiZrFhQW38A4cMqgeYQGlV19JFTKpQ-kUmvQKXP7I0cO4tC2kPnbg2wVdFslM0SCHPMs3vsEPPD7J6hgOGdPCKJyoRxxqUuePHjLLAuzVjimenRJGSLW08NoBK9LUn6SHlrytVOlcpJShB63QLSpBx_WkOzHNePol4fRQo_qMPvQ36ZXsAmd99lMNr2t_GUR9n60EyX9a_wePd5ns","theme":"uswds_sec","theme_token":null},"ajaxTrustedUrl":[],"gtm":{"tagId":null,"settings":{"data_layer":"dataLayer","include_classes":false,"allowlist_classes":"","blocklist_classes":"","include_environment":false,"environment_id":"","environment_token":""},"tagIds":["GTM-TD3BKV"]},"data":{"extlink":{"extTarget":false,"extTargetAppendNewWindowDisplay":true,"extTargetAppendNewWindowLabel":"(opens in a new window)","extTargetNoOverride":false,"extNofollow":false,"extTitleNoOverride":false,"extNoreferrer":false,"extFollowNoOverride":false,"extClass":"0","extLabel":"(link is external)","extImgClass":false,"extSubdomains":true,"extExclude":".*\\.gov|http:\/\/www.xbrl.org\/utr\/2013-05-17\/utr.xml|http:\/\/www.xbrl.org\/dtr\/type\/numeric-2009-12-16.xsd|http:\/\/www.xbrl.org\/dtr\/type\/nonNumeric-2009-12-16.xsd|https:\/\/secir.secure.force.com\/ombudsman\/OMMSForm","extInclude":"","extCssExclude":".data-exempt","extCssInclude":"","extCssExplicit":"","extAlert":true,"extAlertText":"You are now leaving the SEC Website. 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Mylan N.V. , No. 19-civ-2904 (D.D.C. filed September 27, 2019) + + + + + + + + + The Securities and Exchange Commission today announced charges against Pennsylvania-based pharmaceutical company Mylan N.V. for accounting and disclosure failures relating to a Department of Justice probe into whether Mylan overcharged Medicaid by hundreds of millions of dollars for EpiPen, its largest revenue and profit generating product. Mylan agreed to pay $30 million to settle the SEC's charges. + + According to the SEC's complaint, Mylan classified EpiPen as a "generic" drug under the Medicaid Drug Rebate Program, which resulted in Mylan paying much lower rebates to the government than if EpiPen had been classified as a "branded" drug. The complaint alleges that in October 2014, the Centers for Medicare and Medicaid Services (CMS) informed Mylan that EpiPen was misclassified as a generic drug. Starting in November 2014, and continuing for nearly two years, the Department of Justice conducted a civil investigation into whether Mylan misclassified EpiPen and thereby overcharged the government for EpiPen sales to Medicaid patients. During the investigation, DOJ issued multiple subpoenas and investigative demands, rejected Mylan's arguments to close the investigation, and indicated its intent to sue Mylan if Mylan failed to make a settlement offer. As alleged in the complaint, Mylan produced documents and other information to DOJ, including providing potential damages calculations and making offers of settlement. + + As alleged in the complaint, public companies facing possible material losses from a lawsuit or government investigation must (1) disclose the loss contingency if a loss is reasonably possible; and (2) record an accrual for the estimated loss if the loss is probable and reasonably estimable. Mylan, however, failed to disclose or accrue for the loss relating to the DOJ investigation before October 2016, when it announced a $465 million settlement with DOJ. As a result, Mylan's public filings were false and misleading. Further, as alleged in the complaint, Mylan's 2014 and 2015 risk factor disclosures that a governmental authority may take a contrary position on Mylan's Medicaid submissions, when CMS had already informed Mylan that EpiPen was misclassified, were misleading. + + The SEC's complaint, filed in federal court in Washington, DC, charges Mylan with violating Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933, Sections 13(a), 13(b)(2)(A) and 13(b)(2)(B) of the Securities Exchange Act of 1934, and Rules 12b-20, 13a-1, 13a-11 and 13a-13 thereunder. Without admitting or denying the SEC's allegations, Mylan has agreed to the entry of a final judgment ordering a $30 million penalty and permanently enjoining it from violating those provisions. + + The SEC's investigation was conducted by Ian Dattner and Daniel Maher, under the supervision of Lisa Deitch, Peter Rosario, and Antonia Chion. + + + + + + + + SEC Complaint + + + + + + + + + + + + Resources + + + + + SEC Complaint + + + + + + + + + + + + + + + + + + + + + + + + Return to top + + + + + SEC homepage + + + + + + + + + + + + + + About the SEC + + + + + + Budget & Performance + + + Careers + + + Commission Votes + + + Contact + + + Contracts + + + + + + + + Transparency + + + + + + Accessibility & Disability + + + Artificial Intelligence + + + FOIA + + + Inspector General + + + No FEAR Act Data + + + Ombuds + + + SEC Excess Personal Property Guidance + + + + + + + + Websites + + + + + + Investor.gov + + + Related Sites + + + USA.gov + + + + + + + + Site Information + + + + + + Plain Writing + + + Privacy & Security + + + Site Map + + + + + + + + + + + + + + + + + + Stay connected. Sign up for email updates. + + + + + + Your email address + + Sign Up + + + + + + + + + + + + X + + + + + + + + Facebook + + + + + + + + Instagram + + + + + + + + RSS + + + + + + + + YouTube + + + + + + + + Email Updates + + + + + + + + + + + + + + + + + + + diff --git a/raw/aaer/2019/AAER-4098.txt b/raw/aaer/2019/AAER-4098.txt new file mode 100644 index 0000000000000000000000000000000000000000..3bf928cd590669985a3ba7fb565f5b396d3b6d8d --- /dev/null +++ b/raw/aaer/2019/AAER-4098.txt @@ -0,0 +1,1089 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87159 / September 30, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4098 / September 30, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19566 + + + +In the Matter of + +MARLA P. MANOWITZ, CPA, +THOMAS R. VREELAND, CPA, +and +KENNETH J. GRALAK, CPA, + +Respondents. + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS +PURSUANT TO SECTIONS 4C AND +21C OF THE SECURITIES +EXCHANGE ACT OF 1934 AND +RULE 102(e) OF THE +COMMISSION’S RULES OF +PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL +SANCTIONS AND A CEASE-AND- +DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Marla P. +Manowitz, CPA (“Manowitz”), Thomas R. Vreeland, CPA (“Vreeland”), and Kenneth J. Gralak, +CPA (“Gralak”), (collectively, “Respondents”) pursuant to Sections 4C1 and 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) and Rules 102(e)(1)(ii) and 102(e)(1)(iii) of the +Commission’s Rules of Practice.2 + +1 Section 4C provides, in relevant part, that: + + The Commission may censure any person, or deny, temporarily or permanently, +to any person the privilege of appearing or practicing before the Commission in +any way, if that person is found . . . (1) not to possess the requisite qualifications +to represent others; (2) to be lacking in character or integrity, or to have engaged +in unethical or improper professional conduct; or (3) to have willfully violated, or +willfully aided and abetted the violation of, any provision of the securities laws or +the rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: +2 + +II. + +In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over them and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondents consent +to the entry of this Order Instituting Public Administrative Cease-and-Desist Proceedings Pursuant +to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule 102(e) of the +Commission’s Rules of Practice, Making Findings, and Imposing Remedial Sanctions and a Cease- +and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds3 that: +SUMMARY +1. These proceedings arise out of deficient audit and review engagements performed +by Respondents Manowitz, Vreeland, and Gralak, while acting in their capacity as principals of the +public accounting firm Schulman Lobel Zand Katzen Williams & Blackman, LLP a/k/a Schulman +Lobel LLP (“SL”), for Quadrant 4 System Corp. (“QFOR”), a former issuer, as follows: +a. the audit of QFOR’s financial statements for the year ended December 31, 2013 +(the “2013 Audit”), which were included in a Form 10-K filed with the +Commission on August 21, 2015 (the “2014 Form 10-K”); +b. the audit of QFOR’s financial statements for the year ended December 31, 2014 +(the “2014 Audit”), which were also included in the 2014 Form 10-K; + + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found . . . to have +engaged in unethical or improper professional conduct. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + + The Commission may . . . deny, temporarily or permanently, the privilege of +appearing or practicing before it . . . to any person who is found…to have +willfully violated, or willfully aided and abetted the violation of any provision of +the Federal securities laws or the rules and regulations thereunder. + +3 The findings herein are made pursuant to Respondents’ Offers of Settlement and are not +binding on any other person or entity in this or any other proceeding. +3 +c. the review of QFOR’s interim financial information for the quarter ended June 30, +2016 (the “2Q2016 Review”), which was included in a Form 10-Q filed on August +15, 2016 (the “2Q2016 Form 10-Q”); and +d. the audit of QFOR’s amended financial statements for the year ended December 31, +2015 (the “2015 Form 10-K/A Audit”), which were included in a Form 10-K/A +filed on September 22, 2016 (the “2015 Form 10-K/A”). +2. Respondents failed to comply with the standards of the Public Company +Accounting Oversight Board (“PCAOB”) when they did not: (1) identify and properly audit +related party transactions; (2) obtain sufficient appropriate audit evidence; (3) conduct appropriate +procedures to obtain reasonable assurance that the financial statements were free of material +misstatements caused by fraud; (4) conduct appropriate procedures upon the subsequent discovery +of facts existing at the date of a previous audit report; (5) conduct appropriate procedures in +connection with a review of interim financial information; (6) properly plan the audit and assess +and respond to risks of material misstatement; (7) conduct proper engagement quality reviews; and +(8) exercise due professional care and professional skepticism. Additionally, Respondents aided +and abetted and caused SL’s violations of Section 10A(a)(2) of the Exchange Act and Rule 2- +02(b)(1) of Regulation S-X. +RESPONDENTS +3. Marla P. Manowitz, CPA, age 67, is a resident of Westbury, New York, and a +CPA licensed in the State of New York. She is employed by SL as a Principal. She served as the +engagement principal on the audit of QFOR’s amended financial statements contained in the 2015 +Form 10-K/A. She served as a co-engagement principal on the audits of QFOR’s 2013, 2014, and +2015 financial statements and reviews of QFOR’s interim financial information for each quarter of +2015 and the first two quarters of 2016. +4. Thomas R. Vreeland, CPA, age 57, is a resident of Lambertville, New Jersey, and +a CPA licensed in the State of New York. During the relevant time frame, he was employed by SL +as a Principal. He is currently employed by a consulting firm as a field examiner and loan +covenant compliance consultant. Vreeland served as a co-engagement principal on the audits of +QFOR’s 2013, 2014, and 2015 financial statements and reviews of QFOR’s interim financial +information for each quarter of 2015 and the first two quarters of 2016. +5. Kenneth J. Gralak, CPA, age 69, is a resident of Stormville, New York, and a +CPA licensed in the State of New York. He is employed by SL as a Principal and Director of +Quality Control. Gralak served as the engagement quality reviewer (“EQR”) on the review of +QFOR’s interim financial information for the second quarter of 2016 and the audit of QFOR’s +amended financial statements contained in the 2015 Form 10-K/A. +OTHER RELEVANT ENTITIES +6. Schulman Lobel Zand Katzen Williams & Blackman, LLP a/k/a Schulman +Lobel LLP (“SL”) is a PCAOB-registered audit firm based in Princeton, New Jersey. SL +served as QFOR’s auditor from April 2015 until it resigned in October 2016. SL completed +audits of QFOR’s financial statements for the years ended 2013, 2014, and 2015 and reviews of +4 +QFOR’s interim financial information for each quarter of 2015 and the first two quarters of 2016. +SL also completed an audit of QFOR’s amended financial statements contained in the 2015 Form +10-K/A.4 +7. Quadrant 4 System Corp. (CIK No. 878802) was an Illinois corporation +headquartered in Schaumburg, Illinois, that provided software products and IT consulting and +software development services. QFOR did not have any class of securities registered with the +Commission, but was a reporting company pursuant to Section 15(d) of the Exchange Act. +QFOR’s common stock was quoted on OTC Link (formerly “Pink Sheets”) operated by OTC +Markets Group, Inc. under the symbol “QFOR.” On June 29, 2017, QFOR filed for bankruptcy, +and its remaining assets are now under the control of a liquidating trustee. All equity interests in +QFOR, including its common stock, were extinguished on September 13, 2018. +FACTS +Background of QFOR’s Fraud +8. Between at least June 2012 and November 2016, Nandu Thondavadi +(“Thondavadi”) and Dhru Desai (“Desai”) perpetrated a fraudulent scheme through QFOR, a +public company. Thondavadi, as CEO, and Desai, as CFO, used several fraudulent means to +overstate QFOR’s revenue, overstate its assets, understate its liabilities, and conceal their +misappropriation of at least $4.1 million. Among other things, they caused QFOR to enter into +undisclosed related party transactions, misstated the terms of various acquisitions, and concealed +liabilities through a variety of means. Between March 2013 and November 2016, Thondavadi and +Desai caused QFOR to file false and misleading Forms 10-Q, 10-K, and 8-K, which included +numerous material misstatements and omissions regarding QFOR’s revenue, acquisitions, assets, +liabilities, and related party transactions and Thondavadi’s and Desai’s misappropriation and stock +ownership. +SL’s Engagements for QFOR +9. On April 2, 2015, QFOR’s previous auditor resigned after discovering that QFOR +had issued fraudulent invoices and that unknown individuals affiliated with QFOR had returned +false audit confirmations to them. SL was thereafter engaged to perform the 2014 Audit. In June +2015, after being informed that QFOR’s previous auditor would not reissue its 2013 audit report +due to an inability to rely on management’s representations, SL was engaged to conduct the 2013 +Audit. +10. SL’s engagement acceptance and planning workpapers for the 2013 and 2014 +Audits noted that QFOR had internal control deficiencies and characterized the audits as “high- +risk.” Manowitz and Vreeland served as co-engagement principals, sharing responsibility for the + +4 On September 30, 2019, the Commission instituted an Order Instituting Public Administrative +and Cease-and-Desist Proceedings Pursuant to Sections 4C and 21C of the Securities Exchange +Act of 1934 and Rule 102(e) of the Commission’s Rules of Practice and Notice of Hearing +against SL concerning its conduct in audit and review engagements for QFOR (Exchange Act +Rel. No. 34-87157). +5 +engagements and the issuance of the firm’s report. They each focused on different audit areas but +performed some review of each other’s work. SL completed the 2013 and 2014 Audits in August +2015. Manowitz and Vreeland consented to the issuance of SL’s audit report that contained an +unqualified opinion, which was dated August 21, 2015, and incorporated in QFOR’s 2014 Form +10-K filed the same day. +11. SL performed the 2Q2016 Review with Manowitz and Vreeland again serving as +co-engagement principals, and Gralak serving as the EQR. Manowitz and Vreeland consented to, +and Gralak provided concurring approval of issuance of, the release of QFOR’s 2Q2016 Form 10- +Q, which was filed on August 15, 2016. +12. SL audited QFOR’s financial statements for the year ended December 31, 2015 (the +“2015 Audit”). In late August or early September 2016, QFOR told SL that QFOR intended to file +an amended Form 10-K for the year ended December 31, 2015, that would disclose, among other +things, new information about certain related party transactions. On September 6, 2016, SL was +engaged to audit the amended financial statements in the 2015 Form 10-K/A, which included +footnote disclosures regarding certain related party transactions. Manowitz served as the +engagement principal for the 2015 Form 10-K/A Audit, and Gralak served as the EQR. Manowitz +and Gralak consented to the issuance of SL’s audit report that contained an unqualified opinion, +which was dual-dated as of September 22, 2016, as to Notes 11 and 14 (which included the new +disclosures regarding related party transactions) and March 28, 2016, as to the remainder of the +financial statements, and was incorporated in QFOR’s 2015 Form 10-K/A filed on September 22, +2016. +13. SL resigned as QFOR’s auditor on October 21, 2016, citing concerns about the +firm’s ability to rely on management’s representations. Thondavadi and Desai were arrested on +federal charges including wire fraud and certifying false financial reports on November 30, 2016, +and resigned from QFOR shortly thereafter. After the arrests, QFOR filed a Form 8-K in +December 2016 announcing that the Board of Directors had concluded that QFOR’s financial +statements for the previous three years did not fairly present the financial condition of the +company, required restatement, and should no longer be relied upon. No restatement occurred, and +QFOR has since filed for bankruptcy and been liquidated. On June 29, 2017, the Commission filed +a civil injunctive action against QFOR, Thondavadi, and Desai alleging multiple violations of the +securities laws. +Manowitz, Vreeland, and Gralak Failed to Perform Procedures to Identify and Comply with +Relevant Audit Standards in Connection with Related Party Transactions +14. Section 10A(a)(2) of the Exchange Act requires that the audit of the financial +statements of an issuer by a registered public accounting firm shall include procedures designed to +identify related party transactions that are material to the financial statements or otherwise require +disclosure therein. +6 +15. PCAOB Standard AU Section 334, Related Parties (“AU § 334”),5 which applies to +the 2013 and 2014 Audits, provides guidance on procedures to consider in identifying related party +relationships and transactions and to satisfy the auditor concerning the required disclosure of +related party transactions. AU § 334.07 provides that the auditor should place “emphasis on +testing material transactions with parties he knows are related to the reporting entity,” and also +provides for specific audit procedures that may be included to determine the existence of related +party relationships that are not clearly evident. +16. AU § 334.09 requires an auditor to test related party transactions by “obtaining and +evaluating sufficient appropriate evidential matter” which “should extend beyond inquiry of +management.” The standard also makes clear that, when necessary to fully understand a particular +transaction, the auditor should consider “inspect[ing] evidence in possession of the other party or +parties to the transaction” and “confirm[ing] or discuss[ing] significant information with +intermediaries, such as banks, guarantors, agents, or attorneys to obtain a better understanding.” +AU § 334.10. Additionally, the auditor should consider procedures to “obtain information about +the financial capability of the other party or parties to the transaction” when there are “material +uncollected balances, guarantees, and other obligations.” Id. +17. Finally, AU § 334.11 requires that, for each material related party transaction, the +auditor should consider whether he or she has obtained sufficient appropriate evidential matter to +understand the relationship of the parties and the effects of the transaction on the financial +statements. The auditor should evaluate all of the available information and satisfy himself or +herself on the basis of his or her professional judgment that the transaction is adequately disclosed +in the financial statements. +18. PCAOB Auditing Standard No. 18, Related Parties (“AS No. 18”), which applies +to the 2015 Form 10-K/A Audit, sets forth procedures the auditor should perform to “obtain +sufficient appropriate audit evidence to determine whether related parties and relationships and +transactions with related parties have been properly identified, accounted for, and disclosed in the +financial statements.” AS No. 18.2. Among other things, the standard requires the auditor to +“identify[] and assess[] the risks of material misstatement associated with related parties,” AS No. +18.10; perform various procedures for each related party transaction required to be disclosed or +determined to be a significant risk, including evaluating the terms of the transaction and the +circumstances under which it was authorized, AS No. 18.12; “evaluate whether the company has +properly identified” its related parties and transactions with related parties, AS No. 18.14; and +“evaluate whether related party transactions have been properly accounted for and disclosed in the +financial statements,” AS No. 18.17. +19. AS No. 18 provides that, when evaluating whether the company has properly +identified related parties and related party transactions, the auditor’s responsibility requires “more +than assessing the process used by the company,” and “requires the auditor to perform procedures +to test the accuracy and completeness” of the company’s identification of related parties and +related party transactions. AS No. 18.14. The standard provides that, if the auditor identifies +information that indicates that previously undisclosed related parties might exist, “the auditor + +5 References to PCAOB standards refer to the standards in effect at the time of the relevant +conduct. +7 +should perform the procedures necessary to determine whether previously undisclosed +relationships or transactions with related parties, in fact, exist,” and these procedures “should +extend beyond inquiry of management.” AS No. 18.15. Furthermore, the standard outlines a +number of procedures the auditor should perform if he or she determines that a previously +undisclosed related party or related party transaction does exist, including, among other things, +evaluating why it was previously undisclosed and how this bears on the auditor’s ability to rely on +management’s representations relating to other aspects of the financial statements and evaluating +the implications for the audit if the nondisclosure indicates that fraud or an illegal act may have +occurred. AS No. 18.16. +20. Finally, AS No. 18 provides that, if the financial statements state that related party +transactions were conducted on an arm’s-length basis, the auditor should determine “whether +evidence supports or contradicts management’s assertion,” and express a qualified or adverse +opinion if the auditor “is unable to obtain sufficient appropriate audit evidence to substantiate +management’s assertion.” AS No. 18.18. +21. SL did not perform sufficient procedures designed to identify related party +transactions in connection with the 2013 and 2015 Form 10-K/A Audits. QFOR was involved in +transactions with certain significant shareholders, purported vendors, and customers that should +have been disclosed as related party transactions. These related party entities included, among +others: Global Technology Ventures Corp. (“Global Technology”); Congruent Ventures LLC and +Congruent Ventures Ltd. (collectively, “Congruent”); Stonegate Holdings, Inc. (“Stonegate”); Core +Information Technology Solutions, Inc. (“CITS”); and Surrex Solutions Corp. (“Surrex”). In its +2015 Form 10-K/A, QFOR made disclosures regarding related party transactions with CITS, +Surrex, and a vendor owned by Stonegate. However, the 2015 Form 10-K/A disclosures were +incomplete and materially misleading, and QFOR did not disclose other material related party +transactions with Stonegate, Global Technology, or Congruent in its 2014 Form 10-K or 2015 +Form 10-K/A. +22. Prior to the 2013 Audit, Manowitz and Vreeland identified Stonegate and an +affiliated entity as related parties of QFOR. Manowitz and Vreeland also prepared and/or +reviewed workpapers indicating that Stonegate and an affiliated entity collectively owned 14.8% of +QFOR’s common stock as of year-end 2013 and 13% of QFOR’s common stock as of year-end +2014. Manowitz and Vreeland were aware that QFOR had entered into two material transactions +with Stonegate during 2013: the conversion of a $1.1 million debt to equity and the purported +assignment of a legal judgment to Stonegate in exchange for approximately 1.8 million shares of +QFOR common stock. These transactions were not disclosed as related party transactions in the +2014 Form 10-K. Manowitz and Vreeland did not identify these transactions as related party +transactions and did not conduct procedures to evaluate whether they were adequately disclosed. +23. Workpapers prepared by Manowitz and reviewed by Vreeland in connection with +the 2013 Audit also contained documents indicating that the judgment that QFOR purportedly +assigned to Stonegate was jointly owed by QFOR, Thondavadi, and Desai. Manowitz and +Vreeland did not identify this as a related party transaction, did not identify this as a significant +unusual transaction, did not obtain sufficient appropriate audit evidence to substantiate the +transaction and understand its business rationale, did not consider whether Stonegate had the +8 +capability to satisfy the judgment, and did not evaluate whether the transaction was adequately +disclosed. +24. The 2015 Form 10-K/A disclosed that QFOR’s transactions with CITS, Surrex, and +a significant vendor were related party transactions. Among other things, the 2015 Form 10-K/A +stated that the vendor was owned by Stonegate, that Thondavadi and Desai had guaranteed certain +obligations of CITS, and that Thondavadi held signatory authority on CITS and Surrex bank +accounts. The 2015 Form 10-K/A also stated that Thondavadi and Desai had provided +management and consulting services to an affiliate of CITS and received compensation for those +services, which was paid to Global Technology and Congruent. Global Technology and +Congruent were described as inactive entities owned by Thondavadi and Desai, respectively. The +related party relationships disclosed in the 2015 Form 10-K/A were all described as being +structured on an arm’s-length basis. +25. Manowitz failed to obtain sufficient appropriate audit evidence to support the +disclosures contained in the 2015 Form 10-K/A regarding the relationship between QFOR and +Surrex and CITS. Manowitz did not obtain any documentary evidence regarding Thondavadi’s +signatory authority over Surrex and CITS bank accounts or the nature and terms of the consulting +services Thondavadi and Desai provided to the affiliate of CITS. Manowitz requested copies of +Thondavadi’s and Desai’s consulting agreements and tax records regarding their compensation for +the purported consulting services, but Thondavadi told her that QFOR did not have any such +records. Manowitz relied solely upon management representations regarding the nature of the +services Thondavadi and Desai performed and the amounts of the payments they received in lieu of +obtaining any documentary evidence. +26. Manowitz also did not evaluate QFOR’s assertions that its relationships with the +vendor, CITS, and Surrex were structured on an arm’s-length basis. SL’s workpapers for the 2015 +Form 10-K/A Audit do not contain any documentation regarding the terms of the transactions. +Despite failing to obtain sufficient appropriate audit evidence to substantiate these assertions, SL, +by and through Manowitz, issued an unqualified opinion on the 2015 Form 10-K/A. +27. Despite newly learning of previously undisclosed related party transactions, +Manowitz did not evaluate whether QFOR had properly identified and disclosed its related parties +and relationships and transactions with related parties, as required by AS Nos. 18.14-16. In +addition to the transactions that were disclosed in the 2015 Form 10-K/A, Manowitz learned of +other undisclosed related party transactions during the course of the 2015 Form 10-K/A Audit, +including a loan from Global Technology to QFOR that was issued and converted to QFOR +common stock during 2013. SL’s 2015 Form 10-K/A workpapers included a copy of the 2013 +promissory note issued to Global Technology, which included a note added by Manowitz reading: +“Entity owned by Nandu – related party not disclosed prior.” Manowitz prepared this workpaper +but did not perform any procedures to evaluate why this past related party transaction was not +previously disclosed or whether it should be disclosed either in the 2015 Form 10-K/A or through +an amendment of prior filings. Additionally, after being notified once more that Stonegate was a +related party of QFOR, Manowitz did not evaluate whether past transactions with Stonegate should +be disclosed as related party transactions. +9 +28. During the 2015 Form 10-K/A Audit, Manowitz also did not undertake any +procedures, beyond inquiry of management or its agents, to identify whether other previously +undisclosed relationships or transactions with related parties existed, as required by AS No. 18.15. +SL’s workpapers for prior periods contained a number of other documents evidencing past related +party transactions between QFOR and Global Technology and Congruent, including documents +regarding the conversion of the 2013 Global Technology debt to equity, a 2015 promissory note +issued to Global Technology, and general ledgers listing transactions with Global Technology and +Congruent in 2014 and 2015. Manowitz did not perform any procedures to determine whether +QFOR had previously entered into transactions with Global Technology or Congruent. +29. In connection with his engagement quality review of the 2015 Form 10-K/A Audit, +which is discussed further in paragraphs 59-63, Gralak reviewed all of SL’s workpapers relevant to +the auditing of related party transactions. He did not identify the significant engagement +deficiencies described above at paragraphs 24 through 28, including SL’s failure to obtain +sufficient appropriate audit evidence to support the disclosures regarding related party transactions. +Gralak provided concurring approval of the issuance of SL’s audit report that contained an +unqualified opinion even though he should have been aware that SL had not performed procedures +sufficient to identify and evaluate the disclosure of related party transactions material to the +financial statements or required to be disclosed therein. +Manowitz and Vreeland Failed to Obtain Sufficient Appropriate Audit Evidence +30. PCAOB Auditing Standard No. 15, Audit Evidence (“AS No. 15”), requires the +auditor to “plan and perform audit procedures to obtain sufficient appropriate audit evidence to +provide a reasonable basis for his or her opinion.” AS No. 15.04. To be appropriate, audit +evidence must be both relevant and reliable in providing support for the conclusions on which the +auditor’s opinion is based. See AS No. 15.6. The reliability of evidence depends on its nature and +source, and the circumstances under which it is obtained. Evidence obtained directly by the +auditor and from a knowledgeable independent third party is more reliable than evidence obtained +directly from the company. See AS No. 15.8. +31. PCAOB Standard AU Section 330, The Confirmation Process (“AU § 330”), +provides guidance about the audit confirmation process, including the relationship of confirmation +procedures to the assessment of audit risk and the performance of alternative procedures when +responses to confirmation requests are not received. AU § 330.28 requires an auditor to maintain +control over confirmation requests and responses, which means establishing direct communication +between the intended recipient and the auditor to minimize the possibility that the results will be +biased because of interception and alteration. When an auditor does not receive a response to +certain confirmations, AU § 330.31 provides that the auditor should apply alternative procedures to +obtain the evidence necessary to reduce audit risk to an acceptably low level. +32. Further, PCAOB Standard AU Section 333, Management Representations (“AU +§ 333”), states that management representations “are not a substitute for the application of those +auditing procedures necessary to afford a reasonable basis for an opinion regarding the financial +statements under audit,” AU § 333.02, and requires conflicts between management +representations and other audit evidence to be investigated, AU § 333.04. +10 +33. PCAOB Standard AU Section 337, Inquiry of a Client’s Lawyer Concerning +Litigation, Claims, and Assessments (“AU § 337”), provides guidance on procedures an auditor +should consider for identifying and evaluating the accounting and reporting for litigation, claims, +and assessments. For all material litigation, claims, and assessments, AU § 337.06 requires an +auditor to “request the client’s management to send a letter of inquiry to those lawyers with +whom management consulted concerning” such matters. +34. In connection with the 2013 and 2014 Audits, Manowitz and Vreeland did not +obtain sufficient appropriate audit evidence to support SL’s unqualified opinion included in the +2014 Form 10-K, particularly regarding QFOR’s reported liabilities. Much of the deficient +testing fell within audit areas that Manowitz and Vreeland determined were high risk areas and +identified in their planning workpapers as requiring “extended procedures.” +35. Manowitz and Vreeland did not obtain sufficient appropriate audit evidence +regarding a $1.1 million debt to a hedge fund (“Lender A”) that was purportedly converted to +equity in 2013. Manowitz obtained extensive documentation of the convertible debenture giving +rise to the liability. However, her testing of the purported equity conversion, which occurred only +weeks later and did not satisfy the terms of the convertible debenture, was inadequate. For +example, Manowitz did not obtain any documentation signed by Lender A consenting to or +otherwise substantiating the conversion or confirming the liability had been extinguished as of +year-end 2013. In reality, Lender A had not consented to convert its debt to equity in 2013, and a +liability of least $885,045 was still owed to Lender A as of December 31, 2013. Vreeland +reviewed and signed off on the relevant workpapers. +36. Manowitz and Vreeland also did not obtain sufficient appropriate audit evidence +regarding a debt to an entity (“Lender B”). In documents provided by QFOR management to the +engagement team, SL learned that, during 2013, QFOR had made approximately $700,000 in +payments on the debt and converted $2 million to equity, leaving a liability of approximately $3.1 +million as of year-end 2013. In reality, QFOR did not make any payments to Lender B during +2013, and the purported loan payments were actually misappropriated by Thondavadi and Desai. +Manowitz did not obtain any documentation signed by Lender B authorizing the purported debt +conversion or substantiating the balance due at year-end 2013. Manowitz also did not conduct any +testing of the purported debt payments to Lender B in 2013. For example, had she traced these +payments to underlying transaction support from QFOR’s bank, she would have discovered that +Lender B was not the true recipient of the funds. Vreeland reviewed and signed off on the relevant +workpapers. +37. Manowitz and Vreeland did not adhere to the procedures set forth in AU § 330 in +connection with the testing of the Lender A and Lender B liabilities, as well as a material liability +owed to an individual. After receiving no response to initial debt confirmations sent to Lender A, +Lender B, and the individual, Manowitz did not either follow up with a second request or apply +alternate procedures to reduce the audit risk to an acceptably low level, as required under AU §§ +330.30-31. Vreeland reviewed and signed off on the relevant workpapers. +38. The 2014 Form 10-K contained material misrepresentations and omissions +regarding the resolution of a breach of contract suit filed by a New York-based lender (“Plaintiff +A”). The 2014 Form 10-K reported a $692,000 expense for “litigation settlement” in 2013, and the +11 +notes to the financial statements included a disclosure that the lawsuit was settled for 1,870,270 +shares of QFOR stock valued at $692,000. QFOR told SL that, rather than issuing the stock to +Plaintiff A, QFOR had assigned the obligation it owed Plaintiff A to Stonegate in exchange for +1,870,270 shares of QFOR common stock. Though QFOR did issue the stock to Stonegate, +Stonegate never made any payments toward the settlement, and Plaintiff A did not consent to the +assignment of the liability owed to it. Instead, QFOR, Thondavadi, Desai, and a third individual +entered into a settlement agreement with Plaintiff A in December 2013. Between December 2013 +and March 2014, QFOR paid approximately $1.8 million pursuant to the settlement agreement, +largely through a series of wire transfers to Plaintiff A’s lawyers (“Law Firm A”). QFOR falsely +recorded many of these wire transfers as payments related to acquisitions completed earlier in +2013. As of year-end 2013, the outstanding liability on the settlement agreement was $1.25 +million, which was not reported on QFOR’s balance sheet in the 2014 Form 10-K. +39. Manowitz and Vreeland did not obtain sufficient appropriate audit evidence +regarding the liability owed to Plaintiff A. Manowitz did not obtain a copy of the legal judgment, a +settlement agreement or other documentation signed by Plaintiff A, or any other evidence of the +size of the liability owed to Plaintiff A. She also did not obtain any evidence that Plaintiff A +consented to the purported assignment to Stonegate, that Stonegate had performed under the +purported assignment, or that the liability owed to Plaintiff A had been extinguished. Manowitz +and Vreeland, who shared responsibility for preparing and logging letters of inquiry to law firms +and responses thereto, also did not identify the law firm that represented QFOR in the Plaintiff A +litigation and did not request that QFOR management send a letter of inquiry to that law firm. +40. Manowitz and Vreeland did not obtain sufficient appropriate audit evidence in other +areas. While performing journal entry testing for the 2014 Audit, Manowitz examined a journal +entry for a $445,000 payment to Law Firm A. She did not obtain any evidence, aside from a +representation by management, regarding the purpose of this transaction. Vreeland reviewed and +signed off on the relevant workpapers. +41. Additionally, while testing earnouts associated with acquisitions that took place in +2013, Manowitz examined various wire transfers that were recorded as earnouts but actually sent +to Law Firm A in payment of the Plaintiff A settlement. Based on the supporting schedules +included in the workpapers: (1) two of the entities that received earnout payments had not met the +revenue targets entitling them to earnout payments; and (2) the earnout payments were made +piecemeal throughout the quarters, rather than in lump sum at the end of each quarter. Both of +these factors should have prompted Manowitz to further scrutinize the relevant payments, but she +did not obtain sufficient appropriate audit evidence to support the recorded earnout payments. +Many of the recorded earnout payments were made by wire transfer, and Manowitz tested them by +tracing them to the bank statements. However, the bank statements did not provide any +information regarding the counterparty to wire transfers. Rather than obtaining wire details, +Manowitz relied solely on bank statement entries reading “Outgoing Wire Transfer” as evidence +that the earnout payments were made. Vreeland reviewed and signed off on the relevant +workpapers. +42. Vreeland did not obtain sufficient appropriate audit evidence regarding payroll tax +liabilities assumed in connection with an acquisition that took place in 2013. Vreeland did not +obtain sufficient evidence to support the original accrual recorded for assumed payroll tax +12 +liabilities, which was not consistent with the amount of assumed liabilities stated in the purported +asset purchase agreement. He obtained schedules from QFOR listing purported payments on the +tax liabilities, but he did not trace them to any transaction support. Vreeland noted a material +remaining balance for the accrual as of year-end 2014. He relied solely on management’s +representation that this balance represented accounts payable incorrectly included in the tax +payable, without performing any procedures to test that assertion. Vreeland also did not obtain +documentation from the taxing authorities confirming that the liabilities had been extinguished. In +reality, as of year-end 2014, more than $500,000 in payroll tax liability remained outstanding and +was not reported as a liability in the 2014 Form 10-K. +43. As discussed in paragraphs 24 to 28, Manowitz failed to obtain sufficient +appropriate audit evidence regarding the related party transaction disclosures contained in the 2015 +Form 10-K/A. Manowitz also inappropriately relied upon management’s representations, despite +her awareness that those representations conflicted with prior representations made by +management regarding their receipt of compensation. +Manowitz and Vreeland Failed to Conduct Appropriate Procedures to Obtain Reasonable +Assurance that the Financial Statements were Free of Material Misstatements Caused by +Fraud +44. PCAOB Standard AU Section 316, Consideration of Fraud in a Financial +Statement Audit (AU § 316), requires an auditor to perform procedures to address the risk of +fraud in a financial statement audit, including those fraud risks specifically arising from +management override of internal controls. The standard requires an auditor to examine journal +entries “for evidence of possible material misstatement due to fraud.” AU § 316.58. The auditor +should use professional judgment in determining the nature and extent of journal entry testing, +but “the auditor’s procedures should include selecting from the general ledger journal entries to +be tested and examining support for those items.” AU § 316.61. +45. Additionally, AU § 316, as in effect during the 2013 and 2014 Audits, requires an +auditor to evaluate significant transactions that are outside the normal course of business for the +entity, or that otherwise appear to be unusual. The auditor should gain an understanding of the +business purpose of each such transaction and consider whether the rationale for the transaction +suggests that it may have been entered into for fraudulent purposes. AU § 316.66. When +evaluating the business rationale for the transaction, an auditor should consider whether the +transaction involves previously unidentified related parties or parties that do not have the ability to +support the transaction without assistance from the entity under audit. AU § 316.67. +46. During the 2013 and 2014 Audits, Manowitz and Vreeland did not perform +appropriate procedures to obtain reasonable assurance that the financial statements were free of +material misstatements caused by fraud. They did not appropriately perform journal entry testing, +and did not evaluate significant unusual transactions, including a transaction with Stonegate, an +undisclosed related party. +47. Pursuant to PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of +Material Misstatement (“AS No. 12”), the auditor is required to identify the risk of management +override of controls as a fraud risk. AS No. 12.69. Manowitz and Vreeland identified +13 +management override of controls as a significant risk while planning the 2013 and 2014 Audits, yet +they failed to properly perform journal entry testing, one of the required procedures to address this +risk. As discussed in paragraph 40, Manowitz examined a journal entry for a $445,000 payment to +Law Firm A while performing journal entry testing for the 2014 Audit. The only procedure she +performed to test this journal entry was to ask Thondavadi about the purpose of the payment. +Thondavadi told her that it related to an acquisition that took place in 2013, and Manowitz relied +on this representation without performing any procedures to verify it. She did not obtain any +additional evidence of the purpose of the payment, and she did not tie it to other workpapers in +SL’s possession testing acquisition-related payments. Vreeland reviewed and signed off on +Manowitz’s deficient testing. +48. Manowitz and Vreeland also did not identify the assignment of the Plaintiff A +judgment to Stonegate, an entity they had identified in planning workpapers as a related party, as +a significant unusual transaction, and evaluate whether it may have been entered into to engage +in fraudulent financial reporting. The transaction was outside the normal course of business for +QFOR, material, and completed near year-end 2013. Manowitz and Vreeland did not obtain an +understanding of the substance of the transaction, particularly whether the purported assignment +effectively satisfied the liability owed to Plaintiff A. They also did not identify it as a transaction +with a related party. +49. Manowitz and Vreeland also did not identify purported settlements of earnout +obligations that took place in December 2013 as significant unusual transactions and evaluate +whether they may have been entered into to engage in fraudulent financial reporting or conceal +misappropriation. The earnout settlements were outside the normal course of business for +QFOR, material, and completed as of December 31, 2013. They had the effect of materially +increasing QFOR’s 2013 net income while also reducing its liabilities. Manowitz and Vreeland +did not obtain a full understanding of the transactions, including the business rationale for QFOR +making substantial payments to settle contingent obligations to two entities even though the +acquired business units had never met the revenue targets entitling them to earnout payments. +Manowitz Failed to Conduct Appropriate Procedures upon the Subsequent Discovery of +Facts Existing at the Date of a Previous Audit Report +50. PCAOB Standard AU Section 561, Subsequent Discovery of Facts Existing at the +Date of the Auditor’s Report (“AU § 561”), sets forth procedures the auditor should follow when +the auditor becomes aware that facts may have existed at the date of a prior audit report that might +have affected the report if the auditor had been aware of such facts. AU § 561.04 requires that, +when an auditor becomes aware of information that relates to financial statements upon which the +auditor previously issued a report, and which the auditor would have investigated if the auditor had +been aware of it during the audit, the auditor should, “as soon as practicable, undertake to +determine whether the information is reliable and whether the facts existed at the date of his +report.” Upon determining that the information is reliable and existed at the date of the auditor’s +report, the auditor is required to undertake certain procedures, including evaluating whether the +information would have affected the audit report if it had been known but not reflected in the +financial statements, evaluating whether there are persons likely to rely on the financial statements, +and advising the client to make appropriate disclosure of the newly discovered facts and their +impact on the financial statements. AU §§ 561.05-.06. +14 +51. During the 2Q2016 Review, Manowitz did not conduct appropriate procedures after +being provided with additional information relating to the assignment of the Plaintiff A liability +that was previously disclosed in the 2014 Form 10-K. During the planning for the review, QFOR +informed the engagement team that it had cancelled the approximately 1.8 million shares +previously issued to Stonegate because Stonegate had not performed on the assignment. QFOR +provided SL with a memorandum containing extensive new material information that was +inconsistent with the disclosures contained in the 2014 Form 10-K related to the resolution of the +Plaintiff A lawsuit. Among other things, the memorandum stated that Plaintiff A received a +judgment that included reimbursement of legal fees and that QFOR actually ended up paying the +judgment and legal fees rather than satisfying the balances due through the issuance of stock. The +memorandum did not specify the amount of the legal fees or provide any information on when or +how QFOR paid the judgment and legal fees. Manowitz did not perform any procedures to +evaluate the value of the underlying liability to Plaintiff A; to determine whether, when, or how the +liability to Plaintiff A had been extinguished; or to evaluate or assess the impact of the newly +discovered facts on prior period financial statements and disclosures. +52. Manowitz also did not conduct appropriate procedures after learning that a 2013 +loan from Global Technology to QFOR was a related party transaction during the 2015 Form 10- +K/A Audit. Manowitz created a workpaper noting that the loan was a previously undisclosed +related party transaction, but she did not perform any procedures to consider whether this +information would have affected SL’s report on the 2013 financial statements or whether the +information should be disclosed. +Manowitz Failed to Conduct Appropriate Procedures in Connection with a Review of +Interim Financial Information +53. PCAOB Standard AU Section 722, Interim Financial Information (“AU § 722”), +provides that, if “the accountant becomes aware of information that leads him or her to believe that +the interim financial information may not be in conformity with generally accepted accounting +principles in all material respects, the accountant should make additional inquiries or perform other +procedures that the accountant considers appropriate to provide a basis for communicating whether +he or she is aware of any material modifications that should be made to the interim financial +information.” AU § 722.22. Additionally, “if information comes to the accountant’s attention that +leads him or her to question whether the interim financial information departs from generally +accepted accounting principles with respect to litigation, claims, or assessments,” it may be +appropriate to make an inquiry of the company’s legal counsel. AU § 722.20. +54. Manowitz did not conduct appropriate procedures after being provided with +additional information regarding the assignment of the Plaintiff A liability to Stonegate during the +2Q2016 Review. After learning that Stonegate had not satisfied the Plaintiff A liability and being +informed that QFOR had paid it at some unspecified time, Manowitz had sufficient information to +question whether the interim financial information was in conformity with generally accepted +accounting principles (“GAAP”) in all material respects. Manowitz did not make additional +inquiries or perform procedures to determine whether, when, and how the liability to Plaintiff A +had been extinguished, and thus did not have a sufficient basis to communicate whether she was +aware of any material modifications that should be made to the interim financial information. +15 +Manowitz Failed to Properly Plan the Audit and Assess and Respond to Risks of Material +Misstatement +55. PCAOB Auditing Standard No. 9, Audit Planning (“AS No. 9”), requires the +auditor to properly plan the audit. The standard provides that planning is “a continual and iterative +process,” AS No. 9.5, and requires the auditor to modify the audit strategy and plan as necessary if +circumstances change significantly during the course of the audit, including due to the discovery of +a previously unidentified risk of material misstatement, AS No. 9.15. +56. PCAOB Auditing Standard No. 12, Identifying and Assessing Risks of Material +Misstatement (“AS No. 12”), requires the auditor to “perform risk assessment procedures that are +sufficient to provide a reasonable basis for identifying and assessing the risks of material +misstatement, whether due to error or fraud.” AS No. 12.4. The standard provides that risk +assessment should continue throughout the audit, and that the auditor should “revise the risk +assessment and modify planned audit procedures or perform additional procedures in response to +the revised risk assessments” when the auditor obtains evidence “that contradicts the audit +evidence on which the auditor originally based his or her risk assessment.” AS No. 12.74. +57. PCAOB Auditing Standard No. 13, The Auditor’s Responses to the Risks of +Material Misstatement (“AS No. 13”), requires the auditor when responding to the assessed risks +of material misstatement, particularly fraud risks, to apply professional skepticism in gathering and +evaluating audit evidence. Examples include: (a) modifying the planned audit procedures to +obtain more reliable evidence regarding relevant assertions, and (b) obtaining sufficient appropriate +evidence to corroborate management’s explanations or representations concerning important +matters. AS No. 13.7. +58. Manowitz did not properly plan the 2015 Form 10-K/A Audit or perform sufficient +risk assessment procedures. Manowitz should have recognized that the newly disclosed related +party transactions constituted a significant change in circumstances from the 2015 Audit and +revealed previously unidentified risks of material misstatement. Additionally, Manowitz was +aware that the three newly disclosed related parties were QFOR’s most significant vendor and +QFOR’s second and third largest customers. Manowitz was also aware that some of the +information provided by management during the 2015 Form 10-K/A Audit, particularly regarding +their receipt of compensation for consulting services to an affiliate of CITS, was inconsistent with +prior management representations. Despite the inconsistencies in management’s representations +and the significance of the newly disclosed related parties to QFOR’s business, Manowitz did not +engage in any new risk assessment or planning activities in connection with the 2015 Form 10-K/A +Audit. +Gralak Failed to Conduct Proper Engagement Quality Reviews +59. PCAOB Audit Standard 7, Engagement Quality Review (“AS No. 7”), requires an +EQR conducting a review of an engagement to “evaluate the significant judgments made by the +engagement team and the related conclusions reached in forming the overall conclusion on the +engagement and in preparing the engagement report.” AS No. 7.2. For engagement quality +reviews of both audits and reviews of interim financial information, the EQR should “evaluate” +significant judgments as to planning, including consideration of “risks identified in connection +16 +with the firm’s client acceptance and retention process” and the company’s “recent significant +activities.” AS Nos. 7.9-10 (audits), 7.14-15 (reviews). Additionally, the EQR should “evaluate +whether the engagement documentation” reviewed in connection with required procedures +“[s]upports the conclusions reached by the engagement team with respect to the matters reviewed.” +AS Nos. 7.11 (audits), 7.16 (reviews). +60. If the EQR becomes aware of a significant engagement deficiency, including that +the engagement team reached an inappropriate overall conclusion on the subject matter of the +engagement, he or she cannot provide concurring approval of issuance. AS Nos. 7.12 (audits), +7.17 (reviews). For an audit, a significant engagement deficiency includes the failure to obtain +sufficient appropriate evidence in accordance with PCAOB standards. AS No. 7.12. For a review +of interim financial information, a significant engagement deficiency includes a failure to perform +interim review procedures necessary in the circumstances of the engagement. AS No. 7.17. +61. Gralak did not perform an adequate engagement quality review in connection with +the 2Q2016 Review. The cancellation of the shares issued to Stonegate in connection with the +Plaintiff A lawsuit was identified as a recent significant activity, and Gralak reviewed the +workpapers related to that transaction. However, he did not recognize that the workpapers did not +support the conclusions reached by the engagement team regarding that transaction or that the +engagement team had not performed necessary procedures after receiving information that should +have led them to believe that the interim financial information may not have been presented in +conformity with GAAP. +62. Gralak also did not perform an adequate engagement quality review in connection +with the 2015 Form 10-K/A Audit. The engagement team did not perform planning or risk +assessment specific to the 2015 Form 10-K/A Audit, and Gralak did not review any of the planning +or risk assessment documentation associated with the 2015 Audit. Therefore, Gralak did not +evaluate the significant judgments related to engagement planning or the engagement team’s +assessment of, and audit responses to, significant risks, as required by AS No. 7.10. +63. Additionally, as discussed in paragraph 29, Gralak provided concurring approval of +the issuance of the audit report on the 2015 Form 10-K/A Audit despite the fact that, based on the +workpapers he reviewed, he should have been aware that a significant engagement deficiency +existed—namely, the failure to obtain sufficient appropriate audit evidence supporting the accuracy +and completeness of the company’s disclosures regarding related party transactions. Gralak +reviewed nearly all of the workpapers related to the testing of the new disclosures regarding related +party transactions, including the copy of the 2013 promissory note to Global Technology. +However, Gralak did not recognize that the workpapers did not support the audit team’s +conclusions that QFOR’s related party transactions were adequately tested and disclosed. +Manowitz, Vreeland, and Gralak Failed to Exercise Due Professional Care and Professional +Skepticism +64. PCAOB Standard AU Section 230, Due Professional Care in the Performance of +Work (“AU § 230”), requires an auditor to exercise due professional care throughout the audit. +Under this standard, an auditor “should possess ‘the degree of skill commonly possessed’ by other +auditors and should exercise it with ‘reasonable care and diligence.’” AU § 230.05. Due +17 +professional care also requires that the auditor exercise professional skepticism, which is “an +attitude that includes a questioning mind and a critical assessment of audit evidence.” AU +§ 230.07. An auditor is required to “consider the competency and sufficiency of the evidence,” +AU § 230.08, and “should not be satisfied with less than persuasive evidence because of a belief +that management is honest,” AU § 230.09. +65. Manowitz and Vreeland did not exercise due professional care and professional +skepticism in connection with the numerous audit failures described above during the 2013 and +2014 Audits. Similarly, Manowitz and Gralak did not exercise due professional care and +professional skepticism in connection with the numerous engagement failures listed above during +the 2Q2016 Review and 2015 Form 10-K/A Audit. +66. Vreeland also did not exercise due professional care while performing the search +for unrecorded liabilities during the 2013 Audit. Nine out of twenty-six payments that fell within +the testing parameters were erroneously excluded from testing. The excluded payments included +three of the Plaintiff A settlement payments (including a $445,000 payment to Law Firm A), as +well as a settlement payment for another undisclosed lawsuit. +VIOLATIONS +67. Section 10A(a)(2) of the Exchange Act requires each audit to include procedures +designed to identify related party transactions that are material to the financial statements or +otherwise require disclosure therein. No showing of scienter is necessary to establish a violation of +Section 10A of the Exchange Act. SL, by and through Manowitz and Vreeland, conducted the +2013 Audit without including procedures which were adequately designed to identify related party +transactions. Accordingly, through the conduct describe above, Manowitz and Vreeland willfully6 +aided and abetted and caused SL’s violations of Section 10A(a)(2) of the Exchange Act with +respect to the 2013 Audit. Similarly, SL, by and through Manowitz and Gralak, conducted the +2015 Form 10-K/A Audit without including procedures which were adequately designed to +identify related party transactions. Accordingly, through the conduct described above, Manowitz +and Gralak willfully aided and abetted and caused SL’s violations of Section 10A(a)(2) of the +Exchange Act with respect to the 2015 Form 10-K/A Audit. +68. Rule 2-02(b)(1) of Regulation S-X requires an accountant’s report to state “whether +the audit was made in accordance with generally accepted auditing standards” (“GAAS”). +“[R]eferences in Commission rules and staff guidance and in the federal securities laws to GAAS +or to specific standards under GAAS, as they relate to issuers, should be understood to mean the +standards of the PCAOB plus any applicable rules of the Commission.” See SEC Release No. 34- +49708 (May 14, 2004). No showing of scienter is necessary to establish a violation of Rule 2- +02(b)(1) of Regulation S-X. Despite Manowitz’s and Vreeland’s departures from applicable +professional standards during the 2013 and 2014 Audits, SL, by and through Manowitz and +Vreeland, issued an audit report stating that the 2013 and 2014 Audits had been conducted in + +6 “Willfully,” for purposes of imposing relief under Section 4C(a)(3) of the Exchange Act +and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, “‘means no more than that the +person charged with the duty knows what he is doing.’” Wonsover v. SEC, 205 F.3d 408, 414 +(D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. Cir. 1949)). +18 +accordance with PCAOB standards, when they had not been. Accordingly, through the conduct +described above, Manowitz and Vreeland willfully aided and abetted and caused SL’s violation of +Regulation S-X Rule 2-02(b)(1) when they authorized SL to issue its audit report dated August 21, +2015, stating that SL had conducted the 2013 and 2014 Audits in accordance with PCAOB +standards when it had not. Similarly, despite Manowitz’s and Gralak’s departures from applicable +professional standards during the 2015 Form 10-K/A Audit, SL, by and through Manowitz and +Gralak, issued an audit report stating that the 2015 Form 10-K/A Audit had been conducted in +accordance with PCAOB standards, when it had not been. Accordingly, through the conduct +described above, Manowitz and Gralak willfully aided and abetted and caused SL’s violation of +Regulation S-X Rule 2-02(b)(1) when they authorized SL to issue its audit report dual-dated March +28, 2016, and September 22, 2016, stating that SL had conducted the 2015 Form 10-K/A Audit in +accordance with PCAOB standards when it had not. +69. Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice provide, in part, that the Commission may deny, temporarily or permanently, the +privilege of appearing or practicing before the Commission to any person who is found by the +Commission “[t]o have willfully violated, or willfully aided and abetted the violation of, any +provision of the Federal securities laws or the rules and regulations thereunder.” Through the +conduct described above, Manowitz, Vreeland, and Gralak willfully aided and abetted SL’s +violations of the federal securities laws and rules and regulations thereunder within the meaning of +Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. +70. Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s +Rules of Practice provide, in part, that the Commission may deny, temporarily or permanently, the +privilege of appearing or practicing before the Commission to any person who is found by the +Commission to have engaged in improper professional conduct. With respect to persons licensed +to practice as accountants, “improper professional conduct” includes “intentional or knowing +conduct, including reckless conduct that results in a violation of applicable professional standards.” +Rule 102(e)(1)(iv)(A). In addition, “improper professional conduct” includes either of the +following two types of negligent conduct: (1) a single instance of highly unreasonable conduct +that results in a violation of applicable professional standards in circumstances in which an +accountant knows, or should know, that heightened scrutiny is warranted; or (2) repeated instances +of unreasonable conduct, each resulting in a violation of applicable professional standards, that +indicate a lack of competence to practice before the Commission. Rule 102(e)(1)(iv)(B). Through +the conduct described above, Manowitz, Vreeland, and Gralak engaged in “improper professional +conduct” within the meaning of Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the +Commission’s Rules of Practice. +FINDINGS +71. Based on the foregoing, the Commission finds that Manowitz, Vreeland, and +Gralak caused, and willfully aided and abetted within the meaning of Section 4C(a)(3) of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice, SL’s violations of +Section 10A(a)(2) of the Exchange Act and Rule 2-02(b)(1) of Regulation S-X. +19 +72. Based on the foregoing, the Commission finds that Manowitz, Vreeland, and +Gralak engaged in improper professional conduct pursuant to Section 4C(a)(2) of the Exchange +Act and Rule 102(e)(1)(ii) of the Commission’s Rules of Practice. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Respondents Manowitz, Vreeland, and Gralak shall cease and desist from +committing or causing any violations and any future violations of Section 10A(a)(2) of the +Exchange Act and Rule 2-02(b)(1) of Regulation S-X. + +B. Respondent Manowitz is denied the privilege of appearing or practicing before the +Commission as an accountant. + + C. After three years from the date of this order, Manowitz may request that the +Commission consider her reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Manowitz’s work in her +practice before the Commission as an accountant will be reviewed either by +the independent audit committee of the public company for which she works +or in some other acceptable manner, as long as she practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Manowitz, or the public accounting firm with which she is +associated, is registered with the Public Company Accounting +20 +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + + (b) Manowitz, or the registered public accounting firm with which she +is associated, has been inspected by the Board and that inspection +did not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that Manowitz will not receive appropriate supervision; + (c) Manowitz has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Manowitz acknowledges her responsibility, as long as she appears +or practices before the Commission as an independent accountant, +to comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, engagement quality reviews and quality +control standards. + +D. The Commission will consider an application by Manowitz to resume appearing +or practicing before the Commission provided that her state CPA license is current and she has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Manowitz’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause will be +considered on a facts and circumstances basis with due regard for protecting the integrity of the +Commission’s processes. + + E. Respondent Vreeland is denied the privilege of appearing or practicing before the +Commission as an accountant. + + F. After two years from the date of this order, Vreeland may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Vreeland’s work in his +practice before the Commission as an accountant will be reviewed either by +the independent audit committee of the public company for which he works +21 +or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Vreeland, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting +Oversight Board (“Board”) in accordance with the Sarbanes-Oxley +Act of 2002, and such registration continues to be effective; + + (b) Vreeland, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did +not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that Vreeland will not receive appropriate supervision; + (c) Vreeland has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions +imposed by the Board (other than reinstatement by the +Commission); and + + (d) Vreeland acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, engagement quality reviews and quality +control standards. + +G. The Commission will consider an application by Vreeland to resume appearing or +practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Vreeland’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission as an accountant. Whether an application demonstrates good cause will be +22 +considered on a facts and circumstances basis with due regard for protecting the integrity of the +Commission’s processes. + + H. Respondent Gralak is denied the privilege of appearing or practicing before the +Commission as an accountant. + + I. After one year from the date of this order, Gralak may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Gralak’s work in his +practice before the Commission as an accountant will be reviewed either by +the independent audit committee of the public company for which he works +or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Gralak, or the public accounting firm with which he is associated, +is registered with the Public Company Accounting Oversight +Board (“Board”) in accordance with the Sarbanes-Oxley Act of +2002, and such registration continues to be effective; + + (b) Gralak, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did +not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that Gralak will not receive appropriate supervision; + (c) Gralak has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed +by the Board (other than reinstatement by the Commission); and +23 + + (d) Gralak acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, engagement quality reviews and quality +control standards. + +J. The Commission will consider an application by Gralak to resume appearing or +practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Gralak’s character, +integrity, professional conduct, or qualifications to appear or practice before the Commission as +an accountant. Whether an application demonstrates good cause will be considered on a facts +and circumstances basis with due regard for protecting the integrity of the Commission’s +processes. + +K. Respondent Manowitz shall, within 21 days of the entry of this Order, pay a civil +money penalty in the amount of $25,000 to the Securities and Exchange Commission. The +Commission may distribute civil money penalties collected in this proceeding if, in its discretion, +the Commission orders the establishment of a Fair Fund pursuant to 15 U.S.C. § 7246, Section +308(a) of the Sarbanes-Oxley Act of 2002. The Commission will hold funds paid pursuant to this +paragraph in an account at the United States Treasury pending a decision whether the Commission, +in its discretion, will seek to distribute funds or transfer them to the general fund of the United +States Treasury, subject to Exchange Act Section 21F(g)(3). If timely payment is not made, +additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +L. Respondent Vreeland shall pay a civil money penalty in the amount of $15,000 to +the Securities and Exchange Commission. The Commission may distribute civil money penalties +collected in this proceeding if, in its discretion, the Commission orders the establishment of a Fair +Fund pursuant to 15 U.S.C. § 7246, Section 308(a) of the Sarbanes-Oxley Act of 2002. The +Commission will hold funds paid pursuant to this paragraph in an account at the United States +Treasury pending a decision whether the Commission, in its discretion, will seek to distribute funds +or transfer them to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). Payment shall be made in the following installments: $2,500 to be paid within 21 days +of the entry of this Order, and the remaining balance to be paid within 364 days of the entry of this +Order. Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C. +§ 3717. Prior to making the final payment set forth herein, Respondent shall contact the staff of +the Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-Order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application to +the Commission. + +24 +M. Respondent Gralak shall pay a civil money penalty in the amount of $9,472 to the +Securities and Exchange Commission. The Commission may distribute civil money penalties +collected in this proceeding if, in its discretion, the Commission orders the establishment of a Fair +Fund pursuant to 15 U.S.C. § 7246, Section 308(a) of the Sarbanes-Oxley Act of 2002. The +Commission will hold funds paid pursuant to this paragraph in an account at the United States +Treasury pending a decision whether the Commission, in its discretion, will seek to distribute funds +or transfer them to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). Payment shall be made in the following installments: $1,500 to be paid within 21 days +of the entry of this Order, and the remaining balance to be paid within 364 days of the entry of this +Order. Payments shall be applied first to post order interest, which accrues pursuant to 31 U.S.C. +§ 3717. Prior to making the final payment set forth herein, Respondent shall contact the staff of +the Commission for the amount due. If Respondent fails to make any payment by the date agreed +and/or in the amount agreed according to the schedule set forth above, all outstanding payments +under this Order, including post-Order interest, minus any payments made, shall become due and +payable immediately at the discretion of the staff of the Commission without further application to +the Commission. + +N. Payments ordered in Paragraphs K through M above must be made in one of the +following ways: + +(1) Respondents may transmit payment electronically to the Commission, +which will provide detailed ACH transfer/Fedwire instructions upon +request; + +(2) Respondents may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondents may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying the +Respondent by name as a Respondent in these proceedings, and the file number of these +proceedings. A copy of the cover letter and check or money order must be sent to Robert J. +Burson, Senior Associate Regional Director, Division of Enforcement, Securities and Exchange +Commission, 175 West Jackson Boulevard, Suite 1450, Chicago, Illinois 60604. + + O. Regardless of whether the Commission in its discretion orders the creation of a +Fair Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +25 +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondents agree that in any Related Investor Action, they shall not argue that they are entitled +to, nor shall they benefit by, offset or reduction of any award of compensatory damages by the +amount of any part of Respondents’ payment of a civil penalty in this action (“Penalty Offset”). If +the court in any Related Investor Action grants such a Penalty Offset, Respondents agree that they +shall, within 30 days after entry of a final order granting the Penalty Offset, notify the +Commission’s counsel in this action and pay the amount of the Penalty Offset to the Securities and +Exchange Commission. Such a payment shall not be deemed an additional civil penalty and shall +not be deemed to change the amount of the civil penalty imposed in this proceeding. For purposes +of this paragraph, a “Related Investor Action” means a private damages action brought against +Respondents by or on behalf of one or more investors based on substantially the same facts as +alleged in the Order instituted by the Commission in this proceeding. + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondents, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondents under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondents of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + By the Commission. + + + + Vanessa A. Countryman + Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4100.txt b/raw/aaer/2019/AAER-4100.txt new file mode 100644 index 0000000000000000000000000000000000000000..2f6d560609c2f11afee54dff8c08f4ac7deb67df --- /dev/null +++ b/raw/aaer/2019/AAER-4100.txt @@ -0,0 +1,172 @@ + + + + + UNITED STATES OF AMERICA + before the + SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES ACT OF 1933 +Release No. 10718 / October 11, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4100 / October 11, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19583 + + : + : + : + In the Matter of : ORDER INSTITUTING PUBLIC + : ADMINISTRATIVE PROCEEDINGS + : PURSUANT TO RULE 102(e) OF THE +JOHN BUSSHAUS, CPA, : COMMISSION’S RULES OF PRACTICE, + : MAKING FINDINGS, AND IMPOSING +Respondent. : REMEDIAL SANCTIONS + : + : +____________________________________ : + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate and in the +public interest that public administrative proceedings be, and hereby are, instituted against John +Busshaus (“Respondent” or “Busshaus”) pursuant to Rule 102(e)(3)(i) of the Commission’s Rules +of Practice.1 + + +1 Rule 102(e)(3)(i) provides, in relevant part, that: + + The Commission, with due regard to the public interest and without preliminary hearing, +may, by order, . . . suspend from appearing or practicing before it any . . . accountant . . . who has +been by name . . . permanently enjoined by any court of competent jurisdiction, by reason of his +or her misconduct in an action brought by the Commission, from violating or aiding and abetting +the violation of any provision of the Federal securities laws or of the rules and regulations +thereunder. + 2 + +II. + + In anticipation of the institution of these proceedings, Busshaus has submitted an Offer of +Settlement (the “Offer”) which the Commission has determined to accept. Solely for the purpose +of these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over him and the subject matter of these proceedings, and the +findings contained in Section III.3 below, which are admitted, Busshaus consents to the entry of +this Order Instituting Administrative Proceedings Pursuant to Rule 102(e) of the Commission’s +Rules of Practice, Making Findings, and Imposing Remedial Sanctions (“Order”), as set forth +below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: + +1. FAB Universal Corp. (“FAB”) was, at all relevant times, a Colorado +corporation with its headquarters in Pittsburgh, Pennsylvania. FAB was engaged in the business of +marketing and distributing digital entertainment products throughout China, through its Digital +Media Services, Retail Media Sales, and Wholesale Media Distribution units. At all relevant +times, FAB’s common stock was registered with the Commission pursuant to Section 12(b) of the +Securities Exchange Act of 1934 (“Exchange Act”). Its shares were listed on the NYSE MKT +until the NYSE delisted the Company’s shares on December 2, 2014. + +2. John Busshaus, age 56, holds an inactive license as a certified public +accountant issued by the State of Pennsylvania. He has served as FAB’s Controller from April +2006, and CFO from January 29, 2007. He is also a former broker and holds inactive Series 6, 7, +and 63 licenses. + +3. On October 8, 2019, a final judgment was entered against Busshaus, +permanently enjoining him from future violations of Section 17(a)(2) and (3) of the Securities +Act in the civil action entitled Securities and Exchange Commission v. Christopher J. Spencer, et +al., Civil Action Number 1:19-cv-09070-NRB in the United States District Court for the +Southern District of New York. + +4. The Commission’s complaint alleged that between 2012 and 2013, +Busshaus, acting negligently, used a series of false and misleading representations about the +capabilities and growth prospects of a central component of FAB’s business in China. Busshaus +repeatedly represented to FAB’s investors that Intelligent Media Kiosks (“Kiosks”) were a key +component of FAB’s business model. In press releases, earnings calls, and FAB’s public reports, +Busshaus described the Kiosks as ATM-style terminals where customers could download +movies, television shows, music, and other media to their cellphones and other devices. +Busshaus described the business model as “iTunes meets Redbox meets Netflix” and made +numerous statements about the multi-media functionality, profitability, and growth of the Kiosk + 3 +market. In reality, almost all of FAB’s Kiosks did not have the claimed media-download +functionality, and more than half of the Kiosks did not function at all. Furthermore, public +statements reviewed and approved (and in some cases signed and certified) by Busshaus grossly +overstated the number of installed Kiosks, thereby misleading investors about their purported +revenue-generating ability and prospects. Busshaus received and reviewed information provided +by FAB’s personnel located in China prior to making these representations. However, Busshaus +failed to adequately address numerous red flags arising from the information that he received +and thus did not comply with the requisite standard of care before making or approving these and +other representations. + +IV. + + In view of the foregoing, the Commission deems it appropriate and in the public interest to +impose the sanction agreed to in Respondent Busshaus’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Busshaus is suspended from appearing or practicing before the Commission as an +accountant. + +B. After two years from the date of this order, Busshaus may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the Chief +Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission (other +than as a member of an audit committee, as that term is defined in Section 3(a)(58) of the +Securities Exchange Act of 1934). Such an application must satisfy the Commission that +Busshaus’s work in his practice before the Commission will be reviewed either by the +independent audit committee of the public company for which he works or in some other +acceptable manner, as long as he practices before the Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or +review, of any public company’s financial statements that are filed with the Commission as a +member of an audit committee, as that term is defined in Section 3(a)(58) of the Securities +Exchange Act of 1934. Such an application will be considered on a facts and circumstances +basis with respect to such membership, and the applicant’s burden of demonstrating good +cause for reinstatement will be particularly high given the role of the audit committee in +financial and accounting matters; and/or + +3. an independent accountant. + +Such an application must satisfy the Commission that: + + 4 + (a) Busshaus, or the public accounting firm with which he is +associated, is registered with the Public Company Accounting Oversight Board (“Board”) in +accordance with the Sarbanes-Oxley Act of 2002, and such registration continues to be effective; + + (b) Busshaus, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did not identify any criticisms of +or potential defects in the respondent’s or the firm’s quality control system that would indicate +that the respondent will not receive appropriate supervision; + (c) Busshaus has resolved all disciplinary issues with the Board, and +has complied with all terms and conditions of any sanctions imposed by the Board (other than +reinstatement by the Commission); and + + (d) Busshaus acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to comply with all requirements +of the Commission and the Board, including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality control standards. + +C. The Commission will consider an application by Busshaus to resume appearing or +practicing before the Commission provided that his state CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy. However, +if state licensure is dependent on reinstatement by the Commission, the Commission will +consider an application on its other merits. The Commission’s review may include consideration +of, in addition to the matters referenced above, any other matters relating to Respondent’s +character, integrity, professional conduct, or qualifications to appear or practice before the +Commission. Whether an application demonstrates good cause will be considered on a facts and +circumstances basis with due regard for protecting the integrity of the Commission’s processes. + + By the Commission. + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4101.txt b/raw/aaer/2019/AAER-4101.txt new file mode 100644 index 0000000000000000000000000000000000000000..4fea8290119b24ed8e1d04f52c561b53bbd1b929 --- /dev/null +++ b/raw/aaer/2019/AAER-4101.txt @@ -0,0 +1,321 @@ + UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87484 / November 7, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4101 / November 7, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-17950 + + +In the Matter of + +David Pruitt, CPA, + +Respondent. + +ORDER MAKING FINDINGS AND IMPOSING +REMEDIAL SANCTIONS AND A CEASE-AND- +DESIST ORDER PURSUANT TO SECTION 21C +OF THE SECURITIES EXCHANGE ACT OF 1934 + +I. + + On April 28, 2017, the Securities and Exchange Commission (“Commission”) instituted +administrative and cease and desist proceedings pursuant to Sections 21C and 4C of the +Securities Exchange Act of 1934 (“Exchange Act”) against David N. Pruitt (“Pruitt” or +“Respondent”). +II. + + Respondent has submitted an Offer of Settlement (the “Offer”), which the Commission +has determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, and without +admitting or denying the findings herein, except as to the Commission’s jurisdiction over him +and the subject matter of these proceedings, which are admitted, and except as provided herein in +Section V, Respondent consents to the entry of this Order Pursuant to Section 21C of the +Exchange Act, Making Findings and Imposing Remedial Sanctions and a Cease-and-Desist +Order (“Order”), as set forth below. +III. + +On the basis of this Order and Respondent’s Offer, the Commission finds1 that: + + +1 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding +on any other person or entity in this or any other proceeding. + +2 + +A. SUMMARY + +1. These proceedings arise out of L3 Technologies, Inc.’s (formerly known as L-3 +Communications Holdings, Inc.) (“L3”) premature, and thus improper, recognition of $15.45 +million in revenue at its Army Sustainment Division (“ASD”) subsidiary in 2013 and Q1 2014. +The revenue was related to unbilled items under a fixed-price aircraft maintenance contract +between ASD and the U.S. Army, referred to as the C-12 Contract. +2. The unbilled items had been identified as part of a Revenue Recovery Initiative +that had begun in August 2013. In late December 2013, Pruitt—Vice President of Finance at +ASD—instructed a subordinate to generate 63 invoices related to the unbilled work in L3’s +internal accounting system (“SAP”), and withhold delivery of those invoices from the U.S. +Army’s electronic billing system until they were hand-delivered to the U.S. Army for approval. +However, other than a handful of invoices that were delivered to the U.S. Army in early 2014, +the vast majority of these invoices were not submitted to the U.S. Army. By entering the +invoices in SAP but not ensuring their delivery, collectability could not be reasonably assured, as +required under ASC 605, and ASD improperly recognized approximately $17.9 million in +additional revenue at the end of 2013, and in Q1 2014. +3. Following an internal investigation, on October 10, 2014, L3 filed a Form 10-K/A +for the fiscal year ended December 31, 2013, and a Form 10-Q/A for the first quarter of 2014. +Among other things, L3 disclosed that it made $15.4 million in adjustments to pre-tax income +related to the revenue recovery invoices by reversing the revenue from the invoices, and +recording the related costs as assets on its balance sheet. +B. RESPONDENT + +4. Pruitt, 63 years old, is a resident of Owens Cross Roads, AL. Pruitt began working +for L3 in 2003 and served as the VP of Finance for ASD from January 2013 until January 2014. In +January 2014, he was reassigned to the position of Senior Director of Finance for Army Fleet +Support at ASD, and served in that role until his termination from L3 on July 30, 2014. Pruitt is a +certified public accountant (“CPA”) (licensed in Kentucky), certified management accountant, +certified government financial manager, and certified defense financial manager. +C. OTHER RELEVANT ENTITY + +5. L3 (NYSE ticker: LLL), a Delaware corporation with its principal place of business +in New York, NY, is a prime contractor for various foreign and U.S. Government agencies, +including the U.S. Department of Defense. L3’s securities are registered with the Commission +pursuant to Section 12(b) of the Exchange Act. L3 is a prime contractor in aerospace systems and +national security solutions. For fiscal year 2013, L3 reported net sales of $12.6 billion and an +operating income of $1.2 billion on its consolidated statements of operations. +D. BACKGROUND +6. Aerospace Systems is one of four business segments of L3, delivering integrated +solutions for the global intelligence market and providing maintenance and logistics support for a + +3 + +wide variety of aircraft and ground systems. Each business segment is comprised of multiple +business “sectors,” and each business sector is comprised of multiple business “divisions.” Of +relevance to this matter are the Logistics Solutions sector of Aerospace Systems, which provides, +among other things, logistics support and aircraft maintenance services to its military customers, +and ASD, a subsidiary of Logistics Solutions, which provides support for U.S. Army aircraft at +bases throughout the United States and around the world. +7. L3, through its subsidiary Vertex Aerospace, LLC (“Vertex”), and later ASD, +contracted to maintain a fleet of over 160 fixed-wing C-12 airplanes for the U.S. Army pursuant to +the C-12 Contract. The contract had a five-year term, commencing on June 2, 2010, and ending on +January 31, 2015, with the partial initial year referred to as a “base year,” and each subsequent year +referred to as an “option year.” ASD was formed at the beginning of 2013, in part to take over the +C-12 Contract from Vertex, and improve L3’s performance under the contract. ASD, along with +Pruitt and others, worked through 2013 to resolve various issues with the C-12 Contract. +E. THE REVENUE RECOVERY INITIATIVE AND LEGAL ENTITLEMENT +8. In the summer of 2013, Pruitt and the President of ASD (“ASD President”) learned +that ASD had unaccounted for costs related to previously performed work for the U.S. Army on its +balance sheet related to the C-12 Contract in the range of $30 to $35 million. The business +manager on the C-12 contract (the “C-12 Business Manager”) believed the growth in that +particular balance was a result of cost overruns that would result in a large loss to ASD. The C-12 +Business Manager informed Pruitt of the costs, and prepared him for a meeting with the ASD +President and the President of Logistics Solutions—the corporate parent of ASD—to discuss the +potential loss. +9. On or about September 20, 2013, Pruitt, the ASD President, and the C-12 Business +Manager reported to the President of Logistics Solutions that they had identified a growing work in +progress (“WIP”) balance on ASD’s books arising from the C-12 Contract, and that the Division +may need to write off some of the WIP (approximately $8-9 million). The report angered the +President of Logistics Solutions, and he asked members of ASD to re-check their numbers and +verify that it was true. The President of Logistics Solutions also directed ASD to determine what +work the WIP balance related to, and asked Respondent, the ASD President, and other members of +ASD to determine how to bill it to the U.S. Army. The President of Logistics Solutions requested +weekly meetings—and later, daily meetings—with ASD officers and C-12 program management, +including the ASD President and Respondent, to obtain a better understanding of the WIP balance. +Respondent and the ASD President were in constant communication with each other from +September to December 2013 concerning the status of the review. +10. The ASD President directed the C-12 Contract team at ASD to review the contract +in detail to determine if there were items not billed to the Army that should have been billed. This +became known as the Revenue Recovery Initiative. By mid-November 2013, the director of the C- +12 Contract (“C-12 Director”) identified approximately $50.6 million in work performed by ASD +under the contract that was not billed to the U.S. Army. The $50.6 million value was comprised of +nine different work stream items and costs under the C-12 Contract. + +4 + +11. During the fall of 2013, the focus of the Revenue Recovery Initiative turned to +identifying ways to recognize revenue on the unbilled $50.6 million. Based on the President of +Logistics Solutions’ words and conduct, Respondent and the ASD President believed that the +President of Logistics Solutions expected ASD to either recognize revenue or defer the costs +associated with the $50.6 million revenue recovery items by the end of 2013. On November 8, +2013, the President of Logistics Solutions sent an email (copying Respondent) directing the ASD +President to “please identify with coordination with [Respondent and CFO of the Aerospace +Systems segment (“Aerospace Systems CFO”)] the C-12 Army accounting to be used for Q4, +specifically, which costs will be deferred related to the unbilled items, and take this accounting into +consideration on your LRE [i.e. latest revised estimate] so we know where we expect to get to in +EBIT [Earnings Before Interest and Taxes] for 2013.” +12. Also during the fall of 2013, certain individuals at Logistics Solutions and ASD +began discussing the possibility of recognizing revenue on some of the $50.6 million in unbilled +items based on a concept called “legal entitlement,” even though the amounts had not been +resolved with the Army. Respondent and the ASD President both participated in discussions +concerning the recognition of revenue based on legal entitlement. +13. On November 22, 2013, there was a conference call among Respondent, the +Aerospace Systems CFO, and others to discuss certain options for how to record revenue pursuant +to legal entitlement. The Aerospace Systems CFO recalled that the task was for the C-12 Contract +experts—i.e., the General Counsel of ASD and the General Counsel of Logistics Solutions —to +find clauses in the C-12 Contract that entitled ASD to payment, show that the government did not +follow its obligations under the clauses, determine what to submit as a request for equitable +adjustment (“REA”), and estimate based on the contract’s history how much the Army would pay. +REAs were formal methods under the C-12 Contract by which ASD could request an equitable +adjustment to the funding amounts for each Contract Line Item (“CLIN”), although the U.S. Army +also resolved certain billing disputes without resorting to REAs. +14. At Respondent’s request, the General Counsels of ASD and of Logistics Solutions +estimated that ASD was likely to recover approximately $30 million of the entire $50.6 million, +based on their history of negotiations with the government. Between Thanksgiving and December +5, 2013, Pruitt asked the General Counsels of ASD and of Logistics Solutions to prepare letters of +legal entitlement that would be used to support the revenue recognition. +15. On December 3, 2013, the ASD President presented an operations review regarding +ASD to the President of Logistics Solutions. Included was a slide entitled, “Army C-12 Contract +Dispute Summary,” which listed a table of ten rows with separate “REA/Claim Values” adding up +to $50.6 million. A column on the table was entitled “Legal Entitlement” and applied a percentage +of either 50% or 60% to each claim value that comprised the $50.6 million. The presentation also +included detailed slides on six of the claims, and noted that ASD planned to meet with the +government to reach an amicable resolution and that, “[a]fter the negotiations with the government, +L3 is postured to immediately invoice and bill the government.” +16. The revenue recovery items were presented by Logistics Solutions and ASD to the +U.S. Army in meetings that took place in late November and early December 2013. On December +5, 2013, the C-12 Director and the General Counsel of ASD met with representatives of the U.S. + +5 + +Army to discuss the C-12 Contract disputes. An email from the C-12 Director to the President of +Logistics Solutions reporting on this meeting indicates that the U.S. Army planned to meet +internally on December 17, 2013, and begin meeting with L3 after the new year with the “intent [] +to resolve every one of the disputes outside of the REA/Claim process… as quickly as possible.” +The e-mail further stated that, “the government was offended by [ASD’s] use of the term REA . . . . +[and] . . . understands our mutual intent to work amicably to resolve every issue . . . as quickly as +possible.” In a later e-mail in December 2013, certain representatives of the Army +“recommend[ed] L3 submit invoices/billing/justification of payment thru the appropriate +channels,” and indicated that “[o]nce these have been submitted, the government will pay the bill +as they do with all other work if justified.” Respondent did not expect L3 to reach an agreement +with the U.S. Army concerning the amount of revenue recovery items the U.S. Army would pay +before the end of 2013. +F. GENERATION OF INVOICES AND IMPROPER REVENUE RECOGNITION +17. Respondent and the Aerospace Systems CFO had a telephone call on or about +Friday, December 20, 2013. Respondent and the Aerospace Systems CFO discussed a one-page +list of the revenue recovery items that he emailed the Aerospace Systems CFO prior to the call. +Pruitt and the Aerospace Systems CFO went down the list and the Aerospace Systems CFO +instructed Pruitt which items to invoice and which to accrue. The Aerospace Systems CFO +claimed he did not give Pruitt blanket authority to invoice for the items, but does recall a +conversation in which he told Pruitt that he could invoice for work performed during option year 3 +(i.e., 2013). +18. On Monday, December 23, 2013, Respondent emailed the C-12 Business Manager +“billing amounts” for seven of the revenue recovery items to begin the invoicing process. The C- +12 Business Manager emailed ASD’s Controller, copying the C-12 Director and Respondent, +asking the individual to “[p]lease add planned revenue . . . for the revenue recovery billings that I +did today,” and further stating, “I believe the current course of action is that they are not to be +released to the government.” +19. Respondent instructed the C-12 Business Manager not to submit the invoices +electronically through the U.S. Army’s Wide Area Work Flow (“WAWF”) electronic billing +system, and ASD recognized an additional $15.45 million in revenue at the time based on the +undelivered invoices. It was unreasonable for Respondent to generate invoices causing the +recognition of revenue because L3 and the U.S. Army had not completed negotiations regarding +payment for the unbilled work. +G. L3’s INVESTIGATION OF IMPROPER ACCOUNTING +20. In June 2014, L3 investigators discovered that the vast majority of the invoices had +not been delivered to the U.S. Army. +21. Accounting Standards Codification 605-10-25-1 provides that revenue can be +recognized when it is realized or realizable and earned. Consistent with the authoritative literature, +paragraph (A)(1) of the Codification of Staff Accounting Bulletins, Topic 13: Revenue +Recognition (which provides guidance on the C-12 Contract) states (“Topic 13(A)(1)”) that + +6 + +collectability be reasonably assured as a condition to recognizing revenue. By failing to deliver the +invoices, ASD’s recognition of the $15.45 million in revenue did not comply with this standard +and therefore did not comply with U.S. GAAP. +22. L3 filed its Form 10-K for the fiscal year ending December 31, 2013 on February +25, 2014 and its Form 10-Q for the quarter ending March 31, 2014 on May 1, 2014. These filings +were inaccurate, and L3 revised them following its internal investigation. +H. L3’s REVISED FINANCIAL STATEMENTS +23. On October 10, 2014, L3 filed a Form 10-K/A for the fiscal year ended December +31, 2013, and a Form 10-Q/A for the first quarter of 2014. Among other things, L3 reversed the +revenue related to the invoices and recorded the related costs as assets on its balance sheet. In +subsequent public filings, L3 disclosed that it recovered $30 million dollars from the U.S. Army +for cost overruns on the C-12 contract which included recovery for items that were invoiced as part +of the Revenue Recovery Initiative. +I. VIOLATIONS +24. As a result of the conduct described above, Respondent caused L3’s violations of +Section 13(b)(2)(A) of the Exchange Act, which requires an issuer to make and keep books, +records, and accounts, which in reasonable detail, accurately and fairly reflect the transactions and +dispositions of the assets of the issuer. +25. As a result of the conduct described above, Respondent violated Rule 13b2-1 of the +Exchange Act, which prohibits any person from, directly or indirectly, falsifying or causing to be +falsified, any book, record, or account that the Exchange Act requires an issuer to maintain. +IV. +In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent’s Offer. +Accordingly, pursuant to 21C of the Exchange Act, it is hereby ORDERED that: + +A. Respondent cease-and-desist from committing or causing any violations and any +future violations of Sections 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder. + +B. Respondent shall, within 120 days of the entry of this Order, pay a civil money +penalty in the amount of $25,000.00 to the Securities and Exchange Commission for transfer to the +general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If timely +payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. + +Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + + +7 + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +Pruitt as a Respondent in these proceedings, and the file number of these proceedings; a copy of +the cover letter and check or money order must be sent to Sanjay Wadhwa, Senior Associate +Director, Division of Enforcement, New York Regional Office, Securities and Exchange +Commission, 200 Vesey Street, New York, NY 10281. + +Amounts ordered to be paid as civil money penalties pursuant to this Order shall be treated +as penalties paid to the government for all purposes, including all tax purposes. To preserve the +deterrent effect of the civil penalty, Respondent agrees that in any Related Investor Action, he shall +not argue that he is entitled to, nor shall he benefit by, offset or reduction of any award of +compensatory damages by the amount of any part of Respondent’s payment of a civil penalty in +this action (“Penalty Offset”). If the court in any Related Investor Action grants such a Penalty +Offset, Respondent agrees that he shall, within 30 days after entry of a final order granting the +Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the Penalty +Offset to the Securities and Exchange Commission. Such a payment shall not be deemed an +additional civil penalty and shall not be deemed to change the amount of the civil penalty imposed +in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a private +damages action brought against Respondent by or on behalf of one or more investors based on +substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. +V. + +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. § 523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree + + +8 + +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. § 523(a)(19). + + By the Commission. + + + Vanessa A. Countryman + Secretary + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4103.txt b/raw/aaer/2019/AAER-4103.txt new file mode 100644 index 0000000000000000000000000000000000000000..b58da55351d0cb1b04f193028d5dfd602a1386a9 --- /dev/null +++ b/raw/aaer/2019/AAER-4103.txt @@ -0,0 +1,366 @@ +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87642 / November 29, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4103 / November 29, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-18346 + + + +In the Matter of + +Cynthia Holder, CPA, + +Respondent. + + + + + +ORDER MAKING FINDINGS AND +IMPOSING REMEDIAL SANCTIONS +AND AND- AND A CEASE-AND-DESIST ORDER +PURSUANT TO SECTIONS 4C AND 21C +OF THE SECURITIES EXCHANGE ACT +OF 1934 AND RULE 102(e) OF THE +COMMISSION’S RULES OF PRACTICE + + +I. + + On January 22, 2018, the Securities and Exchange Commission (“Commission”) deeming +it appropriate instituted public administrative and cease-and-desist proceedings against Cynthia +Holder (“Holder” or “Respondent”) pursuant to Sections 4C1 and 21C of the Securities Exchange +Act of 1934 (“Exchange Act”) and Rule 102(e)(1)(ii) and 102(e)(1)(iii) of the Commission’s Rules +of Practice.2 + +1 Section 4C provides, in relevant part, that: + +The Commission may censure any person, or deny, temporarily or permanently, to any person the +privilege of appearing or practicing before the Commission in any way, if that person is found . . . +(1) not to possess the requisite qualifications to represent others; (2) to be lacking in character or +integrity, or to have engaged in unethical or improper professional conduct; or (3) to have willfully +violated, or willfully aided and abetted the violation of, any provision of the securities laws or the +rules and regulations issued thereunder. + +2 Rule 102(e)(1)(ii) provides, in pertinent part, that: + + + +2 +II. + +Respondent has submitted an Offer of Settlement (the “Offer”), which the Commission has +determined to accept. Solely for the purpose of these proceedings and any other proceedings +brought by or on behalf of the Commission, or to which the Commission is a party, Respondent +admits the Commission’s jurisdiction over her and the subject matter of these proceedings, and +consents to the entry of this Order Making Findings and Imposing Remedial Sanctions and a Cease- +and-Desist Order Pursuant to Sections 4C and 21C of the Securities Exchange Act of 1934 and Rule +102(e) of the Commission’s Rules of Practice (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +SUMMARY + +1. This case involves the unauthorized disclosures of confidential information from +the Public Company Accounting Oversight Board (“PCAOB” or “Board”) and a concerted effort +by now-former members of KPMG’s Audit Quality and Professional Practice group (“AQPP” or +“National Office”) – including Cynthia Holder – to use that information to improve the results of +the PCAOB’s annual inspections of KPMG audits. +2. In 2015, KPMG hired Brian Sweet from the PCAOB. Shortly after he joined the +firm, Sweet asked Holder, then a PCAOB employee, to send him confidential PCAOB materials. +Holder made the unauthorized disclosure to Sweet at the same time she was seeking employment +from KPMG. In 2016 and 2017, a third PCAOB employee, Jeffrey Wada, leaked specific audit +engagements the PCAOB planned to inspect to Holder, after she had left the PCAOB and joined +KPMG. +3. After obtaining the confidential list of the PCAOB’s planned inspections in 2016, +Holder participated in a program overseen by other now-former KPMG personnel to review and +revise certain audit workpapers after the audit reports had been issued to reduce the likelihood that + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found to be lacking in character or integrity or to have +engaged in unethical or improper professional conduct. + + Rule 102(e)(1)(iii) provides, in pertinent part, that: + +The Commission may . . . deny, temporarily or permanently, the privilege of appearing or +practicing before it . . . to any person who is found…to have willfully violated, or willfully aided +and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder. + +3 The findings herein are made pursuant to Respondent’s Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 +the PCAOB would find deficiencies in those audits. This effort resulted in a substantial +improvement to KPMG’s 2016 inspection results. +4. In 2017, Holder again obtained from Wada the list of audit engagements that the +PCAOB planned to inspect, but the misconduct was discovered by others within the firm and +reported to KPMG leadership before relevant workpapers could be changed. + +RESPONDENT + +5. Cynthia Holder, 53, of Houston, Texas was an Executive Director in KPMG’s +Department of Professional Practice-Inspections group from August 2015 until April 2017, when +she was separated from the firm. Prior to joining KPMG, Holder was an Inspections Specialist and +Inspections Leader at the PCAOB from December 2011 until August 2015. Holder was previously +licensed as a CPA in Texas and New Jersey. +OTHER RELEVANT PERSONS AND ENTITY + +6. Brian Sweet, 42, of Fresno, California, was a Partner in KPMG’s Department of +Professional Practice-Inspections group until March 2017. He was separated from the firm at the +end of March 2017. Prior to joining KPMG, Sweet was an Associate Director in the PCAOB’s +inspections group from March 2014 until April 2015. Sweet was previously licensed as a CPA in +New York, Illinois, and California. The Commission has charged Sweet for his role in the +misconduct described in this Order. +7. Jeffrey Wada, 44, of Tustin, California was an Inspections Leader at the PCAOB +from February 2012 until February 2017. Wada is no longer at the PCAOB. Wada is licensed as a +CPA in California. The Commission has filed litigated administrative and cease-and-desist +proceedings against Wada alleging misconduct related to the events described in this Order. +8. David Middendorf, 55, of Marietta, Georgia, was KPMG’s National Managing +Partner for AQPP until March 2017, and was separated from the firm the following month. +Middendorf is licensed as a CPA in Georgia, New York, and Ohio and was previously licensed in +Texas. The Commission has filed litigated administrative and cease-and-desist proceedings +against Middendorf alleging misconduct related to the events described in this Order. +9. Thomas Whittle, 56, of Gladstone, New Jersey, was KPMG’s National Partner-In- +Charge for Quality Measurement until March 2017, and was separated from the firm the following +month. Whittle is licensed as a CPA in New York and New Jersey and was previously licensed in +Pennsylvania and Connecticut. The Commission has filed litigated administrative and cease-and- +desist proceedings against Whittle alleging misconduct related to the events described in this +Order. +10. David Britt, 55, of New Canaan, Connecticut, was a Partner in KPMG’s +Department of Professional Practice within AQPP, in which he was the Banking and Capital +Markets Group Co-Leader until March 2017, and was separated from the firm the following + +4 +month. Britt is licensed as a CPA in New York and California and was previously licensed in the +District of Columbia. The Commission has filed litigated administrative and cease-and-desist +proceedings against Britt alleging misconduct related to the events described in this Order. + +11. KPMG LLP is a Delaware limited liability partnership and PCAOB-registered +accounting firm. Headquartered in New York, New York, KPMG is the U.S. member firm of +KPMG International Cooperative, a Swiss entity. The Commission has charged KPMG for its role +in the misconduct described in this Order.4 +FACTS + +The PCAOB’s Inspections Process and KPMG’s Efforts to Improve Its Results + +12. The PCAOB was created as part of the Sarbanes-Oxley Act of 2002 to oversee the +audits of public companies that are subject to the federal securities laws in order to protect the +interests of investors and further the public interest in the preparation of informative, accurate, and +independent audit reports. +13. One of the essential ways in which the PCAOB fulfills this mission is by inspecting +audits of public companies conducted by registered public accounting firms. Through these +inspections, the PCAOB assesses the audit firms’ compliance with the statutes, regulations, and +professional standards governing the accounting profession. The PCAOB typically selects the +audit engagements it will inspect based on confidential internal analyses and thereafter notifies +firms of which audits it will inspect. The PCAOB typically issues inspection reports, only parts of +which are made public, after all the inspections for a firm in a given cycle are complete. +14. To ensure the integrity of the inspection process, the PCAOB closely guards the +confidentiality of both its inspection targets prior to firm notification and its methodology for +selecting those targets. All PCAOB employees must certify that they are complying with PCAOB +Ethics Rules that prohibit employees from using confidential PCAOB information for private gain +(or even merely creating the appearance that they are) and that bar them from making unauthorized +disclosures of confidential information obtained during their employment. The PCAOB’s Ethics +Rules and the employees’ ethics certifications state these prohibitions continue to apply even after +their employment with the Board ends. +15. In September 2014, the PCAOB issued a report regarding its 2013 inspections of +KPMG audits. The report found that out of 50 audits the PCAOB inspected, 23 had deficiencies. +This 46 percent deficiency rate reflected a significant decline from KPMG’s 34 percent deficiency +rate the previous year. + +4 KPMG LLP, Exchange Act Release No. 86118 (June 17, 2019). + + +5 +16. As part of its efforts to improve its PCAOB inspection results, KPMG hired Brian +Sweet, an Associate Director at the PCAOB who had worked on the team inspecting KPMG +audits. Sweet joined KPMG as a partner in the group within the firm’s National Office responsible +for PCAOB inspections. +Holder Divulges Confidential PCAOB Information to KPMG + +17. Before he left the PCAOB, Sweet discussed with Cynthia Holder, a friend who was +then a PCAOB Inspections Leader, the prospect of her joining him at KPMG. On Sweet’s first day +at KPMG (May 4, 2015), he informed Holder that he would be meeting with his direct supervisor, +Thomas Whittle, to push the firm to hire her. Whittle was then the KPMG partner responsible for +overseeing the PCAOB’s inspections of the firm. On May 11, 2015, Sweet told Holder he was +going to hand-deliver her resume to Whittle and “make a sell again” in person. +18. On May 12, 2015, Sweet asked Holder to send him a confidential PCAOB +document reflecting comments he had written about KPMG’s audits while he was at the Board. +Sweet told Holder that he needed the document to prepare for an internal KPMG meeting. That +day, Holder sent Sweet the document he requested using their personal email accounts. +19. About two weeks later, Holder notified the PCAOB’s ethics group that she had +recused herself from any work related to KPMG in order to pursue employment at the firm. +KPMG sent Holder an employment offer in July 2015. She joined the firm the following month as +an Executive Director in KPMG’s National Office, performing internal inspections and advising +banking engagement teams on their audits. +Holder Receives Confidential PCAOB Information from Wada in 2016 + +20. After joining KPMG, Holder remained friends with Jeffery Wada, an Inspections +Leader at the PCAOB. In early March 2016, Wada, who had previously performed work on +KPMG inspections but was then assigned to inspect another audit firm, learned that he had not +been selected for a promotion. Wada reacted angrily, telling a colleague the PCAOB had +“screwed” him by passing him over. +21. On March 28, 2016, Wada called Holder and read to her the names of thirteen +KPMG clients the Board planned to inspect.5 Holder provided this information to Sweet, who then +immediately relayed the list to Whittle, David Middendorf, who then oversaw the National +Office’s audit quality and professional practice work, and David Britt, who was then a Partner in +the National Office’s Department of Professional Practice and co-leader of KPMG’s Banking and +Capital Markets Group, informing them that it had come from a former colleague at the PCAOB. + +5 Of the 13 clients, 11 were bank holding or other financial services companies and 2 were other issuers that +Wada appears to have thought were also bank holding or other financial services companies. It appears that Wada +identified these engagements for Holder because her responsibilities at KPMG included advising banking +engagement teams. + + +6 +22. Wada sent Holder the list of the PCAOB’s planned inspections at a critical time. +Though KPMG had already issued audit reports for each of these engagements, it was within the +45-day period in which professional audit standards and firm policy allowed audit teams to +complete the administrative process of assembling final audit files.6 At the end of this 45-day +period, KPMG locked audit workpapers from editing absent special circumstances.7 Thus, Wada +sent the inspections list to Holder, who then provided it to Sweet, when firm personnel were still +able to access and revise audit workpapers. +23. Recognizing that the workpapers had not yet been locked per KPMG’s policy, the +now-former senior members of KPMG’s National Office agreed to have Sweet and others, +including Holder, conduct an additional review of the audit workpapers for the seven banks on the +list Wada had provided that were part of a key monitoring program run by the National Office to +determine whether anything could be done to minimize the risk of receiving inspection comments +from the PCAOB.8 +24. Over the next few weeks, Sweet, Holder, and various partners and managing +directors in the National Office engaged in a review of the audit workpapers of the seven banks in +the monitoring program that were on the list Wada provided. The National Office professionals +suggested edits and proposed revisions to the engagement teams, which then decided what +revisions to incorporate into the final audit workpapers. +25. In contrast to prior years, KPMG’s 2016 inspection results did not include any +inspection comments related to the general Allowance for Loan and Lease Losses (“ALLL”) – an +area where KPMG had historically received criticism related to financial services audits. The +PCAOB did not publish the results because KPMG reported the misconduct to the PCAOB before +the PCAOB issued the 2016 report. However, the PCAOB had designated two of the bank audits +in the ALLL monitoring program whose workpapers Sweet and Holder had reviewed as “positive +quality events,” which meant they were so successful the PCAOB wanted to understand the factors +driving the audit’s quality. Indeed, the level of improvement in the inspection results led Whittle + +6 See Auditing Standard No. 3, Audit Documentation, paragraph 15. “Prior to the report release date, the +auditor must have completed all necessary auditing procedures and obtained sufficient evidence to support the +representations in the auditor’s report. A complete and final set of audit documentation should be assembled for +retention as of a date not more than 45 days after the report release date (documentation completion date).” +References to PCAOB standards are to those that were in effect at the time of the relevant conduct. + +7 KPMG has since revised its audit documentation policies, requiring electronic workpapers to be assembled +and locked within two business days of issuance of the report. + +8 As the PCAOB found an increasing number of audit deficiencies by KPMG beginning in 2013, KPMG’s +National Office implemented “monitoring programs” that worked with audit engagement teams and reviewed +workpapers to improve compliance with professional standards. One of these programs focused on the audits of +certain banking clients’ Allowance for Loan and Lease Losses. KPMG further developed this monitoring program +in 2015 in response to numerous deficiencies the PCAOB had identified in this area. The success of this program +was especially important to KPMG because the firm had promoted it as proof of the seriousness with which the firm +was working to improve its audit quality. + + +7 +to be concerned that if KPMG could not obtain confidential PCAOB information for the next +inspection cycle, there could be a return of audit deficiencies that would be difficult to explain. +26. After the misconduct was discovered, the PCAOB conducted inspections of ten +additional banks for the 2016 inspection cycle to replace the ones for which improper advance +notice had been obtained. The PCAOB found that six of these audits had deficiencies with respect +to auditing the ALLL. +Holder Receives Confidential PCAOB Information from Wada in 2017 + +27. Sweet has testified that in early January 2017 Wada provided Holder a +“preliminary” list of PCAOB inspection targets for 2017 and that on January 9, Holder relayed the +names of the clients on the list to Sweet. On January 10, Wada sent Holder his resume and a +narrative of his work experience, writing, “I am now trying to sell myself to KPMG.” +28. In early February 2017, Wada conveyed to Holder a list of 47 ticker symbols that +Holder understood to be the final list of KPMG audits the PCAOB would inspect that year. Sweet +has testified that Wada also provided Holder the inspection focus areas for the banks on the list (as +well as for another KPMG engagement), and the PCAOB’s list of KPMG engagement partners +with “poor performance evaluations.” +29. Holder relayed the information to Sweet, who then shared it with Middendorf, +Whittle, and Britt. Unlike the prior lists of PCAOB inspection targets, the audits on the February +2017 list were ongoing, thus providing substantially greater ability to improve the audit +workpapers. +30. Whittle instructed Sweet to warn certain engagement partners about the impending +inspections. Though Whittle had warned Sweet to be circumspect in how he communicated this to +KPMG colleagues, Sweet’s notice to one KPMG engagement partner caused her to suspect that the +firm may have received confidential PCAOB information. These concerns were subsequently +reported to the firm’s management, which then reported the matter to the PCAOB, and KPMG +began an internal investigation. +31. During the initial stage of KPMG’s investigation, Sweet and Holder agreed to +conceal how they learned of the PCAOB’s 2017 inspection targets.9 They agreed to tell KPMG’s +Office of General Counsel that Holder had received a list of ticker symbols by mail with no return +address or other identifying information. +32. Holder destroyed evidence during KPMG’s investigation. KPMG attorneys asked +Holder to provide them her phone so they could analyze whether it contained relevant documents. +Before providing her phone to the firm, Holder deleted certain of her texts with Wada. + + +9 Holder told Sweet that she had sworn to Wada she would never identify him as the source. + +8 +VIOLATIONS + +33. As a result of the conduct described above, Respondent willfully violated PCAOB +Ethics Code Section EC3, which prohibits PCAOB staff from acting in a manner which might +reasonably result in or reasonably create the appearance that the employee is using confidential +information obtained through service for the Board for the private gain of any person, within the +meaning of Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s +Rules of Practice. +34. As a result of the conduct described above, Respondent willfully violated PCAOB +Ethics Code Section EC9, which prohibits PCAOB staff from disseminating or otherwise +disclosing any information obtained in the course and scope of his or her employment, and which +has not been released, announced, or otherwise made available publicly, within the meaning of +Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. +35. As a result of the conduct described above, Respondent willfully violated PCAOB +Rule 3500T, which requires members to maintain integrity when performing any professional +service in connection with the preparation or issuance of any audit report, within the meaning of +Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. + +FINDINGS + +36. Based on the foregoing, the Commission finds that Holder willfully violated +PCAOB Ethics Code Sections EC3 and EC9 and PCAOB Rule 3500T within the meaning of +Section 4C(a)(3) of the Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. +37. Based on the foregoing, the Commission finds that Holder lacks integrity pursuant +to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of the Commission’s Rules of +Practice. +38. Based on the foregoing, the Commission finds that Holder engaged in improper +professional conduct pursuant to Section 4C(a)(2) of the Exchange Act and Rule 102(e)(1)(ii) of +the Commission’s Rules of Practice. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Holder’s Offer. + + + + +9 +Accordingly, it is hereby ORDERED, effective immediately, that: + +A. Holder shall cease and desist from committing or causing any violations and any +future violations of PCAOB Ethics Code Sections EC3 and EC9 and PCAOB Rule 3500T. + + B. Holder is denied the privilege of appearing or practicing before the Commission as +an accountant. + + By the Commission. + + + + Vanessa A. Countryman + Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4104.txt b/raw/aaer/2019/AAER-4104.txt new file mode 100644 index 0000000000000000000000000000000000000000..69b59304740b6fe1f9795f9d5f4d9bcb7920faea --- /dev/null +++ b/raw/aaer/2019/AAER-4104.txt @@ -0,0 +1,88 @@ + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87657 / December 4, 2019 +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4104 / December 4, 2019 +ADMINISTRATIVE PROCEEDING +File No. 3-16783 + +In the Matter of +Raymon Holmdahl, CPA + +: +: +: +: +: +: +ORDER GRANTING APPLICATION FOR +REINSTATEMENT TO APPEAR AND PRACTICE +BEFORE THE COMMISSION AS AN ACCOUNTANT +RESPONSIBLE FOR THE PREPARATION OR +REVIEW OF FINANCIAL STATEMENTS REQUIRED +TO BE FILED WITH THE COMMISSION AND AS AN +INDEPENDENT ACCOUNTANT + +On September 4, 2015, Raymon Holmdahl, CPA (“Holmdahl”) was denied the privilege +of appearing or practicing before the Commission as an accountant as a result of settled public +administrative proceedings instituted by the Commission against Holmdahl pursuant to Rule +102(e)(1) of the Commission’s Rules of Practice.1 This order is issued in response to +Holmdahl’s application for reinstatement to appear and practice before the Commission as an +accountant responsible for the preparation or review of financial statements required to be filed +with the Commission and as an independent accountant. + +The Commission’s order found that Holmdahl engaged in improper professional conduct +while serving as the engagement partner on Peterson Sullivan, LLP’s audit of the financial +statements of a private investment fund, Summit Stable Value Fund. In conducting the audit, +Holmdahl failed to comply with American Institute of Certified Public Accountants audit +standards by failing to obtain sufficient appropriate audit evidence about the existence of certain +fund assets, failing to exercise appropriate professional judgment and professional skepticism, +and failing to properly supervise the audit. + +Holmdahl has met all of the conditions set forth in the original order and, in his capacity +as an independent accountant, has stated that he will comply with all requirements of the +Commission and the Public Company Accounting Oversight Board, including, but not limited to +all requirements relating to registration, inspections, concurring partner reviews and quality + +1 See Accounting and Auditing Enforcement Release No. 3681 dated September 4, 2015. Holmdahl was permitted, +pursuant to the order, to apply for reinstatement after three years upon making certain showings. +control standards. In his capacity as a preparer or reviewer, or as a person responsible for the +preparation or review, of financial statements of a public company to be filed with the +Commission, other than as a member of an audit committee, Holmdahl attests that he will +undertake to have his work reviewed by the independent audit committee of any company for +which he works, or in some other manner acceptable to the Commission, while practicing before +the Commission in this capacity. +Rule 102(e)(5) of the Commission’s Rules of Practice governs applications for +reinstatement, and provides that the Commission may reinstate the privilege to appear and +practice before the Commission “for good cause shown.” This “good cause” determination is +necessarily highly fact specific. +On the basis of the information supplied, representations made, and undertakings agreed +to by Holmdahl, it appears that he has complied with the terms of the September 4, 2015 order +denying him the privilege of appearing or practicing before the Commission as an accountant, +that no information has come to the attention of the Commission relating to his character, +integrity, professional conduct, or qualifications to practice before the Commission that would be +a basis for adverse action against him pursuant to Rule 102(e) of the Commission’s Rules of +Practice, and that Holmdahl, by undertaking to have his work reviewed by the independent audit +committee of any company for which he works, or in some other manner acceptable to the +Commission, in his practice before the Commission as a preparer or reviewer of financial +statements required to be filed with the Commission, and that Holmdahl, by undertaking to +comply with all requirements of the Commission and the Public Company Accounting Oversight +Board, including, but not limited to, all requirements relating to registration, inspections, +concurring partner reviews and quality control standards, in his practice before the Commission +as an independent accountant has shown good cause for reinstatement. Therefore, it is +accordingly, +ORDERED pursuant to Rule 102(e)(5)(i) of the Commission’s Rules of Practice that +Raymon Holmdahl, CPA is hereby reinstated to appear and practice before the Commission as +an accountant responsible for the preparation or review of financial statements required to be +filed with the Commission and as an independent accountant. +By the Commission. + +Vanessa A. Countryman +Secretary + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4105.txt b/raw/aaer/2019/AAER-4105.txt new file mode 100644 index 0000000000000000000000000000000000000000..2bc9951a9fa52fcbd7d5dd6b29a05020bc8042d2 --- /dev/null +++ b/raw/aaer/2019/AAER-4105.txt @@ -0,0 +1,801 @@ +UNITED STATES OF AMERICA + Before the + SECURITIES AND EXCHANGE COMMISSION + +SECURITIES ACT OF 1933 +Release No. 10730 / December 5, 2019 + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87661 / December 5, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4105 / December 5, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19612 + + + + +In the Matter of + +WARREN CLAMEN, CPA, + +Respondent. + + + + +ORDER INSTITUTING PUBLIC +ADMINISTRATIVE AND CEASE- + AND-DESIST PROCEEDINGS PURSUANT +TO SECTION 8A OF THE SECURITIES ACT +OF 1933, SECTIONS 4C AND 21C OF THE +SECURITIES EXCHANGE ACT OF 1934, +AND RULE 102(e) OF THE COMMISSION’S +RULES OF PRACTICE, MAKING FINDINGS, +AND IMPOSING REMEDIAL SANCTIONS +AND A CEASE-AND-DESIST ORDER + + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that public +administrative and cease-and-desist proceedings be, and hereby are, instituted against Warren +Clamen, CPA (“Respondent” or “Clamen”) pursuant to Section 8A of the Securities Act of 1933, +Sections 4C1 and 21C of the Securities Exchange Act of 1934 (“Exchange Act”), and Rule +102(e)(1)(iii) of the Commission’s Rules of Practice.2 + + +1 Section 4C provides, in relevant part, that: “The Commission may censure any person, or deny, +temporarily or permanently, to any person the privilege of appearing or practicing before the Commission in an y +way, if that person is found…(3)…to have willfully violated, or willfully aided and abetted the violation of, any +provision of the securities laws or the rules and regulations issued thereunder.” + +2 Rule 102(e)(1)(iii) provides, in pertinent part, that: “The Commission may…deny, temporarily or +permanently, the privilege of appearing or practicing before it…to any person who is found…to have willfully +violated, or willfully aided and abetted the violation of any provision of the Federal securities laws or the rules and +regulations thereunder.” + +2 +II. + +In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (the “Offer”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the findings +herein, except as to the Commission’s jurisdiction over him and the subject matter of these +proceedings, which are admitted, and except as provided herein in Section V, Respondent consents +to the entry of this Order Instituting Public Administrative and Cease-and-Desist Proceedings +Pursuant to Section 8A of the Securities Act of 1933, Sections 4C and 21C of the Securities +Exchange Act of 1934, and Rule 102(e) of the Commission’s Rules of Practice, Making Findings, +and Imposing Remedial Sanctions and a Cease-and-Desist Order (“Order”), as set forth below. + +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds3 that: + +Summary + +1. This matter involves accounting and disclosure misconduct by Warren Clamen, the +former Chief Financial Officer of Iconix Brand Group, Inc. (“Iconix”), a company that owns and +licenses apparel and entertainment brands, concerning: (1) the failure to recognize significant +losses relating to past-due royalties owed by Iconix’s financially-distressed licensees of two of +Iconix’s designer brands referred to herein as “Brand 1” and “Brand 2”; (2) failure to disclose +that Iconix’s acquisition prices for certain investment interests were used to funnel past-due and +future royalties back to Iconix, which kept hidden the growing receivable balance from the +licensees’ failure to meet royalty payments; and (3) the failure to properly test whether Iconix’s +intangible assets from the brands it owned were impaired. + +2. By early 2013, Clamen had notice that Iconix’s core licensees for Brand 1 and +Brand 2, herein referred to as “Company 2” and “Company 3,” were not current on their royalty +obligations to Iconix and that the licensees were financially insolvent, including that Company 3 +faced an imminent threat of bankruptcy. Iconix, through Clamen, however, failed to write-off the +amount of the uncollectible receivables from either core licensee or to create an allowance for bad +debt in connection with the uncollectible past-due royalties. Instead, as the receivable balance +continued to grow, Iconix entered into transactions with these licensees, including a deal in which +Iconix purchased from the owner of Company 3 a 49% interest in a consolidated subsidiary that +held Brand 2, and another deal in which the company purchased a 5% interest in Company 4, +which was partly owned by the majority owner of Company 2. Clamen reviewed documents that +should have put him on notice that Iconix paid a higher acquisition price in order to provide +Company 3 with $20 million and Company 2 with $2.7 million in funds to pay past-due and future +royalties. + +3 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on any +other person or entity in this or any other proceeding. + +3 + +3. As a result of Clamen’s failure to write-off or reserve for uncollectible receivables +owed by Company 3 by the second quarter of 2013, and his failure to do the same with respect to +the receivable from Company 2 by the third quarter 2013, Iconix’s interim reports for the second +and third quarters of 2013 materially overstated the company’s net income after taxes by 16% and +14%, respectively; and Iconix’s 2013 Form 10-K materially overstated net income by 7%. As +CFO, Clamen also approved Iconix’s inaccurate disclosures of these deals, which omitted that a +significant portion of Iconix’s acquisition costs would be returned back to the company as past-due +and future royalties. + +4. In addition, Clamen failed to properly consider whether receding cash flows from +Company 3 and Company 2, and the impending loss of these significant licensees, which made +up 38% and 25% of actual Brand 2 and Brand 1 revenue in 2013, respectively, were impairment +“triggering events or triggers.” Clamen also failed to appreciate that Iconix’s annual impairment +testing for 2013, which was completed in early 2014 months after the deals with Company 2 and +Company 3 had closed, included unreasonable Brand 1 and Brand 2 revenue projections. At that +time, Clamen was presented with additional red flags for impairment when Iconix signed a new, +short-term licensee for both Brand 1 and Brand 2. As Clamen should have understood, the new +licensee was a start-up company with little operating capital and no history of owning or licensing +brands, and Iconix had agreed to finance certain up-front costs for the licensee. However, Clamen +included in Iconix’s 2013 impairment analysis that this new licensee would pay $15.3 million in +Brand 1 royalties in 2018, despite the fact that that its license did not extend to 2018, and approved +unsupported royalty projections for this licensee. The values of Brand 1 and Brand 2 were, in +fact, overstated on Iconix’s year-end balance sheet in its 2013 Form 10-K by approximately $132.7 +million to $142.7 million and $106.7 million to $116.7 million, respectively, for a total of +approximately $239.4 million to $259.4 million. + +Respondent +5. Warren Clamen, 55, resides in New York. Clamen is a Certified Public +Accountant (CPA) licensed in the state of Maine and the province of Quebec in Canada. Clamen +was Iconix’s CFO from March 2005 to March 2014, when he resigned from the company. + + +Relevant Entities + +6. Iconix Brand Group, Inc. is a Delaware-incorporated, publicly-traded company +based in New York, New York. Iconix’s common stock trades on the Nasdaq under the symbol, +“ICON.” During the relevant period, Iconix had reporting obligations under Section 13(a) of the +Exchange Act. + +Facts + +Background of Iconix’s Business and Decline of its Key Brands + +4 +7. Iconix calls itself “asset light” because it does not own apparel or other inventory +associated with its brands, but instead owns brand trademarks and other related intangible assets. +Iconix’s business strategy involves monetizing its intangible assets, primarily by licensing its +brands to third parties which typically handle manufacturing and sales. The licensees pay royalties +and other fees to Iconix for the right to use Iconix brand names. + +Company 2, the Licensee for Brand 1 + +8. Iconix acquired Brand 1 in 2007 for $204 million. Iconix immediately made +Company 2 the “core licensee” for Brand 1, meaning that Company 2 set the creative direction +for all other Brand 1 licensees and provided Iconix with significant royalty revenues. In 2009, +Iconix acquired a 16.67% minority interest in Company 2, which it maintained at all relevant +times. + +9. As early as 2012, Brand 1 had declined in market acceptance and performance. +Company 2, in fact, viewed Brand 1 as having “senior citizen status” and the licensing company +was in “free fall mode.” In January 2012, Iconix and Company 2 entered into a Fifth +Amendment to Company 2’s Brand 1 License Agreement. The total annual minimum payments +due to Iconix was $3 million for the period from April 2012 through March 2013. Company 2 +acknowledged that, prior to the effect of the Fifth Amendment, it was in default of its obligations +to pay its royalties to Iconix. After signing the Fifth Amendment, however, Iconix agreed that +Company 2 could pay a settlement amount of approximately $5 million for past due royalties +owed to Iconix based on a payment schedule of thirteen payments from January 2012 through +December 2013. + +10. By August 2012, however, due to lack of operations and sales, Company 2 had +ceased making royalty payments to Iconix and was unable to stay current with respect to its 2012 +payment plan and the royalties owed under the Fifth Amendment. By December 31, 2012, +Company 2 was millions of dollars behind in its royalty payments to Iconix and had a negative +working capital. + +11. In 2013, Company 2 was the second largest licensee of Brand 1, supplying +approximately a quarter of all of Iconix’s royalty revenue related to the brand. During 2013, +although Iconix recognized approximately only $4 million in royalty revenue from Company 2, +Iconix’s accounts receivable balance for Company 2 remained as high as approximately $5 +million. At the close of 2013, Company 2 reported a net loss of $17 million. By 2013, Company +2 became so financially distressed, Iconix faced the imminent prospect of losing its core Brand 1 +licensee. In addition, Iconix’s largest Brand 1 license agreement, with a different licensee, was +set to expire at the end of 2013. On December 13, 2013, Iconix negotiated an extension of this +agreement through 2015, but the new contract with this licensee was significantly less lucrative +for Iconix. Specifically, in the extension agreement, Iconix reduced the royalties by nearly 50% +and agreed to pay this licensee significant sums for its marketing expenditures. + +Improper Accounting of Uncollectible Receivables from the Brand 1 Licensee and Failure +to Disclose Royalty Roundtrip +5 + +12. Throughout 2012 and 2013, Clamen was aware of several factors that he should +have known required Iconix to recognize a loss on the uncollectible receivables owed by +Company 2 under the licensing agreement. Company 2 stopped making any royalty payments to +Iconix by August 2012 and continued in a state of delinquency because the company was on the +verge of bankruptcy by this point. By the beginning of the third quarter of 2013, Iconix carried +approximately $5 million in its receivable balance reflecting past-due royalties owed by +Company 2. Despite these factors, Clamen failed to recognize a loss by writing off the +uncollectible receivables or creating an allowance for bad debt. This caused Iconix’s net income +after taxes with the interim report for the third quarter of 2013 to be materially overstated by 14%. + +13. Instead of recognizing the loss, Iconix entered into an acquisition transaction for +an interest in Company 4, which was owned in part by the majority owner of Company 2, in +which $2.7 million of Iconix’s purchase price was roundtripped back to Iconix as past-due +royalties owed by Company 2. The transaction allowed Iconix to continue to hide losses from +Company 2’s growing receivable balance. + + 14. Specifically, in July 2013, Iconix entered into a $40 million deal to purchase an +interest in Company 4. In its Form 10-Q for the third quarter of 2013, Iconix disclosed that it +paid: $32 million to buy 10% of Company 5, which owned half of Company 4;4 and $8 million +to Company 4 in connection with the launch of a so-called Brand 1 “diffusion brand,” referred to +herein as the “Diffusion Brand.”5 + + 15. In reality, Iconix paid only $22 million for its share of Company 5 and, by +extension, Company 4, not $32 million as disclosed. Iconix, in fact, paid $10 million to various +creditors of Company 2, including $2.7 million to itself to satisfy Company 2’s past-due royalty +obligations. At a minimum, the transaction was further notice to Clamen that Iconix should have +written off the uncollectible receivables from Company 2 or created an allowance for bad debt +because the licensee made royalty payments through funds provided by Iconix that were +roundtripped back to Iconix. However, Clamen caused Iconix to continue to improperly carry +the receivable balance and failed to disclose to Iconix’s auditors factors indicating that it was +probable that the receivables were impaired and the amount of the loss could be reasonably +estimated. + +16. Iconix’s financial statements, approved by Clamen, also overstated the cost of +Iconix’s Company 4 investment by at least $10 million, causing that asset to be overstated on +Iconix’s books beginning in the third quarter of 2013. By improperly attributing an extra $10 + +4 Through this deal, Iconix technically purchased an 18.2% interest in another LLC that was a then newly- +created affiliate of Company 5. This provided Iconix with a 10% share of Company 5 and, indirectly, with a 5% +ownership interest in Company 4. To this day, Iconix owns a minority share of the LLC. + +5 As part of the deal, Iconix also received a minority ownership interest of 16.667% in another newly-created +company that licensed the Diffusion Brand (the “Diffusion Brand Licensee”), which interest Iconix held until July +2015. The Diffusion Brand Licensee received a license for the new Diffusion Brand, and was supposed to distribute +Diffusion Brand apparel. +6 +million to the cost of Iconix’s Company 4 investment, Iconix understated its investment in +Company 2, which led to a material error in Iconix’s net income for the third quarter of 2013. + +17. In addition, prior to the transaction, on June 5, 2013, Clamen received long-term +earnings projections from Company 4 indicating that Iconix would potentially incur a loss if its +purchase price was nearly half of what it actually paid in the transactions. For example, one +document reflects that Iconix would suffer a $4.7 million loss by the end of 2017 under a +scenario in which it paid $22.5 million (nearly half of the $40 million it ultimately paid) for even +a 5% (indirect) interest in Company 4. Later that same day, Clamen, however, created several +iterations of a spreadsheet, one of which more than doubled or tripled Company 4’s earnings +projections for certain years. + + 18. In its Form 10-Q for the third quarter of 2013, approved and signed by Clamen, +Iconix failed to disclose that a portion of its $40 million investment would be roundtripped back +to Iconix. Specifically, Iconix disclosed that it “purchased a 10% minority interest in [Company +5, which provided a 5% interest in Company 4]…for $32 million.” Iconix, however, failed to +make material disclosures surrounding the transactions, including that the transaction kept +hidden Company 2’s growing receivable balance and created the false appearance that the +licensee was able to make royalty payments. + +Company 3, the Licensee for Brand 2 + + 19. Brand 2 is the main brand within what Iconix calls its Brand 2 “portfolio of +brands,” which also includes a Brand 2 Specialty Line. From 2009 to May 2013, Company 3 +was the core and largest Brand 2 licensee, with exclusive distribution rights for substantial +product categories for Brand 2 and the Brand 2 Specialty Line. + + 20. In 2009, Iconix acquired a 51% controlling stake in the Brand 2 portfolio and +created a consolidated subsidiary to hold the brand. The other 49% of this consolidated +subsidiary was owned by the principal of Company 3. Company 3 was comprised of a group of +privately-held companies and was owned and operated by one of the original founders of Brand +2. + + 21. Starting in 2012, Company 3 experienced financial distress, including reduced +cash flows from the lack of sales. According to a Company 3 senior official, the minimum +royalties in Company 3’s Brand 2 license agreement were higher than its capacity to sell the +brand, making it difficult for Company 3 to stay current with respect to its royalty payment +obligations to Iconix.6 + +6 Company 3’s principal and CEO additionally ran the day-to-day operations of the Iconix subsidiary that +owned Brand 2until May 2013, which made him responsible for collecting royalties from all of the Brand 2 +licensees, including sub-licensees of Company 3 that were owned in whole or part by Company 3 as well as +independent licensees. A portion of the total royalty collections from all of the Brand 2 licensees flowed to +Company 3 as a partner in the Iconix subsidiary, and Company 3 used those funds to offset Company 3’s own +royalty obligations to Iconix under Company 3’s Brand 2 license agreement. The decline in cash flows from sales +thus caused Company 3’s royalty distributions as a partner in the Iconix subsidiary to decline. This further hurt +Company 3’s cash flows in 2013 and 2014. +7 + + 22. In March of 2013, Iconix discussed Company 3’s dire financial condition with +management of both Company 3 and Company 2. For example, Iconix’s CEO emailed the CEO +of Company 2 about a potential merger, saying “Iconix is an interested party…and doesn’t want +[Brand 2] trademarks to die a similar story like [Brand 1].” At the same time, Iconix’s former +CEO emailed Company 3’s CEO, “I think we are on our last breath….we have lost almost all of +our licensees and [Company 3] doesn’t even want to use [the] logo….” Company 3 filed for +Chapter 11 bankruptcy in April 2014 and Company 2 wound down its business around the end of +2013 and the start of 2014. + +23. During the relevant time, Clamen, as Iconix’s CFO, should have understood that +Brand 1 and Brand 2 experienced steep declines in market acceptance and performance, resulting +in Company 3’s and Company 2’s inability to pay royalties owed to Iconix. + +Improper Accounting Concerning Uncollectible Receivables from the Brand 2 Licensee +and Failure to Disclose $20 million Royalty Roundtrip + +24. By the second quarter of 2013, Clamen, as Iconix’s CFO, failed to recognize a $9 +million loss relating to past-due uncollectible receivables from Company 3. Clamen, for +example, was aware that Iconix had issued Company 3 a series of default notices up to this point; +Company 3’s lender was seeking a default; and Company 3 was at high risk of declaring +bankruptcy. As a result, Clamen should have written off the uncollectible receivables or created +an allowance for bad debt. In failing to do so, Iconix’s net income after taxes during the second +quarter of 2013 was materially overstated by more than 16%. + +25. Per ASC 310, Receivables, a receivable is impaired when, based on current +information and events, it is probable that a creditor will be unable to collect all amounts due +according to the contractual terms of the relevant agreement. ASC 310-35-8 subtopic 450-20 +requires recognition of a loss when both of the following conditions are met: (1) information +available indicates that it is probable that a receivable has been impaired and (2) the amount of +the loss can be reasonably estimated. Clamen, however, failed to identify the receivables that +Company 3 owed to Iconix pursuant to its license for subsequent measurement and evaluation to +determine if the receivables were impaired, which, in turn, would have required Iconix to write +off the uncollectible receivables or reserve for it. + +26. Instead of properly recognizing a loss from the uncollectible receivables from +Company 3, Iconix entered into a transaction that resulted in keeping the loss hidden. +Specifically, in May of 2013, Iconix purchased the remaining 49% interest in the consolidated +subsidiary that owned Brand 2and awarded Company 3 a new, go-forward Brand 2 license with a +significantly reduced role (e.g., Company 3 would no longer be the core licensee for Brand 2 or +an exclusive licensee in any product category, hold a Brand 2 Specialty Line license, or operate +the day-to-day Brand 2 licensing business for Iconix, and it would not receive any distributions +from other licensees’ royalty payments). Clamen as the CFO was informed about the evolution +of this deal and its final terms. + + +8 + +27. As stated in the final acquisition agreement, Iconix paid $25 million for the +minority interest of Company 3’s owner in the consolidated Iconix subsidiary, but added $20 +million to the purchase price in order to provide Company 3 with funds to return back to Iconix +as past-due and prepaid royalties under Company 3’s go-forward license. Clamen reviewed the +acquisition agreement, which reflected that Iconix’s $20 million payment included $9 million in +past-due royalties that Company 3 owed and $11 million in prepaid royalties that would be owed +for the remainder of 2013 and all of 2014 under the terms of Company 3’s new licensing +agreement. Although he should have understood that Company 3’s only ability to satisfy its +royalty payment obligations to Iconix was through this transaction—in which Iconix’s own +money was roundtripped back to itself—Clamen failed to write off the uncollectible receivables +owed by Company 3. In addition, Clamen should have understood that it was appropriate to +disclose to Iconix’s auditors facts indicating that it was probable that Company 3’s receivable +balance was impaired and that the amount of the loss could be reasonably estimated. + +28. The $20 million royalty roundtrip was not disclosed to investors in Iconix’s +quarterly and annual reports that were signed and approved by Clamen. For example, Iconix’s +interim reports for the second and third quarters of 2013 as well as its annual report for 2013 +stated that the company “purchased the remaining 49% minority interest in [a consolidated +subsidiary that held Brand 2] for $45 million in cash,” but failed to disclose the $20 million as a +royalty roundtrip that was embedded in Iconix’s purchase price. In addition, Iconix referred to +the acquisition of the consolidated subsidiary as “investing activity” in its Form 10-Qs for the +second and third quarters of 2013 and as “financing activity” in its 2013 Form 10-K, without +disclosing the true nature of the acquisition or that the transaction allowed Iconix to hide the +losses resulting from Company 3’s failure to meet its royalty payment obligations. This was +material because it prevented investors from learning that Iconix’s licensees were failing in their +royalty obligations; the transaction was executed to create the false appearance that the licensees +were financially stable; and Brand 2 was potentially impaired. + + +2013 Improper Impairment Testing + + Company 3’s License of Brand 2 + +29. By the second quarter of 2013, Clamen was on notice of several triggering events +or triggers for impairment for Brand 1 and Brand 2, but failed to properly consider them in +connection with impairment testing for these brands in accordance with ASC 350, Intangibles – +Goodwill and Other, which states that an intangible asset with an indefinite use life shall be +reviewed for impairment if events or changes in circumstances indicate that it is more likely than +not that the asset is impaired. + +30. With regard to Brand 2, on April 13, 2013, about two weeks prior to the 2013 +acquisition of Company 3’s owner’s interest in the consolidated subsidiary that held Brand 2, +Clamen assessed how much royalty revenue Iconix would need from a replacement licensee for +Company 3. By then, Company 3 was already on the verge of bankruptcy, experienced a +9 +negative cash flow situation, and was about to sell off its owner’s Brand 2-related assets to +Iconix, leaving it with no chance to profit from a portion of the royalties paid by other Brand 2 +licensees in the future. In addition, this transaction would result in Company 3 losing its +exclusive Brand 2 distribution rights and, thus, it would need to compete with other Brand 2 +licensees and sellers. + +31. Clamen also had notice that Company 3 was only able to pay past-due royalties +and future royalties through funds Iconix provided by acquiring the remainder of the subsidiary +that owned Brand 2. In addition, Clamen understood, from presentations he conducted before +Iconix’s Board of Directors in February 2013, that relevant triggering events for Iconix included, +at a minimum, loss of a significant licensee and loss of key personnel. By the second quarter, +Iconix faced the loss of its licensee, Company 3, and Company 3’s longtime CEO would leave +Iconix’s Brand 2 licensing business following the acquisition of his interest in the subsidiary that +owned Brand 2. Finally, on April 30, 2013, just two days before the acquisition agreement was +executed, Clamen reviewed an email sent by another Iconix officer indicating that the officer +believed impairment of Brand 2 was likely even if Iconix were to return more than $20 million in +royalty payments to itself through the deal. + +32. Clamen failed to act on the presence of these testing triggers when they occurred, +and did not test for impairment until its annual testing period, which began at year-end 2013 and +continued into February of 2014.7 Clamen therefore caused Iconix to fail to comply with US +GAAP, including ASC 350, Intangibles – Goodwill and Other, and ASC 360, Property, Plant, +and Equipment, by failing to test Brand 2 for impairment prior to the buyout of the minority +interest in the subsidiary that held Brand 2. During the relevant time, Iconix was required to make +this determination at least annually for the indefinite-lived assets on its balance sheet, such as +Brand 2. Iconix was also required to test the intangible assets associated with Brand 2 on its +balance sheet for impairment when certain indicators, or “triggering events,” were present, +meaning “whenever events or changes in circumstance indicate that the asset might be impaired.”8 + +33. Clamen also approved royalty projections for Company 3 within Iconix’s 2013 +Brand 2 impairment test that he should have known were neither supported by what was in +Company 3’s Brand 2 license agreement nor what Clamen knew about Company 3’s financial +situation. Clamen should have understood that Iconix needed to provide Company 3 with cash +liquidity so that Company 3 could return the funds as prepaid Brand 2 “royalties” in 2013 and +2014. He was aware that Company 3’s license after the buyout deal did not extend past 2014. +Iconix, with Clamen’s approval, nevertheless projected in its 2013 impairment test that Company + +7 Iconix tested its intangible assets for impairment as of October of 2013. + +8 Iconix aggregated the value of its brands in a single line item for intangible assets within its financial +statements. Intangible assets that are listed on a company’s balance sheet are subject to periodic testing for +impairment using several testing inputs, such as royalty projections and growth rates relating to the performance of +Iconix’s licensees. Pursuant to ASC 350, an intangible asset is impaired when its carrying amount exceeds its fair +value. (ASC 820 defines fair value as the price that would be received to sell an asset or to transfer a liability in an +orderly transaction between market participants at the measurement date.) + +10 +3 would continue to pay between $5.2 and $6.2 million each year through 2018. This was +unreasonable and unsupported. + +34. As a result, the company failed to recognize that Brand 2 was materially +overvalued on its balance sheet in 2013 by an amount that was at least in the range of $106.7 +million to $116.7 million. + +Company 2’s License of Brand 1 + +35. With regard to Brand 1, Iconix improperly bolstered the value of that brand in its +2013 impairment test, overseen by Clamen, by attributing projections for Diffusion Brand +royalties to Brand 1. Iconix, with Clamen’s approval, compounded this error by applying an +excessive, year-over-year growth rate ranging from 825% in 2015 through 26% in 2018 to the +Diffusion Brand licensee’s projections. This was unreasonable and had no basis in past +performance. It also ignored the fact that the Diffusion Brand’s license did not extend into 2018. + + 36. Clamen failed to properly assess the loss of a significant licensee, Company 2, as +a triggering event. This triggering event obligated Iconix, through Clamen, to test its Brand 1 +asset for impairment as of the third quarter of 2013. As a result of Clamen’s failure to properly +assess impairment triggering events, Iconix violated US GAAP, including ASC 350 and ASC +360, by failing to test Brand 1 for impairment following the loss of a significant licensee around +the time of Iconix’s acquisition of an interest in Company 4. + +New Licensee in 2014 for Brand 1 and Brand 2 + +37. By early 2014, Iconix signed a new core licensee for Brand 1 and Brand 2, +referred to herein as the “Factory Liaison.” The Factory Liaison was a start-up company with +little operations and no prior history of owning or licensing any brands. + +38. At the time the Factory Liaison signed its Brand 1 licensing agreement with +Iconix, the Factory Liaison believed that Brand 1 was not desirable and lacked customer demand. + +39. The Factory Liaison agreed to be a Brand 1 licensee because Iconix agreed to +operate and finance front-end functions for it, such as sales, design, and payroll for Brand 1 staff. +The Factory Liaison’s primary responsibility would be limited to purchasing and shipping +products. + + 40. The Factory Liaison’s Brand 1 license also included a “shortfall” provision that +allowed the Factory Liaison to pay just a percentage of its actual Brand 1 sales revenue each +year, and pushed forward indefinitely the amount of any shortfall between that number and the +“guaranteed” minimum royalty payments in its license agreement.9 As a result of this provision, + +9 ASC 605, Revenue Recognition, provides that revenue should not be recognized until it is realized or +realizable and earned. Iconix’s revenue recognition policy, consistent with GAAP, set forth four requirements that +must generally be met before revenue can be realized and earned: 1) persuasive evidence of an arrangement exists; +11 +the contractual minimums in the Factory Liaison’s Brand 1 license were not fixed or +determinable under Iconix’s revenue recognition policy, which policy was consistent with US +GAAP.10 + +41. Clamen included unreasonable and unsupported projections in Iconix’s 2013 +impairment testing of Brand 1, including unreasonable projections for the Factory Liaison. +Specifically, the Brand 1 royalty projections that Clamen approved for the Factory Liaison in +Iconix’s 2013 impairment test were much higher than those in its license. Iconix projected that +the Factory Liaison would pay between 88% and 578% more in Brand 1 royalties each year from +2014 through 2017 than the targets listed in its license. Overages on projections of a few +hundred percent were unreasonable, and had no basis in past performance. + +42. Clamen also approved Iconix’s projection that the Factory Liaison would pay +$15.3 million in Brand 1 royalties in 2018, even though its license did not extend to 2018. +Clamen should have known that this was unreasonable, since he received emails and documents +from other Iconix executives indicating that the Factory Liaison was a mere “12-18 month +solution” for whom Iconix would serve as front-end by running and financing its Brand 1 +operations. Moreover, the projections were made further unreasonable given the shortfall +provision in its contract, and its substantial Brand 2 commitments. + +43. As a result of Clamen’s failure to properly identify triggering events and +approving unreasonable projections for the Factory Liaison, Iconix failed to recognize that its +Brand 1 asset (and its Brand 2 asset, as aforementioned) was materially overvalued on its balance +sheet in 2013 by an amount that was at least in the range of $132.7 million to $142.7 million and +to properly account for this asset. + +Improper Accounting for and Disclosure of Iconix’s Ownership Interest in Company 2, the +2013 Core Licensee of Brand 1 + +44. More than a year before the Company 4 acquisition, in March 2012, Company 2 +delegated day-to-day management responsibilities over its affairs to Iconix and Iconix’s CEO at +the time. The terms of this arrangement were memorialized in a confidential written agreement +which supported the fact that, from this point forward, Iconix exercised significant influence +over Company 2, and this licensee began a practice of steady reporting of its operational +circumstances to Iconix. + +45. Under ASC 323, Equity Method and Joint Ventures, a 5% or more investment in a +limited liability company, such as Company 2, is generally accounted for under the equity + +2) delivery has occurred or services have been rendered; 3) the seller’s price to the buyer is fixed or determinable; +and 4) collectability is reasonably assured. + +10 The Factory Liaison’s Brand 2 license was structured differently from its Brand 1 license (e.g., no shortfall +provision and Iconix was not responsible for front-end functions), and therefore the Brand 2 license did not on its +face present the same revenue recognition issues for Iconix. + +12 +method. Therefore, since Iconix owned 16.67% of Company 2, Iconix should have accounted for +its investment under the equity method. In addition, under ASC 323, the equity method is also the +appropriate method to use in circumstances where, as here, Iconix had the ability to (and did) +exercise significant influence over the operating and financial policies of Company 2. + +46. Clamen periodically met with Company 2’s management to review financial and +business updates, which should have been an indication of Iconix’s influence over Company +2. For example, in August 2013, Clamen received and reviewed the 2013 and 2014 Company 2 +internal financial projections that Company 2 used to obtain financing. As these documents reflect, +Iconix’s then-CEO directed management decisions for Company 2. For example, Clamen +understood that Iconix’s CEO terminated Company 2’s CEO. Furthermore, according to Company +2 officials, from at least late 2012 to mid-2013, Clamen and Iconix’s then-CEO were actively +involved in the management of Company 2’s business from a financial standpoint. At certain +times, Iconix’s then-CEO asked Company 2’s CEO to have Clamen “vet the financials.” + +47. Despite these indications that Iconix exercised significant influence over Company +2 (which, in fact, it had, pursuant to the management agreement between the parties), and the fact +that Iconix had a 5% or more investment in this licensee, an LLC, Clamen failed to properly +examine whether it was appropriate to continue to use the cost method to account for Iconix’s +interest in Company 2, as opposed to the equity method. As a result, Iconix did not properly +account for a material equity loss pick-up in the third quarter of 2013 relating to the $10 million +payment it made in connection with the Company 4 acquisition. In addition, Iconix did not +disclose related party transactions with Company 2, including the Company 4 acquisition, pursuant +to ASC 850, Related Party Disclosures11 and Rule 4-08(k) of Regulation S-X. + + + +Inaccurate Representation Letters to Iconix’s Auditor + + 48. As CFO, Clamen was responsible for the fair presentation in the financial +statements of financial position, results of operations, and cash flows in conformity with US +GAAP. He signed quarterly representation letters to Iconix’s outside auditors on August 9, 2013 +(for the second quarter Form 10-Q), November 6, 2013 (for the third quarter Form 10-Q) and +February 27, 2014 (for the 2013 Form 10-K). The representation letters conveyed inaccurate +information, or omitted material facts, to Iconix’s auditor that, among other things: + +(a) all of Iconix’s material transactions were properly recorded; + +(b) Iconix tested its indefinite-lived intangibles for impairment in accordance with FASB +ASC 350 and recorded any and all adjustments appropriately; + +(c) Iconix reviewed intangibles whenever events indicated that the carrying amount might +not be recoverable and found that no impairment write-downs were required; + +11 See also ASC 850-10-20(b) (related parties include entities required to be accounted for by the equity +method); ASC 850-10-50-1 (“Financial statements shall include disclosures of material related party transactions”). + +13 + +(d) all related-party transactions, including sales, purchases, guarantees and amounts +receivable from or payable to related parties, such as unconsolidated subsidiaries and +affiliates under common control with Iconix or directly or indirectly controlled by Iconix, +were properly recorded and disclosed; + +(e) Iconix disclosed to its auditors on a quarterly basis the identity of related parties and all +related party relationships known to the company, and also properly disclosed these +things in its annual financial statements; + +(f) unconsolidated joint ventures or other such participations were properly recorded and +disclosed;12 + +(g) receivables in the financial statements represented valid claims and were properly +accounted for; + +(h) the cost method was used to account for Iconix’s investment in Company 2 because +Iconix did not have the ability to exercise significant influence over Company 2’s +operating and financial policies; + +(i) Iconix made available to the auditors all financial records and related data; and + +(j) Iconix’s system of internal controls was effective and had no deficiencies. + + +Violations + + 49. As a result of the negligent conduct described above, Clamen willfully13 violated +Sections 17(a)(2) and 17(a)(3) of the Securities Act. Specifically, he violated these statutes in +connection with Iconix’s improper disclosure of its acquisition of the minority interest in the +subsidiary that owned Brand 2 and the Company 4 acquisition transaction and accounting for the +loss and cost of investments in connection with the buyout related to Brand 2 and Company 4 +acquisitions. Negligence is sufficient to establish violations of Sections 17(a)(2) and 17(a)(3). + + 50. As a result of the conduct described above, Clamen willfully violated Exchange Act +Rules 13b2-1 and 13b2-2, which make it unlawful to directly or indirectly, falsify, or cause to be +falsified, any book, record, or account, or for officers, directors, and any persons acting under the +direction thereof, to make a materially false or misleading statement, or omit certain material facts, + +12 In March 2016, Iconix restated its historical accounting treatment for several overseas joint ventures to +consolidate them within Iconix’s financial statements. Some of those joint ventures were operational while Clamen +was still at the company. Additionally, Iconix did not properly record its investment in Company 2 since it failed to +use the equity method of accounting. + +13 “Willfully,” for purposes of imposing relief under Section 4C of the Exchange Act and Rule 102(e) of the +Commission’s Rules of Practice, “‘means no more than that the person charged with the duty knows what he is +doing.’” Wonsover v. SEC, 205 F.3d 408, 414 (D.C. Cir. 2000) (quoting Hughes v. SEC, 174 F.2d 969, 977 (D.C. +Cir. 1949)). There is no requirement that the actor “‘also be aware that he is violating one of the Rules or Acts.” +Tager v. SEC, 344 F.2d 5, 8 (2d Cir. 1965). + +14 +to an accountant in connection with an audit. No showing of scienter is required to establish a +violation of Rules 13b2-1 or 13b2-2. + + 51. As a result of the conduct described above, Clamen caused Iconix to violate Section +13(a) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 thereunder, which require +issuers to file annual, current and quarterly reports, which include such further information as may +be necessary to make the required statements not misleading. + + 52. As a result of the conduct described above, Clamen caused Iconix to violate Section +13(b)(2)(A) of the Exchange Act, which requires issuers to make and keep books, records, and +accounts, which, in reasonable detail, accurately and fairly reflect the transactions and dispositions +of the issuer. + + 53. As a result of the conduct described above, Clamen caused Iconix to violate Section +13(b)(2)(B) of the Exchange Act, which requires issuers to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that transactions are +recorded as necessary to permit preparation of financial statements in accordance with generally +accepted accounting principles. + + 54. As a result of the conduct described above, Clamen is subject to the provisions set +forth in Exchange Act Section 4C(a)(3) and Rule 102(e)(1)(iii) of the Commission’s Rules of +Practice. + + +Findings + + 55. Based on the foregoing, the Commission finds that Clamen (a) committed willful +violations of Sections 17(a)(2) and (3) of the Securities Act and committed willful violations of +Exchange Act Rules 13b2-1 and 13b2-2; (b) caused Iconix’s violations of Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act, and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +promulgated thereunder; and (c) is subject to the provisions set forth in Section 4C(a)(3) of the +Exchange Act and Rule 102(e)(1)(iii) of the Commission’s Rules of Practice. + + +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Clamen’s Offer. + + Accordingly, it is hereby ORDERED, effective immediately, that: + + A. Clamen shall cease and desist from committing or causing any violations and any +future violations of Sections 17(a)(2) and 17(a)(3) of the Securities Act; Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act; and Exchange Act Rules 12b-20, 13a-1, 13a- +11, 13a-13, 13b2-1, and 13b2-2. +15 + + B. Clamen is denied the privilege of appearing or practicing before the Commission as +an accountant. + + C. After three (3) years from the date of this order, Clamen may request that the +Commission consider his reinstatement by submitting an application (attention: Office of the +Chief Accountant) to resume appearing or practicing before the Commission as: + + 1. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission (other than as a member of an audit committee, as that term is +defined in Section 3(a)(58) of the Securities Exchange Act of 1934). Such +an application must satisfy the Commission that Clamen’s work in his +practice before the Commission as an accountant will be reviewed either by +the independent audit committee of the public company for which he works +or in some other acceptable manner, as long as he practices before the +Commission in this capacity; and/or + + 2. a preparer or reviewer, or a person responsible for the preparation or review, +of any public company’s financial statements that are filed with the +Commission as a member of an audit committee, as that term is defined in +Section 3(a)(58) of the Securities Exchange Act of 1934. Such an +application will be considered on a facts and circumstances basis with +respect to such membership, and the applicant’s burden of demonstrating +good cause for reinstatement will be particularly high given the role of the +audit committee in financial and accounting matters; and/or + + 3. an independent accountant. + + Such an application must satisfy the Commission that: + + (a) Clamen, or the public accounting firm with which he is associated, +is registered with the Public Company Accounting Oversight +Board (“Board”) in accordance with the Sarbanes-Oxley Act of +2002, and such registration continues to be effective; + + (b) Clamen, or the registered public accounting firm with which he is +associated, has been inspected by the Board and that inspection did +not identify any criticisms of or potential defects in the +respondent’s or the firm’s quality control system that would +indicate that Clamen will not receive appropriate supervision; + (c) Clamen has resolved all disciplinary issues with the Board, and has +complied with all terms and conditions of any sanctions imposed +by the Board (other than reinstatement by the Commission); and + +16 + (d) Clamen acknowledges his responsibility, as long as he appears or +practices before the Commission as an independent accountant, to +comply with all requirements of the Commission and the Board, +including, but not limited to, all requirements relating to +registration, inspections, concurring partner reviews and quality +control standards. + +D. The Commission will consider an application by Clamen to resume appearing or +practicing before the Commission provided that his relevant CPA license is current and he has +resolved all other disciplinary issues with the applicable state boards of accountancy or relevant +Canadian licensing authority. However, if licensure is dependent on reinstatement by the +Commission, the Commission will consider an application on its other merits. The +Commission’s review may include consideration of, in addition to the matters referenced above, +any other matters relating to Clamen’s character, integrity professional conduct, or qualifications +to appear or practice before the Commission as an accountant. Whether an application +demonstrates good cause will be considered on a facts and circumstances basis with due regard +for protecting the integrity of the Commission’s processes. + + E. Clamen shall, within 10 days of the entry of this Order, pay disgorgement of +$39,042.61, prejudgment interest of $10,082.65, and a civil money penalty in the amount of +$150,000.00 to the Securities and Exchange Commission. The Commission will hold funds paid +pursuant to this paragraph in an account at the United States Treasury pending a decision whether +the Commission, in its discretion, will seek to distribute funds or, transfer them to the general fund +of the United States Treasury, subject to Section 21F(g)(3). If timely payment of disgorgement +and prejudgment interest is not made, additional interest shall accrue pursuant to SEC Rule of +Practice 600. If timely payment of a civil money penalty is not made, additional interest shall +accrue pursuant to 31 U.S.C. §3717. + +F. Payment must be made in one of the following ways: + +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +17 + +Payments by check or money order must be accompanied by a cover letter +identifying Clamen as a Respondent in these proceedings, and the file number of +these proceedings; a copy of the cover letter and check or money order must be sent +to Anita B. Bandy, Associate Director, Division of Enforcement, Securities and +Exchange Commission, 100 F St., NE, Washington, DC 20549-6561. + + F. Regardless of whether the Commission in its discretion orders the creation of a +Fair Fund for the penalties ordered in this proceeding, amounts ordered to be paid as civil money +penalties pursuant to this Order shall be treated as penalties paid to the government for all +purposes, including all tax purposes. To preserve the deterrent effect of the civil penalty, +Respondent agrees that in any Related Investor Action, he shall not argue that he is entitled to, nor +shall he benefit by, offset or reduction of any award of compensatory damages by the amount of +any part of Respondent’s payment of a civil penalty in this action ("Penalty Offset"). If the court in +any Related Investor Action grants such a Penalty Offset, Respondent agrees that he shall, within +30 days after entry of a final order granting the Penalty Offset, notify the Commission's counsel in +this action and pay the amount of the Penalty Offset to the Securities and Exchange Commission. +Such a payment shall not be deemed an additional civil penalty and shall not be deemed to change +the amount of the civil penalty imposed in this proceeding. For purposes of this paragraph, a +"Related Investor Action" means a private damages action brought against Respondent by or on +behalf of one or more investors based on substantially the same facts as alleged in the Order +instituted by the Commission in this proceeding. + + +V. +It is further Ordered that, solely for purposes of exceptions to discharge set forth in Section +523 of the Bankruptcy Code, 11 U.S.C. §523, the findings in this Order are true and admitted by +Respondent, and further, any debt for disgorgement, prejudgment interest, civil penalty or other +amounts due by Respondent under this Order or any other judgment, order, consent order, decree +or settlement agreement entered in connection with this proceeding, is a debt for the violation by +Respondent of the federal securities laws or any regulation or order issued under such laws, as set +forth in Section 523(a)(19) of the Bankruptcy Code, 11 U.S.C. §523(a)(19). + + By the Commission. + + +Vanessa A. Countryman +Secretary \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4107.txt b/raw/aaer/2019/AAER-4107.txt new file mode 100644 index 0000000000000000000000000000000000000000..c3f2af2bb6ffc8bdb2a0b9edfc5bf7004ef54b34 --- /dev/null +++ b/raw/aaer/2019/AAER-4107.txt @@ -0,0 +1,401 @@ +1 + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87732 / December 12, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4107 / December 12, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19616 + +In the Matter of + +STONEMOR PARTNERS +L.P. and STONEMOR GP +LLC, + +Respondents. + + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”), against StoneMor Partners L.P. and StoneMor GP LLC. + +II. + + In anticipation of the institution of these proceedings, Respondents have submitted Offers +of Settlement (the “Offers”) which the Commission has determined to accept. Solely for the +purpose of these proceedings and any other proceedings brought by or on behalf of the +Commission, or to which the Commission is a party, and without admitting or denying the +findings herein, except as to the Commission’s jurisdiction over them and the subject matter of +these proceedings, which are admitted, Respondents consent to the entry of this Order Instituting +Cease-and-Desist Proceedings Pursuant to Section 21C of the Securities Exchange Act of 1934, +Making Findings, and Imposing a Cease-and-Desist Order (“Order”), as set forth below. +2 + +III. + + On the basis of this Order and Respondents’ Offers, the Commission finds1 that: +Summary +1. These proceedings involve violations of the reporting, books and records, internal +accounting controls and related provisions of the federal securities laws by StoneMor Partners L.P. +(“StoneMor”), a publicly traded master limited partnership (“MLP”) and owner and operator of +cemeteries and funeral homes throughout the United States, and its general partner, StoneMor GP +LLC (the “General Partner”). + +2. Beginning in the fourth quarter of 2015, and continuing through at least the second +quarter of 2016, the General Partner internally identified material issues concerning StoneMor’s +two primary sources of cash flow—customer sales and short-term borrowings—which jeopardized +the General Partner’s ability to operate and grow StoneMor’s business. Despite these issues, the +Management’s Discussion & Analysis (“MD&A”) sections of StoneMor’s 2015 annual report on +Form 10-K, and its quarterly reports for first and second quarter of 2016 on Forms 10-Q, did not +include a discussion of material unfavorable trends and uncertainties concerning these two areas, as +contemplated by Item 303 of Regulation S-K. As a result, investors and others were unable to +fully assess StoneMor’s liquidity. + +3. Additionally, between March 2014 and November 2016, StoneMor filed annual and +quarterly reports on Forms 10-K and Forms 10-Q, respectively, that contained financial statements +that did not materially comply with U.S. generally accepted accounting principles (“GAAP”). +When StoneMor publicly announced its decision to restate its inaccurate financial statements, it +disclosed that the GAAP reporting errors were the result of material weaknesses in its internal +control over financial reporting (ICFR). These material weaknesses persisted for several years and +caused StoneMor to be delinquent in filing nine consecutive quarterly and annual reports beginning +with its 2016 annual report on Form 10-K and continuing through its 2018 annual report on Form +10-K. These delinquent filings likewise deprived investors and others of timely and material +information concerning StoneMor’s results of operations and financial condition. +Respondents +4. StoneMor Partners L.P., a Delaware master limited partnership headquartered in +Trevose, Pennsylvania, is an owner and operator of cemeteries and funeral homes. StoneMor’s +common stock is registered with the Commission pursuant to Section 12(b) of the Exchange Act +and is quoted under the symbol “STON” on the New York Stock Exchange. On September 28, +2018, StoneMor announced its intention to transition from an MLP to a Delaware corporation. +To date, that transition is not complete. + + +1 The findings herein are made pursuant to Respondent's Offer of Settlement and are not binding on +any other person or entity in this or any other proceeding. + +3 + +5. StoneMor GP LLC, a privately-held Delaware limited liability company, is +StoneMor’s general partner. StoneMor GP LLC is a wholly owned subsidiary of StoneMor GP +Holdings LLC, which is, in turn, owned or controlled by certain current and former members of +StoneMor GP LLC senior management. At all relevant times, StoneMor GP LLC was +responsible for the timely and accurate filing of periodic reports with the Commission. +Facts +Item 303 of Regulation S-K +6. Item 303 of Regulation S-K sets forth the types of information an issuer must +disclose in the MD&A section of its quarterly and annual filings. As the Commission has +previously emphasized, the MD&A is an important disclosure tool that is designed to provide +investors with a perspective on a company’s business “as seen through the eyes of those who +manage that business” because “management has a unique perspective on its business that only it +can present.”2 + +7. Item 303(a) of Regulation S-K requires an issuer’s annual filings to include +discussion and analysis of “material events and uncertainties known to management that would +cause reported financial information not to be necessarily indicative of future operating results or +of future financial condition.” See 17 C.F.R. § 229.303(a), Instruction 3. This includes the +requirement to identify “any known trends or any known demands, commitments, events or +uncertainties that will result in or that are reasonably likely to result in the registrant’s liquidity +increasing or decreasing in a material way.”3 “If a material deficiency is identified,” an issuer +must “indicate the course of action that [it] has taken or proposes to take to remedy the +deficiency.” See 17 C.F.R. § 229.303(a)(1). As used in Item 303 of Regulation S-K, liquidity +refers to “the ability of an enterprise to generate adequate amounts of cash to meet [its] needs for +cash” and “shall be discussed in the context of the registrant’s own business.” See 17 C.F.R. § +229.303(a), Instruction 5. See 17 C.F.R. § 229.303(a)(1). Item 303(b) of Regulation S-K +imposes related requirements on an issuer’s quarterly filings—namely, that an issuer report in an +MD&A section any material changes to its financial condition or results of operations. See 17 +C.F.R. § 229.303(b). + +Relevant StoneMor Background +8. At all relevant times, and pursuant to StoneMor’s limited partnership agreement +(“LPA”), the General Partner retained full power, authority, and responsibility to conduct +StoneMor’s business, which included, but was not limited to, owning and operating cemeteries +throughout the United States. For the year ended December 31, 2015, StoneMor’s cemetery +segment accounted for more than 80 percent of its total revenues. This segment of the business + +2 Commission Guidance Regarding Management’s Discussion and Analysis of Financial Condition +and Results from Operations, Securities Act Release No. 33-8350 (December 29, 2003). + +3 The Commission has explained that the “reasonably likely” standard for disclosures mandated by +Item 303 of Regulation S-K is lower than “more likely than not.” Commission Statement About +Management’s Discussion and Analysis of Financial Condition and Results of Operations, Release No. +33-8056 (Jan. 25, 2002). +4 + +involved the sale of cemetery products and services both at time of death (“at-need”) and prior to +time of death (“pre-need”). Pre-need sales, which typically accounted for more than half of +StoneMor’s cemetery sales, were generated through, among other things, telemarketing, direct +mail campaigns, cold calling, and other marketing efforts conducted by StoneMor’s salesforce. +Pre-need sales – which provided for the performance of services and delivery of products largely +at an unspecified date in the future – typically did not meet GAAP requirements for full revenue +recognition in the period in which the sales were made. Nevertheless, the General Partner +monitored pre-need sales along with at-need sales as part of its evaluation of StoneMor’s current +period operating performance. + +9. At all relevant times, as an MLP and in accordance with its LPA, StoneMor was +required to distribute nearly all of its available cash to its unitholders on a quarterly basis. As a +result, the predictability of, and growth in, StoneMor’s cash distributions was material +information to the income-oriented investors who held StoneMor units. + +10. StoneMor disclosed in periodic filings that its primary sources of liquidity were +cash generated from operations and amounts available for borrowing under its revolving credit +facility. StoneMor also disclosed that it expected to fund cash distributions from operating cash +flow. Since cash collected from pre-need sales accounted for a significant portion of the cash +StoneMor generated from its operations, StoneMor’s ability to maintain a qualified and +productive salesforce – which included a need to consistently increase pre-need sales – was +critical to its ability to generate operating cash flow sufficient to pay cash distributions. + +11. The General Partner’s senior management internally monitored StoneMor’s sales +through various operational metrics (“Sales Metrics”). The Sales Metrics included, but were not +limited to, weekly statistics regarding: customer contacts; customer presentations; salespeople +who recorded at least one sale; and the value and number of pre-need contracts written during the +week. Senior management also analyzed monthly sales performance relative to internal budgets. + +12. At all relevant times, StoneMor had access to a revolving credit facility. +StoneMor used it to finance, among other things, acquisitions, capital expenditures and other +critical cash outlays which, in turn, allowed StoneMor to pay cash distributions primarily from +operating cash flow. +StoneMor’s Sales Decline and Liquidity Concerns Emerge +13. On or around October 1, 2015, StoneMor implemented significant structural +changes to its salesforce in an effort to provide more transparent incentive compensation +guidelines, promote salesforce accountability, and reduce costly turnover. However, +immediately after the salesforce restructuring took effect, StoneMor’s Sales Metrics showed a +significant decline relative to past performance. + +14. Beginning in October 2015 and continuing through February 2016, StoneMor’s +weekly internal Sales Metrics reports, as compared to third quarter of 2015 historical averages, +revealed significant declines. For example, between October 2015 and February 2016, the Sales +Metrics had average monthly declines of between 17 percent and 23 percent. As a result, +StoneMor’s sales revenue over the same five month period, driven in large part by the decline in +5 + +pre-need business, missed the internal budget established by the General Partner’s management +by a total of $8.3 million, or 11 percent. These sales-related declines had a material and adverse +impact on StoneMor’s liquidity and its ability to continue to pay distributions. + +15. StoneMor faced liquidity problems as its Sales Metrics declined. By late +November 2015, StoneMor had available only $21 million to borrow—less than 12 percent of its +revolving credit facility. The General Partner’s management knew that StoneMor’s limited +ability to draw on its line of credit jeopardized its power to pursue strategic acquisitions and to +finance critical corporate expenditures which, in turn, reduced the amount of operating cash flow +available for its cash distributions. + +16. In February 2016, nearly four weeks prior to StoneMor’s filing of its 2015 annual +report on Form 10-K, the General Partner finalized StoneMor’s full year 2016 internal operating +budget. To ensure StoneMor had adequate liquidity to meet its full year 2016 budgeted cash +needs, the General Partner estimated that StoneMor needed to raise more than $110 million +through the public issuance of debt and equity securities. Without access to these funds, as +reflected in the budget, StoneMor would be unable to operate and complete budgeted +acquisitions. +Sales Continue to Falter and Liquidity Issues Persist Through July 2016 +17. In the first half of 2016, StoneMor’s Sales Metrics continued to decline and its +liquidity further deteriorated. In March 2016, and continuing through July 2016, StoneMor’s +weekly internal Sales Metrics reports, as compared to third quarter of 2015 historical averages, +revealed similar declines in salesforce performance. For example, between March 2016 and July +2016, the Sales Metrics experienced average monthly declines of between 10 percent and 22 +percent. As a result, over this five month period, StoneMor’s sales fell short of internal budgets +by approximately $17.5 million, or 15 percent, which, when coupled with budget misses between +November 2015 and February 2016, continued to have a material and adverse impact on +StoneMor’s liquidity. + +18. As was the case during the October 2015 through February 2016 timeframe +discussed above, StoneMor’s liquidity issues jeopardized its ability to finance acquisitions, +operate and grow its business, and pay cash distributions. Moreover, in March 2016, the General +Partner was notified that a planned bond offering could potentially result in a credit rating +downgrade. In June 2016, less than three months later, the General Partner instituted mandatory +employee furloughs to address the material and negative impact the decline in Sales Metrics had +on StoneMor’s liquidity. + +19. In July 2016, nearly three weeks before StoneMor filed its second quarter 2016 +Form 10-Q, internal financial results indicated that StoneMor’s pre-need sales for the second +quarter of 2016 missed budget by $6.3 million—nearly 13 percent. In response, the General +Partner suspended all acquisitions and capital raising activities and, in an attempt to improve +StoneMor’s liquidity, immediately instituted employee layoffs and imposed other cost +controlling measures. + +6 + + +The General Partner Reduces StoneMor’s Distribution by Half +20. On October 27, 2016, StoneMor issued a press release to announce that its +General Partner had elected to reduce StoneMor’s quarterly cash distribution by 50 percent. +StoneMor and the General Partner stated that “previous efforts to accomplish our salesforce +goals have meaningfully lagged our expectations, resulting in a negative impact on our revenue” +and that StoneMor’s reduced distribution level, “along with previously announced cost savings +measures totaling $7 million annually, will enhance StoneMor’s liquidity by approximately $12 +million in quarterly cash savings.” The next day, StoneMor’s units declined in value by nearly +45 percent from the previous day’s closing price. +StoneMor’s MD&A Disclosures +21. StoneMor filed its 2015 annual report on Form 10-K on February 29, 2016. The +MD&A section contained generic disclosure of various sources and uses of cash, but did not +include any discussion and analysis of certain material trends, events and uncertainties known to +management. Specifically, StoneMor did not discuss the known trend that its pre-need sales had +declined due to structural changes to its salesforce and, as a result, StoneMor’s liquidity and its +ability to: (1) continue to pay distributions at historical levels; (2) borrow under its revolving +credit facility; and (3) issue debt and equity was decreasing in a material way. + +22. StoneMor filed its quarterly reports for the first and second quarters of 2016 on +Forms 10-Q on May 9, 2016 and August 5, 2016, respectively. The MD&A sections of these +two quarterly reports contained largely the same discussion and analysis that StoneMor included +in its 2015 annual report on Form 10-K. In addition to the known trends, events and +uncertainties discussed above, StoneMor also did not disclose in the Form 10-Q for the second +quarter that its General Partner, in response to these issues, had immediately instituted employee +layoffs and suspended all acquisitions and all capital raising activity, which materially and +negatively impacted StoneMor’s ability to operate and grow its business. +Misstated Financial Statements and Filing Delays + +23. On September 2, 2016, StoneMor disclosed that its 2013, 2014, and 2015 Forms +10-K and its Forms 10-Q for the first and second quarters of 2016 needed to be restated due to +errors in the allocation of GAAP net loss between the General Partner and StoneMor’s limited +partners in its consolidated balance sheets. In total, StoneMor overstated limited partners’ +capital by more than $10 million, equal to five percent of June 30, 2016 total partners’ capital. +These misstated financial statements were also included in various earnings releases filed on +Forms 8-K. + +24. On February 27, 2017, StoneMor disclosed that its 2015 Form 10-K and Forms +10-Q for the first, second, and third quarters of 2016 needed to be restated, due to, among other +things, errors in StoneMor’s cemetery revenue recognition. Specifically, StoneMor cumulatively +overstated its GAAP deferred cemetery revenue liability in its consolidated balance sheets, and +understated GAAP revenue in its consolidated statements of operations, by approximately $30 +7 + +million, equal to 13 percent of September 30, 2016 year-to-date total revenues. These misstated +financial statements were also included in various earnings releases filed on Forms 8-K. + +25. StoneMor attributed the GAAP reporting errors discussed above to material +weaknesses in StoneMor’s ICFR that failed to prevent or detect the material accounting errors. +In connection with its September 2, 2016 and February 27, 2017 restatement announcements, +StoneMor disclosed five distinct material weaknesses. The accounting issues identified above +also led to StoneMor repeatedly missing periodic filing deadlines beginning with its 2016 Form +10-K and continuing through its Form 10-Q for the third quarter of 2018. These delinquent +filings deprived investors and others of timely and material information concerning StoneMor’s +results of operations and financial condition. +Violations +26. Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, and 13a-13 +thereunder require that every issuer of a security registered pursuant to Exchange Act Section 12 +file with the Commission, among other things, accurate annual, current, and quarterly reports as +the Commission may require. Additionally, Item 303 of Regulation S-K requires an issuer to +disclose in its MD&A sections of required periodic filings, among other things, “material events +and uncertainties known to management that would cause reported financial information not to +be necessarily indicative of future operating results or of future financial condition.” Failure to +comply with Regulation S-K constitutes a violation under Section 13(a) of the Exchange Act. As +a result of the conduct described above, StoneMor violated, and the General Partner caused +StoneMor’s violations of, Section 13(a) of the Exchange Act and Rules 13a-1, 13a-11, and 13a- +13 thereunder. + +27. Rule 12b-20 of the Exchange Act requires that, in addition to the information +expressly required to be included in a statement or report filed with the Commission, there shall +be added such further material information, if any, as may be necessary to make the required +statements, in light of the circumstances under which they are made, not misleading. As a result +of the conduct described above, StoneMor violated, and the General Partner caused StoneMor’s +violations of, Rule 12b-20 of the Exchange Act. + +28. Section 13(b)(2)(A) of the Exchange Act requires companies with securities +registered pursuant to Exchange Act Section 12 to make and keep books, records and accounts +which, in reasonable detail, accurately and fairly reflect transactions and dispositions of their +assets. As a result of the conduct described above, StoneMor violated, and the General Partner +caused StoneMor’s violations of, Section 13(b)(2)(A) of the Exchange Act. + +29. Section 13(b)(2)(B) of the Exchange Act requires all companies with securities +registered pursuant to Exchange Act Section 12 to devise and maintain a system of internal +accounting controls sufficient to provide reasonable assurances that transactions are recorded as +necessary to permit preparation of financial statements in conformity with generally accepted +accounting principles and to maintain accountability for assets. As a result of the conduct +described above, StoneMor violated, and the General Partner caused StoneMor’s violations of, +Section 13(b)(2)(B) of the Exchange Act. +8 + + +StoneMor’s Remedial Efforts + +30. In determining to accept the Offer, the Commission considered remedial acts +promptly undertaken by Respondent and cooperation afforded the Commission staff. +IV. + + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondents’ Offers. + Accordingly, it is hereby ORDERED that: + + A. Pursuant to Section 21C of the Exchange Act, Respondent StoneMor Partners L.P. +cease and desist from committing or causing any violations and any future violations of Sections +13(a), 13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a- +13 thereunder. + + B. Pursuant to Section 21C of the Exchange Act, Respondent StoneMor GP, LLC cease +and desist from committing or causing any violations and any future violations of Sections 13(a), +13(b)(2)(A), and 13(b)(2)(B) of the Exchange Act and Rules 12b-20, 13a-1, 13a-11, and 13a-13 +thereunder. + + C. Respondent StoneMor GP LLC shall, within ten (10) days of the entry of this Order, +pay a civil money penalty in the amount of $250,000 to the Securities and Exchange Commission +for transfer to the general fund of the United States Treasury, subject to Exchange Act Section +21F(g)(3). If timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. +§3717. Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; + +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or + +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: + +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 + +Payments by check or money order must be accompanied by a cover letter identifying +StoneMor GP LLC as Respondent in these proceedings, and the file number of these proceedings; +9 + +a copy of the cover letter and check or money order must be sent to Kelly L. Gibson, Associate +Regional Director, Philadelphia Regional Office, 1617 John F. Kennedy Blvd, Suite 520, +Philadelphia, PA 19103. + +D. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondents agree that in any Related Investor +Action, they shall not argue that they are entitled to, nor shall they benefit by, offset or reduction of +any award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action ("Penalty Offset"). If the court in any Related Investor Action grants such a +Penalty Offset, Respondents agree that they shall, within 30 days after entry of a final order +granting the Penalty Offset, notify the Commission's counsel in this action and pay the amount of +the Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be +deemed an additional civil penalty and shall not be deemed to change the amount of the civil +penalty imposed in this proceeding. For purposes of this paragraph, a "Related Investor Action" +means a private damages action brought against Respondents by or on behalf of one or more +investors based on substantially the same facts as alleged in the Order instituted by the +Commission in this proceeding. + + By the Commission. + + +Vanessa A. Countryman +Secretary + + + + + + + + \ No newline at end of file diff --git a/raw/aaer/2019/AAER-4110.txt b/raw/aaer/2019/AAER-4110.txt new file mode 100644 index 0000000000000000000000000000000000000000..bfbe64d07da1b12e7c372fac898f94f3403477f3 --- /dev/null +++ b/raw/aaer/2019/AAER-4110.txt @@ -0,0 +1,315 @@ + + 1 + + +UNITED STATES OF AMERICA +Before the +SECURITIES AND EXCHANGE COMMISSION + +SECURITIES EXCHANGE ACT OF 1934 +Release No. 87812 / December 20, 2019 + +ACCOUNTING AND AUDITING ENFORCEMENT +Release No. 4110 / December 20, 2019 + +ADMINISTRATIVE PROCEEDING +File No. 3-19626 + + + +In the Matter of + +QUANTUM +CORPORATION, + +Respondent. + +ORDER INSTITUTING CEASE-AND- +DESIST PROCEEDINGS PURSUANT TO +SECTION 21C OF THE SECURITIES +EXCHANGE ACT OF 1934, MAKING +FINDINGS, AND IMPOSING A CEASE- +AND-DESIST ORDER + +I. + + The Securities and Exchange Commission (“Commission”) deems it appropriate that cease- +and-desist proceedings be, and hereby are, instituted pursuant to Section 21C of the Securities +Exchange Act of 1934 (“Exchange Act”) against Quantum Corporation (“Quantum” or +“Respondent”). + +II. + + In anticipation of the institution of these proceedings, Respondent has submitted an Offer +of Settlement (“Offer”) which the Commission has determined to accept. Solely for the purpose of +these proceedings and any other proceedings brought by or on behalf of the Commission, or to +which the Commission is a party, and without admitting or denying the findings herein, except as +to the Commission’s jurisdiction over it and the subject matter of these proceedings, which are +admitted, Respondent consents to the entry of this Order Instituting Cease-and-Desist Proceedings +Pursuant to Section 21C of the Securities Exchange Act of 1934, Making Findings, and Imposing a +Cease-and-Desist Order (“Order”), as set forth below. + + + + 2 +III. + + On the basis of this Order and Respondent’s Offer, the Commission finds that: +Summary +1. Quantum is a public data storage company that manufactures and sells hardware to +channel partners such as distributors and resellers, as well as to end-user customers. Between the +fourth quarter of its 2015 fiscal year (which ended March 31, 2015) and the second quarter of its +2018 fiscal year (which ended September 30, 2017) (“the restatement period”), Quantum +recognized revenue from dozens of transactions with channel partners without meeting the +necessary revenue recognition criteria under Generally Accepted Accounting Principles (“GAAP”). +These errors caused Quantum to materially overstate its revenue for certain reporting periods and to +understate its revenue in other periods. +2. Quantum’s revenue recognition errors resulted from internal accounting control +failures, including insufficient controls to provide reasonable assurance that the relevant accounting +personnel had sufficient expertise and knowledge regarding channel partner transactions to make +appropriate revenue recognition determinations. In this environment, Quantum’s revenue +recognition errors continued unchecked for almost three years. +3. In 2019, Quantum disclosed material misstatements in its consolidated financial +statements for three annual periods and five quarterly periods and announced a restatement, as well +as material weaknesses in its internal control over financial reporting. +Respondent +4. Quantum is a Delaware corporation with its principal executive offices in San Jose, +California. Quantum’s common stock is registered with the Commission pursuant to Section 12(g) +of the Exchange Act. Until January 2019, Quantum’s common stock traded on the New York Stock +Exchange (“NYSE”) under the ticker symbol QTM. Currently, Quantum’s common stock trades on +the OTC Pink exchange under the ticker symbol QMCO. +Facts +A. Quantum’s Business and Historical Revenue Recognition Policy +5. At all relevant times, Quantum’s business focused on manufacturing and selling data +storage devices and systems, including physical hardware such as disk drives. Quantum works with +a network of numerous channel partners, including distributors and value-added resellers. Channel +partners purchase hardware from Quantum and then resell the products to end users or other channel +partners. +6. Quantum disclosed in its Forms 10-K for fiscal years 2015, 2016, and 2017 that it +prepared its financial statements in accordance with GAAP. Under Accounting Standards +Codification (“ASC”) 605, Revenue Recognition, revenue should be recognized only when it is both + + 3 +earned and realized or realizable. Consistent with GAAP, in its Forms 10-K, Quantum’s critical +accounting policies explained that the company considered revenue to be earned and realized or +realizable when: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred or +services have been rendered; (3) the seller’s price to the buyer is fixed or determinable; and (4) +collectability is reasonably assured. As disclosed in its Forms 10-K, Quantum told investors that it +generally recognized revenue upon shipment (i.e., on a “sell-in” basis) for hardware products sold to +channel partners. Quantum’s Forms 10-K also disclosed that when significant post-delivery +obligations existed, the related revenue was deferred until such obligations were fulfilled. +B. For Almost Three Years, Quantum Repeatedly Recognized Revenue in Incorrect +Periods +7. During the restatement period, Quantum did not design or maintain sufficient +internal accounting controls to provide reasonable assurance that the company complied with the +revenue recognition criteria under GAAP. In the absence of sufficient controls, Quantum overstated +or understated up to approximately 7% of its total quarterly revenue in incorrect periods as a result +of (1) certain sales practices of granting favorable deal terms to channel partners that were not +properly accounted for at the time of revenue recognition; and (2) bill and hold arrangements. As a +result, Quantum materially misstated its financial statements from the fourth quarter of fiscal year +2015 through the second quarter of fiscal year 2018, and failed to make and keep accurate books +and records. +Quantum’s Sales Practices to Encourage Channel Partners to Buy More Inventory +8. Quantum’s revenue recognition issues began in early 2015. By that time, Quantum +had experienced waning market demand for certain products, causing its total revenues to shrink +from about $1.01 billion in fiscal year 2007 to about $553 million in fiscal year 2014. In 2014, an +activist investor approached Quantum regarding its performance and entered into a standstill +agreement with the company. Among other things, the standstill agreement set forth business +objectives (including revenue targets) that Quantum needed to hit in its 2015 fiscal year. If +Quantum missed the targets, the activist investor would gain two additional seats on Quantum’s +board of directors. +9. In response, Quantum made a business decision to rely more heavily on two pre- +existing sales practices to help the company achieve the revenue targets in the standstill agreement. +First, Quantum increasingly encouraged channel partners to place “stocking orders.” The general +purpose of “stocking orders” was to enable channel partners to build up inventory of new Quantum +products that they would resell in later periods to satisfy expected future end user demand. Second, +Quantum encouraged channel partners to “pre-buy” products for specific, already-identified deals +that were expected to close in later periods but had not yet been ordered by end users. Quantum’s +management did not, however, sufficiently consider the risks presented by these types of +transactions, including whether their increased use may have warranted additional consideration of +whether Quantum’s existing internal accounting controls were sufficient. + + 4 +10. In fact, unbeknownst to management, sales personnel regularly added deal terms to +stocking orders and pre-buys that undermined the company’s revenue recognition under ASC 605. +However, Quantum’s lower-level accounting personnel responsible for making revenue recognition +determinations lacked both appropriate accounting expertise and relevant information from sales +personnel regarding channel partner transactions. In many instances, the existence of additional +deal terms was not communicated to the accounting personnel. In the absence of sufficient internal +accounting controls around revenue recognition, Quantum prematurely recorded revenue for many +stocking orders and pre-buys with such deal terms, as set forth below. + Guaranteed Profit Margins and Extra Return Rights +11. Quantum prematurely recognized revenue from channel partner transactions where +the pricing was not fixed or determinable. For example, in connection with certain transactions, +Quantum agreed to provide channel partners with guaranteed profit margins. For these deals, +Quantum’s ultimate price to the relevant channel partners was not fixed or determinable because +the guaranteed profit margins caused the ultimate payment from the channel partner to be +contingent on the subsequent resale price of the product to the end user, which at times was lower +than anticipated. +12. Quantum also allowed certain channel partners to return previously purchased +inventory beyond the return rights specified in the original contractual agreements. In its +Forms 10-K for the restatement period, Quantum told investors that it recognized hardware revenue +upon shipment and, for deals involving future product returns, recorded an allowance for estimated +future price adjustments in the period revenue was recognized. However, Quantum could not +reasonably estimate future price adjustments in deals involving extra-contractual return rights, so its +ultimate price on the transactions was not fixed or determinable at the time of shipment. + Post-Delivery Obligations +13. Quantum also prematurely recognized revenue for certain transactions because it +continued to have significant post-delivery obligations after products had been shipped to channel +partners. Because Quantum had not substantially accomplished all it must do to earn the revenue, +Quantum should have deferred revenue until it had fulfilled its post-delivery obligations. + +14. Among other post-delivery obligations, in connection with certain transactions, +Quantum arranged for the shipment of channel partners’ orders to third party warehouses, paid for +channel partners’ storage costs, relabeled products for the benefit of channel partners, and/or paid +for shipping and insurance to end users. Quantum also had continuing involvement in channel +partners’ resale efforts after deals had ostensibly closed, including arranging for certain partners to +purchase stale inventory from other partners and facilitating pricing for such partner-to-partner +deals. For transactions involving such obligations, revenue should not have been recognized at the +time of shipment. + + + + + 5 +Transactions Did Not Meet Bill and Hold Criteria +15. Separate from certain stocking orders and pre-buys, Quantum also determined that it +had not recognized revenue consistently with GAAP and its own accounting policies for bill and +hold arrangements. In bill and hold arrangements, the buyer is billed for products ready for +delivery, but the seller retains possession until the buyer requests delivery at a later date. Quantum +determined that it should not have recognized revenue at the time of sale because Quantum—not the +buyer—requested the bill and hold arrangements, and certain transactions required specific +performance obligations from Quantum after shipment in order to sell the products to end users. +C. Quantum’s Deficient Controls +16. Quantum’s revenue recognition issues stemmed from a failure to design and +maintain internal accounting controls sufficient to provide reasonable assurance that its financial +statements were presented in accordance with GAAP. Quantum accounting personnel did not have +the necessary expertise or knowledge to reach the appropriate accounting treatment for certain +transactions with channel partners. + +17. During the restatement period, Quantum’s tone-at-the-top contributed to its +insufficient internal accounting controls environment. While management encouraged sales +personnel to pursue stocking orders and pre-buys, Quantum did not sufficiently consider the risks +presented by these transactions, including whether these transactions may have required them to +design any additional internal accounting controls. +18. Personnel within Quantum’s sales, accounting, and other departments at times +lacked knowledge, experience, and training regarding channel partner arrangements and +relationships and proper application of revenue recognition. Contributing to this issue, Quantum’s +accounting department experienced significant turnover during the relevant period. Key +accounting personnel lacked knowledge of the details and scope of Quantum’s overall business +practices with channel partners, which limited their ability to appropriately recognize revenue for +certain transactions. + +19. In addition, Quantum’s sales teams did not communicate material terms of +arrangements with channel partners to the relevant accounting personnel. Instead, personnel +outside the accounting department had discretion for escalating deals that may have had revenue +recognition implications to the appropriate accounting personnel. However, sales personnel +became accustomed to offering additional deal terms without adequate policies or procedures +requiring that they disclose these terms to the relevant accounting personnel. Due to a lack of clear +reporting structures and responsibilities, accounting personnel were ultimately left unaware of +critical information about certain deals necessary to properly recognize revenue in accordance with +GAAP. + +20. Finally, Quantum failed to adequately prepare, analyze, and review revenue +recognition and other significant account reconciliations. As a result, revenue transactions were +recorded prematurely and not in accordance with GAAP during the relevant period. + + 6 + +D. Quantum Restated Three Years of Financial Statements +21. Quantum began an internal investigation into its revenue recognition practices after +being contacted by the staff in the Commission’s Division of Enforcement. On February 8, 2018, +Quantum filed a Form 8-K disclosing that it had postponed its quarterly earnings call to allow its +audit committee to complete an investigation into accounting matters and related internal controls. +By the close of trading that day, Quantum’s stock price had declined by approximately 30 percent. +On January 15, 2019, due to Quantum’s failure to meet SEC reporting requirements, its stock was +delisted from the NYSE. +22. On August 6, 2019, Quantum announced that it had completed its restatement of +financial statements for prior periods. Quantum concluded that there were material misstatements +in its consolidated financial statements reported on Forms 10-K for the fiscal years ending March +31, 2015, 2016 and 2017, as well as in the unaudited condensed consolidated financial statements +reported on Forms 10-Q for the quarters ending June 30, 2016, September 30, 2016, December 31, +2016, June 30, 2017, and September 30, 2017. The restatement revealed that Quantum’s revenue, +once adjusted for the correct reporting periods, would have missed the objectives set forth in the +standstill agreement, as well as the company’s public revenue guidance for fiscal year 2017. +23. Quantum also disclosed that it had identified material weaknesses in its internal +control over financial reporting, which had contributed to the restatement. Among other things, +Quantum identified material weaknesses related to its tone-at-the top, including a lack of sufficient +personnel with appropriate accounting knowledge, a failure to establish clear reporting structures in +the organization, and a failure to design effective controls over the period-end financial reporting +process. As part of its remediation efforts, Quantum terminated several sales, accounting, and +operations personnel and enhanced its policies and procedures regarding revenue recognition, +stocking orders, pre-buys, and bill-and-hold transactions. +Violations +24. As a result of the conduct described above, Quantum violated Section 13(a) of the +Exchange Act and Rules 13a-1 and 13a-13 thereunder, which require every issuer of securities +registered pursuant to Section 12 of the Exchange Act to file with the Commission accurate +periodic reports, including annual Reports on Form 10-K and quarterly Reports on Form 10-Q. +25. As a result of the conduct described above, Quantum also violated Section +13(b)(2)(A) of the Exchange Act, which requires an issuer to make and keep books, records, and +accounts which, in reasonable detail, accurately and fairly reflect the issuer’s transactions and +disposition of assets. +26. As a result of the conduct described above, Quantum also violated Section +13(b)(2)(B) of the Exchange Act, which requires an issuer to devise and maintain a system of +internal accounting controls sufficient to provide reasonable assurances that: transactions are +executed in accordance with management’s general and specific authorization; transactions are + + 7 +recorded as necessary to permit preparation of financial statements in conformity with GAAP or +any other criteria applicable to such statements, and to maintain accountability for assets; access to +assets is permitted only in accordance with management’s general or specific authorization; and +the recorded accountability for assets is compared with the existing assets at reasonable intervals +and appropriate action is taken with respect to any differences. +IV. + In view of the foregoing, the Commission deems it appropriate to impose the sanctions +agreed to in Respondent Quantum Corporation’s Offer. + Accordingly, it is hereby ORDERED that: + A. Pursuant to Section 21C of the Exchange Act, Respondent shall cease and desist +from committing or causing any violations and any future violations of Sections 13(a), 13(b)(2)(A), +and 13(b)(2)(B) of the Exchange Act and Rules 13a-1 and 13a-13 thereunder. +B. Respondent shall, within 10 days of the entry of this Order, pay a civil money +penalty in the amount of $1,000,000.00 to the Securities and Exchange Commission for transfer to +the general fund of the United States Treasury, subject to Exchange Act Section 21F(g)(3). If +timely payment is not made, additional interest shall accrue pursuant to 31 U.S.C. § 3717. +Payment must be made in one of the following ways: +(1) Respondent may transmit payment electronically to the Commission, which +will provide detailed ACH transfer/Fedwire instructions upon request; +(2) Respondent may make direct payment from a bank account via Pay.gov +through the SEC website at http://www.sec.gov/about/offices/ofm.htm; or +(3) Respondent may pay by certified check, bank cashier’s check, or United +States postal money order, made payable to the Securities and Exchange +Commission and hand-delivered or mailed to: +Enterprise Services Center +Accounts Receivable Branch +HQ Bldg., Room 181, AMZ-341 +6500 South MacArthur Boulevard +Oklahoma City, OK 73169 +Payments by check or money order must be accompanied by a cover letter identifying +Quantum Corporation as a Respondent in these proceedings, and the file number of these +proceedings; a copy of the cover letter and check or money order must be sent to Monique +Winkler, Division of Enforcement, Securities and Exchange Commission, 44 Montgomery Street, +Suite 2800, San Francisco, CA 94104. + + 8 + C. Amounts ordered to be paid as civil money penalties pursuant to this Order shall be +treated as penalties paid to the government for all purposes, including all tax purposes. To +preserve the deterrent effect of the civil penalty, Respondent agrees that in any Related Investor +Action, it shall not argue that it is entitled to, nor shall it benefit by, offset or reduction of any +award of compensatory damages by the amount of any part of Respondent’s payment of a civil +penalty in this action (“Penalty Offset”). If the court in any Related Investor Action grants such a +Penalty Offset, Respondent agrees that it shall, within 30 days after entry of a final order granting +the Penalty Offset, notify the Commission’s counsel in this action and pay the amount of the +Penalty Offset to the Securities and Exchange Commission. Such a payment shall not be deemed +an additional civil penalty and shall not be deemed to change the amount of the civil penalty +imposed in this proceeding. For purposes of this paragraph, a “Related Investor Action” means a +private damages action brought against Respondent by or on behalf of one or more investors based +on substantially the same facts as alleged in the Order instituted by the Commission in this +proceeding. + + By the Commission. + + + + + Vanessa A. Countryman + Secretary \ No newline at end of file